Despite Tepid Q3 GDP, FG Must Sustain Structural Reforms to Consolidate Growth

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For most economic experts, including those with multilateral financial organisations like the International Monetary Fund (IMF) and World Bank, an economic growth of 1.4 per cent for Nigeria in 2017 is unimaginable. But in its characteristic manner, Nigeria achieved the unexpected growth three months after it emerged from its worst recession in two decades. Notwithstanding the remarkable growth, the federal government has been asked to strengthen the recovery process. Kunle Aderinokun and Bamidele Famoofo report

In second quarter of fiscal year 2017, Nigeria, biggest economy in Africa, emerged from an economic recession which lasted about five quarters. The 0.55 per cent growth at the end of second quarter, which was later revised to 0.72 per cent was considered weak by economic analysts and there were  concerns on sustainability of the growth . 

But three months later, the National Bureau of Statistics (NBS), disclosed that Gross Domestic Product (GDP) has again grown by 1.4 per cent, which means GDP almost doubled compared with 0.72 per cent growth recorded in the preceding quarter.

Beyond doubling its GDP, it is to the nation’s credit that it has surpassed growth projections of both the International Monetary Fund (IMF) and the World Bank for 2017.

 

IMF/World Bank Projections

IMF raised projections for Nigeria’s economy to grow 0.8 per cent in 2017 and also revised its growth forecast for Nigeria in 2018 to 2.3 per cent.  This was contained in its January 2017 World Economic Outlook – “A Shifting Global Economic Landscape. The latest forecast for Nigeria was revised based on prospects of higher oil production due to security improvement. 

The IMF growth projection for Nigeria came a week after the World Bank projected Nigeria’s GDP to grow by one per cent in 2017. 

Q3 GDP

But the reality according to the Statistician General, NBS, Dr. Yemi Kale, is that Nigeria’s economic growth at three months before the end of 2017 has surpassed what both the IMF and World Bank could envisage.

“The nation’s Gross Domestic Product (GDP) grew in Q3 2017 by 1.40 per cent (year-on-year) in real terms, the second consecutive positive growth since the emergence of the economy from recession in Q2 2017. This growth is 3.74 per cent points higher than the rate recorded in the corresponding quarter of 2016 (-2.34 per cent) and higher by 0.68 per cent points from the rate recorded in the preceding quarter, which was revised to 0.72 per cent from 0.55 per cent (Q2 was revised following revision by NNPC to oil output and hence led to revision to Oil GDP). Quarter on quarter, real GDP growth was 8.97 per cent”, the NBS GDP report for third quarter 2017 disclosed. 

According to the  NBS GDP report,  Nigeria’s aggregate GDP stood at over N29.45trillion in nominal terms higher when compared to  over N26.55 trillion in Q3 2016, resulting in a Nominal GDP growth of 10.98 per cent. This growth is higher relative to growth recorded in Q3 2016 of 9.15 per cent. The report puts Nigeria’s year to date Real GDP growth at 0.43 per cent as at end of September 2017.

 

Analysts

Meanwhile, there are differing thoughts from experts over the improved economic growth in the third quarter period.  They were, however, united in expressing no surprise at the impressive Q3 growth rate, especially with the rising fortunes of oil.

In a swift response, the World Bank stated that notwithstanding Nigeria’s positive economic growth in Q3, the country needed to address what it identified as the many fiscal challenges at the different levels of government.

The World Bank Lead Economist for Nigeria, Ulrich Bartsch, said: “In light of the continuing fiscal pressures, there is a strong need to strengthen the performance of the states through the full and sustained implementation of reforms to increase internally-generated revenues and state spending efficiency, and to strengthen state debt management and fiscal transparency.” 

The bank stated that while all states have made progress on the reform measures included in the 22-point Fiscal Sustainability Plan, implementation is incomplete.

In its view, Renaissance Capital said Nigeria’s GDP growth remained on track to meet its 0.7 percent forecast for 2017 though recovery is lopsided. The report, which analysed the third quarter performance of the Nigerian economy pointed out that the growth has largely been driven by the oil sector. “Outside of agriculture, the remaining two-thirds of the economy is sluggish. Manufacturing’s return to negative growth territory highlights the fragility of this recovery. That said, we think GDP growth remains on track to meet our 0.7 per cent forecast for 2017. We expect the stepping up of government capex and pick-up in demand, on the back of improved FX liquidity, to help lift growth to 2 per cent in 2018. The consumer confidence index’s YtD upturn, since it bottomed in 4Q16, suggests demand is picking up, albeit off a low base. The lopsidedness of the recovery implies downside risk to our 2018 forecast”, Renaissance Capital added

Also, President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs, noted that the principal factor that contributed to the growth in the nation’s GDP in the 3rd quarter was the upward swing in the quantity of crude oil production and price. This, he pointed out,  was “evident in improvement in oil production by 0.42million barrels per day relative to the corresponding quarter in 2016 and 0.16million barrels higher than the revised output of Q2.”

Equally critical to this is the oil production cut exemption granted Nigeria in 2015 by OPEC  in compensation for producing below allotted quantity in the last few years, Jacobs added.   “Other factors include the obvious improvement in sourcing of Forex, relative stability in exchange rates, seeming improvement in the price of crude oil, global rating of the country on Ease of Doing Business, introduction of new policies, regulatory environment, general perception of the business community that government would  effectively implement development oriented policies, receding inflation and on-going nationwide upgrade in infrastructure.”

Jacobs noted that  by recording a consecutive positive growth at an incremental rate growing from 0.72per cent (revised) in Q2 to 1.40per cent in Q3, “Nigeria is now on the part to strengthening her recovery from recession.”

“It is however important to note that this growth rate is increasing at a decreasing rate which should be a cause for concern. Equally worrisome is the fact that the productive sector like manufacturing, construction, trade, coal mining that ideally should drive meaningful and sustainable growth, all dipped into the realm of negative growth. Equally noteworthy is the fact that NBS report shows that the non-oil sector experienced negative growth of -0.76per cent while the economy grew positively and the oil sector appeared to have contributed entirely to the growth of the economy in the quarter, “ he added.

Jacobs, who stated that looking at the issue from the point of view of a manufacturer, the implications  were numerous, pointed out that, on the positive side, it means that things are looking up. According to him, “The oil sector being the mainstay of the economy has broken the jinx of negative growth over the years and hopefully would be positioned to provide the much needed employment.”

Similarly, he said  “This also portends likely improvement in investment, consolidation of the extrication of the economy from recession and expectation of better days ahead.”

On the negative side, Jacobs indicated that  it meant that “the growth rate may not be sustainable because productive sectoral groups performed extremely poor in Q3 recording negative growth with the Non Metallic being the biggest loser, receding by -2.02per cent; followed by Motor Vehicle Assembly  -1.54per cent; followed by the Basic metal, Iron and Steel that plummeted by -0.48per cent;  with the Cement sub-sector following closely with -0.40per cent.”

“You may agree with me that with the afore-mentioned negative growth rates recorded by the productive sector with manufacturing recording -2.58per cent; all is not well yet and I boldly say that Nigeria may not be entirely through with recession,” he cautioned, urging that the government adopt an urgent measure to arrest these downward trend before the economy recedes into recession.

Given this scenario, Jacobs demanded that the government rise to the occasion by further deploying strategic synthesis of fiscal and monetary policies, further make the operating environment friendlier, enhance the purchasing power of average Nigerians, further support the manufacturing, agriculture, telecoms and oil and gas with comprehensive and integrated support system that would guarantee meaningful growth. 

According to him, “The manufacturing sector at the moment still requires stable and adequate enabling environment, a reliable policy support systems that would effectively address existing familiar challenges like inadequate power and dearth of basic infrastructure prevalent in the sector.”

In his view, Director General, West African Institute of Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, the Q3 positive growth of 1.4 per cent was  a welcome development, indicating that the economy was on a recovery path after exiting the recession.  He, however, added that, “it is still to a large extent the oil story.”

Also, Ekpo noted that, “In addition, fiscal policy, that is, spending on capital projects is beginning to have marginal but positive effect on the economy.”

“However, vital sectors registered such as manufacturing and its sub-sectors grew negatively; only agriculture showed positive growth rate when compared to last quarter and same quarter of last year. It should be noted that the economy is still in a stagflation phase as shown by high rates of unemployment and double-digit rate of inflation. Government needs to spend more and sustain structural reforms to ensure that the growth of GDP at least equal the growth rate of population,” he added.

In the same vein, Director, Union Capital Ltd, Egie Akpata, said given the significant improvement in oil prices and stability in the FX market, GDP growth of 1.4 per cent  was  not a  surprise. 

Akpata added that compared to the population growth rate of 2.8 per cent, the current growth rate was not something to celebrate. He believed the government would have to execute more ambitious plans to get growth back above 5 per cent at which point the masses might feel some positive impact.

A lecturer at the Faculty of Economics, Lagos Business School (LBS), Dr. Bongo Adi, acknowledged that the growth was unexpected. He was, however, quick to attribute the surprise growth to improved developments in the international oil and gas market, which he said was the only reason Nigeria was able to record the growth.

“The reason why we exited recession in the first place was because of the improved earnings the nation got from the international oil market, which boosted government’s revenue, eased tension in the local foreign exchange market. This, however, does not mean we are out of the woods”, Adi disclosed.

The LBS economist pointed out that Nigeria’s economic recovery as seen in the last two quarters was not due to its capability to produce. According to Dr. Bongo Adi, Nigeria remains the least undiversified economy in the world at the moment.

But a seasoned economist, Dr. Boniface Chizea, says the drivers of Nigeria’s economy must be given some credit for taking the nation out of recession and further deepening the growth achieved in second quarter, which led to GDP doubling in third quarter.

Though Chizea, like Adi, acknowledged that oil remained Nigeria’s biggest growth driver, he said other policy measures adopted by organs of government like the Central Bank of Nigeria (CBN), have helped improved economic growth.  

Chizea noted that the CBN’s Investors’ and Exporters’ (I&E) window of the foreign exchange market had increased the confidence of foreign investors in Nigerian markets, which is one of the other reasons why the economy had recorded increasing growth beginning from second quarter in 2017.

The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) at the end of its last meeting in 2017 held in Abuja last week, noted that the I&E window had increased liquidity and boosted confidence in the market with over US$18.70 billion in transactions since its introduction in April 2017. 

Head, Research, SCM Capital (formerly Sterling Capital Markets Limited), Mr. Sewa Wusu, told THISDAY that the efforts of government to achieve the growth must be commended. He, however, cautioned that economic predictions by the IMF and World Bank were usually modest.  “Sustaining growth after recession is a big achievement and it suggests that the potential for economic growth is bright”. He wants government to keep stimulating the economy to sustain the third quarter growth of 1.4 per cent.

Nevertheless, Wusu believed conscious efforts must be made by government to ascertain that the ordinary Nigerian feels the impact of economic growth, which he argued is yet to trickle down to Nigerians. Like others, Wusu noted that resurgent in oil price helped Nigeria to achieve the growth, said the impact of efforts to diversify the economy by government through agriculture and other means will soon begin to reduce the domineering impact of oil on the revenue of government.

He, however, warned that the ability of government to implement the budget and also monitor its workability as well as creating the right environment for investment will keep the country on the path of growth perpetually.

The CEO, Global Analytics Consulting, Tope Fasua, said it was news, given where Nigeria was coming from. 

“We should believe that the economy is finally on a positive trajectory that we can only build upon. The issues still remain – inclusiveness of the growth for one. There is also the fact that with inflation still at double digits, and population growth around 4per cent, what we have is still negative growth in real terms. I personally believe Nigeria oughtn’t have gone into a recession in the first place,” he said. 

Fasua noted that the ‘unfortunate’ occurrence was due to a combination of bad policy miscues and political nonchalance at the highest levels of our leadership. “The pains of the recent years have been excruciating for most Nigerians. Businesses have been destroyed and jobs lost. I believe that the managers of the economy should now understand the urgency of our predicament. Until the day Nigeria grows at 15 per cent per annum, we would not have arrived.”

Corroborating Fasua, CEO, The CFG Advisory Ltd, Adetilewa Adebajo, posited that the GDP growth recovery was now on a sustained upward trajectory,  which was positive. He, however, added that, “The  growth rate is still very fragile and fiscal issues still persist that constrain growth.”

“The growth is also nowhere above our population growth rate of 3 per cent which will be the benchmark for a sustainable growth rate that will drive the economy from recovery mode to realistic economic growth,” Adebajo also submitted. 

To the CEO/Lead Consultant, Sound Invest Ltd, Mr. Wale Champion, much more is expected from government to drive economic growth in Nigeria. He said despite the exit of recession and the consolidated growth recorded in third quarter, state of infrastructure in Nigeria, which should be a key driver of investment into the country, was far from the expected. “The fact that oil is the only reason why GDP is growing shows that we are not totally in control of the economy. I don’t believe that OPEC will not still cut oil price in 2018 and it can be very challenging to keep depending on revenue from the sales of commodities to run your economy”, he lamented.

 

Outlook

The Monetary Policy Committee of the CBN said forecasts of key macroeconomic variables indicate a positive outlook for the economy up to Q1 2018. But the committee predicated its forecast on continued implementation of the 2017 budget into early 2018. It said in the communiqué of its November 2017 meeting in Abuja that anticipated improvements in government revenue from the implementation of the Voluntary Asset and Income Declaration Scheme (VAIDS) as well as favourable crude oil prices, will keep sustaining the economy. 

“The development finance initiatives by the CBN in the real sector, particularly in agriculture, are expected to continue to yield positive results in terms of output expansion and job creation”, the committee said.