Expectations, Projections for the Economy in 2019

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As 2019 begins with hopes and aspirations, there are expectations from the federal government to better the economy with a view to making it have more meaningful impact on Nigerians. Kunle Aderinokun looks at the key indicators that will characterise the economy and determine its fortunes this year

The economy appears to have lost its sparkle; its growth has dwindled. And there are palpable fears that the effect of political activities in the lead-up to the general elections, scheduled to commence on February 16, could overshadow whatever gains the economy may muster during this period, thus, compounding its woes. As it stands, the federal government has abandoned the economy for politics and the economy is already bearing the brunt.

After five quarters of recession, which the economy entered in the second quarter of 2016, having plummeted to a gross domestic product (GDP) growth rate of -2.06 per cent, the economy exited the quagmire in the second quarter of 2017 with a GDP growth rate of 0.55 per cent, which was revised upward to 0.72 per cent, according to data from the National Bureau of Statistics.

Then, the economy turned the corner as it grew at 1.40 per cent in the next quarter- that is, the third quarter of the year, and sustained the improvement recording a GDP growth rate of 2.11 per cent in the fourth quarter of the year. However, in the first quarter and second quarter of 2018, the economy reversed the rising streak as evidenced in the slowed growth rates . NBS data showed that the GDP growth rate fell to 1.95 per cent in the first quarter of 2018 from the 2.11 per cent it achieved at the end of 2017. It dropped further to 1.50 per cent in the second quarter.

The agency noted that the clashes between farmers and herdsmen, which took its heavy toll on agriculture, mainly dragged down the growth rate during the quarter under review. Agriculture, being a major component of the non-oil sector was badly affected. However, with improvement in the non-oil sector, the economy received an impetus for growth, which pushed the GDP growth rate to 1.81 per cent. According to NBS, growth in the third quarter was largely helped by the non-oil sector, which contributed 90.62 per cent to the total GDP, while the oil sector contributed 9.38 per cent to growth in the review period. Oil GDP was reported to have contracted by -2.91 per cent compared to -3.95 per cent in second quarter and 23.93 per cent in third quarter 2017.

Despite the improvement in growth rate in the third quarter of 2018, the economy is still experiencing slowdown and was recently put on red alert of slipping into another recession over weak economic growth.

According to the Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, who raised the alarm at a recent Monetary Policy Committee meeting, the economy may be under threat of relapse into a recession, which it recently exited from with fanfare, given the weak economic growth of the second quarter of 2018.

Emefiele also raised concerns about threat to efforts to curb inflation, stabilise exchange rate and build reserves, considering the macroeconomic fundamentals at the period.

The consumer price index, which measures inflation dropped from 11.28 per cent in September 2018 to 11.26 per cent in October 2018 and rose again to 11.28 per cent in November 2018, but when compared with the levels in the corresponding year of 2017, when it dropped from 15.98 per cent in September to 15.91 per cent in October and 15.90 per cent in November, it was not where the monetary authority had envisaged it would be. The apex bank has the onerous task of bringing inflation to its targeted single digit, especially in an election year.

Also, of note as a potential contributor to relapsing the economy into recession, as pointed out by the CBN governor, was the delay in budget implementation. A situation, where three months after presidential assent and about three months to the end of 2018, there was no budget implementation was unhealthy for the economy. According to the apex bank, long years of fiscal policy lag had contributed to the weakness in the economy. Most of the inimical factors identified by Emefiele at that time are still at play.

Given this scenario, as the New Year begins, economic managers have the arduous task of resolving those issues as well as ensuring the economy not only continues to grow, but also record appreciable and inclusive growth. While 2019 is an unusual year, being an election year, more, but critical efforts would be required by handlers to put the economy on a sure footing with a viewing to avoiding a relapse into recession.

The federal government has proposed a budget of N8.83 trillion for the 2019 fiscal year. Nigerians would not accept any excuse for delay in its passage and poor Implementation. The executive and the National Assembly should therefore quickly address the grey areas and harmonise their positions so that the appropriation bill could be passed into law and implemented in earnest.

The budget has been predicated on an oil-price benchmark of $60 per barrel. In recent times, oil prices have been sliding at the international market and currently stood around $54 per barrel. The falling oil prices have been identified as threat to implementation of the budget and as such, the relevant authorities would do well to peg the budget at the most appropriate benchmark.

As part of its strategy to mobilise revenue, the federal government through the ministry of finance, in July 2017, created Voluntary Assets and Income Declaration Scheme (VAIDS), a tax amnesty , which was expected to rein in $1 billion from tax evaders and avoiders. By the end of the scheme, one year later, with only about N30 billion, the proceeds fell short of the government target, but the scheme was able to swell the tax database by five million to 19 million from 14 million. The government is expected to follow up on this initiative as well as intensify the revenue mobilisation from more alternative sources than oil and borrowing to fund the budget . As at the end of 2018, the total revenue collection by the Federal Inland Revenue Service was N5.3 trillion.

Besides, the federal government is expected to review the power sector transition market policy performance this year after its first five years of implementation.

It is obvious that this present administration led by President Muhammadu Buhari, which is already pre-occupied with politicking ahead of the general elections, would not be able to solve the burgeoning unemployment problem. With unemployed Nigerians now at 20.9 million, having risen by 17.6 million in nine months, one of the major tasks before the incoming administration is to tackle the factors causing unemployment or to put it more aptly, provide employment opportunities in the economy and tame the rising scourge of unemployment.

Besides, Nigerians are anxiously waiting for positive outcomes from the talks, between the Nigeria Labour Congress and federal government over the N30,000 minimum wage, that have resumed and are expected to be brought to a logical conclusion before the general elections.

Experts

But in the view of the Chief Executive Officer of Financial Derivatives Company Ltd, Mr. Bismarck Rewane, political jostling and the elections would becloud the talks on the minimum wage.

Rewane also expressed the opinion that political activities and elections would becloud 2019 budget talks by the legislature and the first monetary policy committee (MPC) meeting this month.

He, however, predicted that MTN Nigeria would float the long-awaited initial public offer (IPO) and get its shares listed on the Nigeria Stock Exchange.

Also, in his projections, Director, Union Capita Market Ltd, Mr. Egie Akpata, posited that 2019 would likely be more challenging for the Nigerian economy than 2018.

According to him, most variables which were in the country’s favour last year, but not capitalised on, have reversed. “Oil prices, local interest rates, inflation, stock market indices, political environment and other variables that were positive for most of 2018 are now negative and will remain so for most of 2019.”

On the key areas that are likely to impact the entire economy, Akpata noted that in the aspect of government finances, it was unfortunate that for the federal government , tax revenues could be generated by threat or decree.

“The VAIDS programme fell far short of expectation and so did many other initiatives to diversify government revenues away from oil. These failures are not surprising. Individuals and companies have to be financially buoyant to pay a lot of tax. The reality is that most sectors of the economy are in a recession and profitability has been badly eroded.

“Self-inflicted damage from Apapa ports congestion, inability to solve the power crises, government crowding out the private sector in the debt markets, insecurity in large sections of the country amongst others mean that corporate profitability is unlikely to improve and hence better non-oil revenue for the government will take a while to materialise.”

Akpata added that, the federal and state governments had shown that they were unable to reduce their costs and instead had resorted to massive borrowing, particularly at the federal level.

This borrowing, he pointed out, was almost entirely to fund overheads. “Unfortunately, this produces very high market borrowing rates which very few private companies can afford. As long as the economy continues to have a risk free rate close to 20 per cent, it is unlikely that there will be massive credit to the private sector to drive the investment needed to grow the economy at the required levels.”

“Until there is a political force to stop government simply borrowing to fund overheads, FGN debt will continue to grow at an alarming rate. Since a default is very unlikely, the market will happily give the FGN all the debt it wants to pay its bills today. Repayment is largely a problem for future governments to worry about,” he also submitted.

He argued that the presented 2019 budget showed that “it is business as usual – unrealistic revenue targets, huge borrowing and waste on fuel subsidy. None of these are a positive for government finances,” stating that, the ongoing minimum wage battle with the NLC would likely result in some kind of wage increase, which will put more pressure on government finances.

On interest rates, Akpata believed, high level of government borrowing to fund deficits would put upward pressure on interest rates. “Lower oil prices in 2019 than 2018 means the CBN will attempt to convince foreign portfolio investors (FPI) to bring in their funds into the economy to invest in government securities. This FPI is needed to stabilize the naira, very much needed in a period of lower oil prices. It seems the interest rate needed to achieve the level of impact on foreign reserves will be higher than the current yield of 17.65 per cent on 1 year TBills. It would not be surprising if yields get up to 20 per cent around the time of the February/March elections.”

Besides, the director said the CBN, from recent experience, has seen that Naira stability was more beneficial to the economy on the short term in dealing with inflation. “The CBN has opted for high interest rates in exchange for a stable Naira.

Some analysts argue that a lower interest rate to make credit more available to the private sector would be better for GDP growth. “

“However, given the huge appetite for borrowing by the government, lower rates would just lead to huge government borrowing to fund overheads. Besides, most Nigerian individuals and corporates don’t have access to any kind of credit. Where they do, it is to ‘shylock’ lenders whose all-in rates are from 40 to 400 per cent per annum. So having low interest rates, runaway inflation and a rapidly declining Naira are unlikely to provide any net benefit to the economy; at least that is the CBN view,” he added.

He also believed, it would be very difficult for the CBN to keep the Naira around the current N360/$ over 2019, but added that, “if the current CBN Governor is given another 5-year term effective end of May 2019, it is possible that exchange rates remain close to these levels for most of 2019.”

“That automatically means that very high (around 20 per cent level) interest rates will be with us for a while. It is theoretically difficult to explain how an economy with around 12 per cent inflation can hold its exchange rate steady against the USD whose home country has inflation of below 3 per cent. This inflation differential has brought sharp devaluation in most emerging/frontier economies in 2018. Somehow, Nigeria has defied economic logic for nearly 2 years.

The odds are that before the end of 2019, there will be a material devaluation of the Naira in the parallel market or I&E window.”

Regarding infrastructure deficit, Akpata noted that despite all the talk about borrowing to fund massive infrastructure development, there was very little evidence that this was actually happening. “None of the obvious major projects that can be done today have been fixed – Apapa ports and environs, Lagos-Ibadan expressway, Second Niger Bridge etc. The sad reality is that the federal government simply cannot fund any major infrastructure development with the current finances.”

“Unfortunately, the current government has not been successful in attracting large private capital to the infrastructure sector largely due to no clear plan, philosophy or programmes to do so effectively. Incidents like the MTN saga only help to chase away the few brave foreign investors willing to gamble on Nigeria.

A re-election of the current government certainly guarantees continuation of the current trajectory – no private capital to infrastructure and hence to significant infrastructure development,” he added.

In the same vein, an economist and Chief Executive Officer, The CFG Advisory Ltd, Adetilewa Adebajo, lamented that the challenges of the last three years had been “the inability of the government to come out of a self-inflicted recession and providing the policy and stimulus for sustainable economic growth.”

“It’s no longer news that as a result of our economy growing below our rate of population, we have put 100 million Nigerians into poverty compounded by 35 per cent unemployment rate amongst the youth. The debt profile has also doubled with the last three years from 11 to 22 trillion Naira resulting in an unsustainable 55 per cent of revenues going towards debt service,” the chief executive noted.

Given this scenario, Adebajo suggested the review of the Economic Recovery and Growth Plan (ERGP) to “reflect the current realities as the projections from the budget have also been affected by the current slump on oil prices.” The budget which has not been passed already, he added, required additional deficit financing, which “is a challenge to the government.”

“Going forward this year government needs to focus more on privatisation and concessions to enable it plug the holes and address its several fiscal challenges. On the other hand it’s time to begin to consider and implement the findings of the Oronsaye report to right-size and consolidate government,” he also proposed.

Giving his own projections, Managing Director, Investment Banking, Cordros Capital Ltd, Femi Ademola, believed if the oil price stabilises, the effect will be sufficient to ease pressure on the Naira in 2019, especially with the recent CBN-managed approach to the market.

According to him, the foreign exchange reserve at about US$42 billion provides some comfort for stability of the foreign exchange. The downside risk relates to the upcoming general election in 2019.

Ademola also believed the clamour for completely floating the Naira would reduce demand pressure on the exchange rate, especially coming from speculations. He, however, added that, “As an import depended country, this would lead to increased costs of raw materials and finished products and consequent increase in general price levels in the short term. “

“While this may force us to consider domestic substitutes, the structural defect in the economy means that imports may continue to be cheaper than locally made goods until we bridge the infrastructure gaps. This means that the fundamental FX weakening pressures remain and the CBN would need to deploy the FX reserves to support the demand until the pressure wanes,” he posited.

The chief executive noted that regardless of who wins the forthcoming election, reviving the economy remained of critical importance. According to him, all the sectors of the economy must be supported to function at optimal capacity and especially the power sector, which has the capacity to unleash huge potential for sustainable economic growth.