Will Economy be Better in 2021?

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As 2020 draws to a close, many Nigerians look towards 2021 uninspired by the catatonic state of the economy. The bland hope is that 2021 will be different and bring about jobs, economic growth and opportunities. Nosa James-Igbinadolor looks at the outlook for the Nigerian economy in 2021

A Year Better Forgotten

2020 has been a more than tempestuous year for the Nigerian economy. A medley of poor economic management, raging global pandemic, unsteady oil prices and national lockdown served to draw the curtain on a most disappointing year for Africa’s largest economy.

“From an economic perspective, 2020 has been a very bad year … the worst in recent history,” Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry told the Chinese news agency Xinhua.

The country, according to data from the National Bureau of Statistics (NBS), recorded a lower Gross Domestic Product (GDP) or economic growth of 1.87 percent, year-on-year in Q1 2020 reflecting the impact of the COVID-19 pandemic on the economic activities across the country. This represented a decline of 23 basis points when compared with the 2.55 per cent recorded in Q4 2019. It also represents 68 basis points when compared with the 2.10 per cent recorded in Q1 2019.

In Q2 2020, GDP contracted by 6.10 percent. This was the worst quarterly dip in production in the country since Q1 of 2004, when the GDP contracted by 7.59 per cent

In Q3, Nigeria’s Gross Domestic Product (GDP) in real terms declined by -3.62% (year-on-year), thereby marking a full-blown recession and second consecutive contraction from -6.10% recorded in the previous quarter (Q2 2020).

“It was a bleak year for the Nigerian economy,” Celestine Odo, the Manager in charge of Governance for ActionAid Nigeria concluded.

According to the NBS, the performance of the economy in Q3 2020 reflected residual effects of the restrictions to movement and economic activity implemented across the country in early Q2 in response to the COVID-19 pandemic.

In the wake of the pandemic, the World Bank forecast a decline of -3.2% for 2020; a five-percentage point drop from its previous projections.

The International Monetary Fund (IMF) projected that the GDP growth for Nigeria will shrink to -4.3 per cent at the end of 2020 from 2.2 per cent in 2019. The negative growth forecast was of course attributed to fall in oil prices, coupled with a reduction in crude oil production due to production cut agreement by Organisation of Petroleum Exporting Countries and other major oil producers (OPEC+). Also, the decline in domestic demand owing to the lockdown is another driver of the negative outlook.

A 2019 IMF report on Nigeria concluded that Nigeria is set to experience incremental decline to income per capita over the next eight years, through 2022. This decline, as noted by PwC Nigeria, is a result of slow GDP growth exceeded by a population growth rate that is not expected to slow in the near future. Population is expected to reach 263 million by 2030. In contrast, GDP is growing at a slower and less consistent rate, averaging 1.4% since 2016.

Andrew Nevin, Partner and Chief Economist at PwC Nigeria notes that the situation Nigeria finds itself, “is not just a Nigerian issue.

We all understand globally that we are in a very difficult situation as headline GDP declined in almost every country with projections for Nigeria being about 4 or 5 percent declining GDP for 2020 over 2019 from varied sources…”

What Does 2021 Look Like?

On the background of an economy buffeted on all sides by unpleasant headwinds, the economy more than needs strong tailwinds to drive growth in 2021.

Celestine Odo of ActionAid Nigeria believes that the unrealism of the 2021 budget is critical to understanding the outlook of the Nigerian economy in 2021. “If you look at the budget,” he said, “it’s a budget of N13.6 trillion, but when you look at the deficit and the debt servicing, it is realistically a budget of just about N6 trillion. Realistically the potential of getting the targeted revenue of over N7 trillion is…realistically we have never met our revenue targets in the past, so if you look at the benchmark, the global oil price, the exchange rate, the inflation, the unemployment rate, it is evident that the budget is riddled with a lot of challenges already before it is even implemented. So, I am not that optimistic that the 2021 budget can serve as a basis for driving economic growth next year.”

The Economist Intelligence Unit in its 2021 projection for Nigeria warned that “macroeconomic instability casts a shadow over the near-term outlook. Inflation is structurally high, but the central bank will prioritise credit growth in its monetary stance. A low interest rate environment points to further devaluations of the naira, with the current account remaining in deficit over 2021, further adding to inflationary pressure and impeding an economic recovery.”

As noted by the African Development Bank (AfDB), poverty remains widespread in Nigeria. The poverty rate in over half Nigeria’s 36 states is above the national average of 69%. High poverty reflects rising unemployment, estimated at 27.1% in Q2. Low skills limit opportunities for employment in the formal economy. Government social programmes such as N-Power and other youth empowerment schemes have made remarkable little impact in addressing unemployment.

For PwC, some of the factors that account for the unemployment and underemployment rates include the low level of industralisation in the country, slow economic growth, low employability and quality of the labour force, slow implementation of the national labour policy, in addition to lack of coordinating labour policies at the sub-national level.

In its September 2020 Nigeria Economic Alert, PwC estimates that unemployment could reach 28% in Q3 and 30% in Q4 2020

It is these factors that compels Andrew Nevin to argue that the country’s major challenge is structural in nature, and what is needed in 2021 is that those who make decisions “do so, so that Nigeria can reach its GDP growth potential. The Central Bank Governor made it very clear recently that he was targeting double digit for GDP growth…So what is needed is faster growth that is obviously inclusive, sustainable, alleviates poverty and increases employment.”

The AfDB agrees that there is need for structural reform of the Nigerian economy if there is to be a noteworthy resurgence. The bank projects real GDP growth to rise to 3.3% in 2021, depending on the country “implementing the Economic Recovery and Growth Plan (2017–20), which emphasises economic diversification.”

According to the bank, “an increase in the value-added tax from 5% to 7.5% to shore up domestic non-oil revenues is welcome, though organised labour and businesses have raised concerns of a potential rise in costs.”

The bank contends that Nigeria has many opportunities to transform its economy, particularly in agro-processing, positing that “special agro-processing zones could promote agro-industrial development and employment.”

The potentials for growth in 2021 cannot be divorced from the reality of the country’s distressing security situation. “Insecurity would likely continue to dissuade foreign investors, “shrivel the domestic economy, and ultimately dampen prospects for economic growth. High unemployment could create social tensions. Rising public debt and associated funding costs could pose fiscal risks if proposed adjustments are not implemented.

“Nigeria’s oil exports could be affected by developments in the Middle East. Trade tensions between the United States and China could weaken global growth and lower demand for Nigeria’s products, including oil. Protracted delays in concluding the Brexit deal could accentuate investors’ aversion to emerging markets, including Nigeria, reversing the current upward trend in foreign portfolio flows. Prolonged closure of borders by Nigeria to curb smuggling may affect trade with other countries in West Africa and raise the prices of imported products, especially rice. These risks underscore the need to accelerate structural reforms to promote economic diversification and industrialisation to minimise vulnerability to external shocks,” the AfDB argued.

Celestine Odo believes, if government is really sincere about growing the economy, there are obvious yet critical policy decisions it should take. “The truth is that oil can no longer sustain us. The oil price is going down, but if you look at it, our budget is still based on oil benchmark,” he said.

“If you look at third quarter revenue,” he added, “70 per cent of that revenue is from non-oil sources. So, if 70 percent is coming from non-oil sources, it is simply telling you that oil should longer be the mainstay of the economy and budgeting. The government really needs to start thinking about diversifying the economy… We just took a USD1.5 billion loan from the World Bank just last week and if you see what that money is meant for, diversification is part of it.

“Government should have the political will to do what is right for the economy. If you look at the cost of governance, the revenue leakages and how the money goes out, yet we are borrowing. We need to emphasise as a matter of urgency, internal domestic mobilisation. Tax is critical in this respect. In the third quarter, 70 percent of the revenue came from tax. At the same time, we need to close up the varied avenues of leakages. We at ActionAid have been campaigning about the monies we are losing through tax incentives. The finance minister is aware of this and promised to do something about it. At the same time, the cost of governance is not and cannot be sustainable. Government is borrowing to run bureaucracy and if government stops borrowing, the bureaucracy will crash. This does not make any sense at all. You can’t be borrowing to run recurrent expenditure; it doesn’t enable growth and development. Government needs to summon the political will to do right for Nigerians

To drive short- and long-term growth and engender economic development, Andrew Nevin asserts that Nigeria needs to focus on three major issues. The first is unlocking dead assets; PwC estimates that Nigeria holds at least $300 billion or as much as $900 billion worth of dead capital in residential real estate and agricultural land alone. The high value real estate market segment holds between $230 billion and $750 billion of value, while the middle market carries between $60 billion and $170 billion in value.

“These dead capital like Ajaokuta steel, the refineries, National Theatre, real estate and others,” according to Nevin, need to be converted to live capital through structural reforms that would help convert most of the capital in the informal economy which is currently valued at 65% of GDP into the formal economy.

PwC argues that by creating trust in the system, increased participation will bring about the capital conversion in this economic class through fiscal receipts into the formal economy. It would also increase capital for infrastructure in the sector and increase economic activity.

The second thing the government needs to do, the Chief Economist of PwC says is to harness the power of remittances from the diaspora.

In its report on the economic power of Nigeria’s diaspora, PwC argues that remittances “can have a strong impact on development, both at the macro and micro- level, especially as it has a multiplier effect on consumption, investment and economic growth. In order to ensure that remittances are being utilised in ways that are beneficial to the economy.”

It posits that what is required is a coherent policy framework to harness remittances into generating capital for productive investments for the growth and development of small and micro-enterprises, which will in turn, create employment. In addition, remittances can be deployed toward philanthropic activities which can serve as solutions for specific deficiencies in the local infrastructure such as schools, hospitals and roads.

“Remittances help to hold up the Nigerian economy. The World Bank says that one out of two Nigerians are supported by remittances from abroad. Its probably larger than we think as most of the remittances come through informal channels…The point about the remittances is that the biggest export that Nigeria has, is brain power…Our view of course is that we should be exporting brain power,” Andrew Nevin said.

He noted further that, “We believe that we need to optimise our brain power and not political power. Brain power is the greatest asset Nigeria has. We can export brain power without people necessarily leaving Nigeria,” by getting an increasing number of global companies to outsource many of their services and operations to Nigerian firms, thus earning foreign exchange for Nigeria. He added that, “our view is that Nigeria should actually focus on creating value with Nigerian brains some in the diaspora, but majority in Nigeria where most Nigerians live”.

Nevin says that the third problem that needs to be focused on is the issue of state led development. He believes that, “states need to take responsibility for their own destinies. There are clearly a number of state governors who are doing excellent jobs despite of difficult circumstances of developing their states. Governors Nasir El-Rufai of Kaduna, Fayemi of Ekiti and Obaseki of Edo are doing pretty good jobs in this regard”.

What is clear is that, the country has to make tangible progress on key challenges and pursue some bold reforms to realise its long-term potential. In the short to long term, the drivers of Nigeria’s economic policies need to marshal the needed fiscal resources for a pro-poor response to the debilitating economic crisis and undertake the reforms that will help ensure a robust recovery in 2021.