Economic Diversification Remains the Way Out



By Obinna Chima

Although Gross Domestic Product (GDP) figures released by the National Bureau of Statistics (NBS) last week showed that the Nigerian economy expanded marginally in the second quarter (Q2) of the year and has exited recession, the near-term vulnerabilities and risks to economic recovery and macroeconomic stability remain elevated in the country.

Therefore, analysts have stressed the need for policymakers to continue to drive towards diversifying the country’s revenue base in order to achieve sustainable economic growth.

The NBS figures showed that the economy grew by 0.55 per cent (year-on-year) in Q2 2017. It is noteworthy that the muted Q2 2017 growth rate was 2.04 per cent higher than the corresponding quarter of 2016 (-1.49%) and higher by 1.46 percentage points over the -0.91 per cent recorded in the preceding quarter.

According to the report, Nigeria’s economic recovery was driven principally by the performance of four main economic activities comprising oil, agriculture, manufacturing and trade.

 Clearly, the growth rate was driven mainly by oil sector GDP, which recovered significantly by 17.04 percentage points from the -15.40 per cent recorded in Q1 2017 to 1.64 per cent in Q2 2017, reflecting the relative peace in the Niger Delta and increased oil output from the region.

Expectedly, this rubbed off positively on the electricity and gas sector, which also grew significantly by 35.5 per cent, compared to the contractions of 5.04 per cent in Q1 2017 and 10.46 per cent in Q2 2016.

Nevertheless, while oil GDP expanded considerably in the second quarter of 2017, non-oil GDP only grew slightly by 0.45 per cent, down from 0.72 per cent in the preceding quarter.

The non-oil sectoral breakdown showed that the agriculture sector, which should be the main growth driver in the government’s quest to diversify the economy, grew by only 3.01 per cent in Q2 2017, down from 3.39 per cent in Q1 2017 and 4.53 per cent in Q2 2016.

 Manufacturing also declined to 0.64 per cent, compared to 1.36 per cent in Q1 2017, while trade which has a dominant share of GDP remained negative at -1.62 per cent, but the contraction in the sector decelerated from the -3.08 per cent recorded in Q1 2017.

The NBS report further showed that industry grew positively by 1.45 per cent in Q2 2017, after nine consecutive quarters of negative growth since Q4 2014.

Similarly, financial services sector grew by 11.78 per cent in Q2 2017, compared to 0.60 per cent in Q1 2017 and -13.24 per cent in Q2 2016.

These figures clearly call for more work by policymakers so as to promote activities in the non-oil sectors, even though some Nigerians have continued to criticise the NBS report, saying they were yet to feel the impact of the economic turnaround.

NBS Explains

The Statistician General of the Federation, Dr. Yemi Kale, last week explained that economic recovery was a gradual process, stressing that Nigerians would not feel the impact of the country’s exit from the recession overnight.

Speaking in an interview on ARISE News Channel, the broadcast arm of THISDAY Newspapers, the NBS boss noted that the first step to come out of an economic recession was to halt the contraction, which the nation has been able to achieve.

But Kale, who took his interviewers through reasons why the nation was able to reverse the contraction, however, stressed that the GDP growth attained in the second quarter was still fragile.

According to him, the economy started slowing down from six per cent, before it slumped to five per cent, and continued spiralling downwards.

“Nobody was paying attention then. The numbers are there. From five per cent it went to three per cent, two per cent and down to negative. It has been happening for a while, but nobody was paying attention.

“So, the same way, the recovery will be a gradual process. The first step is to arrest the decline. Once you stop the slump, then you can now build on it. That is the stage we are in now. It doesn’t mean that things are now alright.

“Look at manufacturing, during the recession, employers laid off workers, they cut down on advertisement and in the process the advertising companies lost revenue, sacked staff and cut back on other services,” he pointed out.

According to him, the country exiting the recession was based on 46 different economic activities. In those 46 activities, he said some grew while some contracted.

Shedding more light on how the NBS arrived at its data, Kale said when the entire sectors were aggregated total output came to 0.55 per cent.

He explained: “It does not mean that the entire economic activities were negative. Of the 46 economic activities, 21 still remained negative which suggested that everything was not yet well. But the other 25 that went positive were enough to push up the overall figure. So, that was basically what happened.

“So the man on the street would say he didn’t feel the growth, but there is a reason for that: the broader sectors that drove the growth were agriculture and industry. Industry is basically mining, manufacturing and crude oil production.

“Whether I have money in my pocket or not, does not stop the oil from flowing from the Niger Delta. So, when you say oil production grew the economy, the man on the street will not feel it because it has nothing to do with his pocket,” he explained.

He noted that improvement in dollar supply to manufacturers arising from the growth in the country’s external reserves as well as improved crude oil production, contributed to the economic expansion.

Analysts’ Opinion

With this feat, the Director General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo said, there is need for the government to continue to push for structural reforms.

Specifically, the WAIFEM boss urged the government to ensure that the challenge of epileptic power supply is addressed, take steps to improve the quality of education in the country, continue with the drive to promote made-in-Nigeria goods and services as well to improve the quality of infrastructure in the country.

In addition, Ekpo said: “Monetary policy should now be loosened. It shouldn’t be tight so as to enhance growth.”

Also, the Chief Executive Officer, Cowry Assets Management Limited, Mr. Johnson Chukwu, urged the government to ensure the implementation of the Economic Recovery and Growth Plan (ERGP).

“We cannot control oil price, but we can control what we produce. So, the government must ensure that the peace in the Niger Delta is sustained. Then the policies they have put together in the ERGP, the government needs to evolve actionable plans towards implementing those policies.

“For example, the target for the power sector, we need to have actionable plans on how to achieve that. The issue of stopping the importation of refined petroleum products must also be addressed.

“Also, our approach to infrastructure financing should be reviewed such that public-private partnership is adopted because government does not have the wherewithal to fund infrastructure,” he added.

On his part, the Chairman, Polar-Afrique Consulting Limited, Dr. Chris Itsede, believes the government is getting into indebtedness and an ambitious spending plan which obviously outstrips its expected revenue stream.

Itsede, who is the founding Director General of the West African Institute for Financial and Economic Management, said what he expected was for the government to scale back expenditure and tighten spending efficiency, so that for example, if you spend N1, it would be sure of getting at least 85 per cent of the real value of that N1.

“That is spending efficiency and that is what we should be thinking about now. If you look at the numbers now, our debt profile as a country is really alarming. It has never been this bad.

 Research Analyst at FXTM, Lukman Otunuga also stressed the need for governments at all levels in Nigeria to focus on infrastructural development.

Otunuga pointed out that while major roads in the country are in poor condition; the power sector remains a cause for concern, adding, health and education also needed to be revamped.

According to the analyst, rectifying these issues has the ability to not only create jobs but also support economic growth and boost investor confidence.

He said: “Focusing on the fiscal side, this still remains a grey are with the nation’s long-running infrastructure problems compounding to its woes. With the overall projected fiscal deficit tagged at N2.36 trillion one can only hope that the approved budget offers a helping hand to the nation.

“Nigeria’s mission to diversify away from oil reliance while recovering from an economic deceleration remains an on-going quest and it will be interesting to see how far the nation has progressed by year end.”

According Otunuga, the current speed of Nigeria’s recovery could be described as slow and steady, with the macro-fundamentals gradually stabilising.

 “Although I remain optimistic over Nigeria resurging from an economic meltdown and eventually breaking away from its dependence on oil as an engine for growth, there are still external risks which could present headwinds on the road to recovery.

“The greatest threat to Nigeria’s current recovery in the medium to longer term is depressed oil prices. Falling oil has the ability to directly impact the nation’s government revenues, external reserves, and stability of the nation’s foreign exchange market,” he said.