Otunuga: Fanatical dependence on oil Nigeria’s undoing

Lukman Otunuga

There Are Visible Signs Of Economic Recovery
Currency and research analyst at the Cyprus-based FXTM, Lukman Otunuga, says Nigeria’s greatest challenge to growth and development is being trapped in the past and failing to see that the era of high oil price is in the distant past. He told CHIJIOKE NELSON, that despite all odds, the country’s economy is gradually crawling out of the woods.
Are there reasons to be confident about the country’s economic resurgence?
I find it quite remarkable and highly encouraging how, despite several months of recessionary woes, Nigeria remains resilient, and on a mission to stabilise in the longer term. Although 2017 has dished out various difficulties ranging from soft domestic data, to external risks and falling oil prices, the macro fundamentals of the country continue to display signs of stability with recent positive data releases reinforcing this sentiment. Visible signs of recovery can be seen across GDP, inflation and even FX, which I am confident would support further the rising confidence over the nation’s health.

Did you see a resource curse in the ongoing challenge?
Sure, the source of Nigeria’s economic woes today was basically its fanatical dependence on oil as an engine for economic growth. When oil was trading around $100 a barrel a few years ago, the nation missed a rare opportunity to reinvest the excess funds back into the economy in the form of diversification. With oil exports representing a massive chunk of government revenues, the sharp and prolonged depreciation in the commodity seriously punished the Nigerian economy and placed it into the hands of the recession we see today. Had Nigeria focused on infrastructure and reinvested in other non-oil sectors during the oil boom, it may have been discussing a very different story today.

But how sustainable is the current economic rebound, in the midst of revenue and side risks?
The current speed of Nigeria’s recovery is slow and steady with macro-fundamentals gradually stabilising. Inflation has declined for the fourth consecutive month in May to 16.25 per cent, while GDP growth in Q1 was the best seen in four quarters. With the naira attempting to stabilise on the parallel market, and the government already passing the 2017 budget, the outlook from the onset does look quite encouraging. If inflation continues to follow a negative trajectory, the naira stabilises and other forms of hard economic data improve, the CBN may be gifted an opportunity to cut interest rates to support growth in real sector.

Besides these, what other risks remain elevated?
Although Nigeria seems to be resurging from an economic meltdown, there are still internal and external risks, which impede recovery. Externally, Nigeria’s greatest threat in the short to medium term is falling oil prices. Falling oil price has the ability to directly impact the nation’s revenues, external reserves and stability of the nation’s foreign exchange market. An earlier risk was higher United States’ interest rates, although as of this discussion, sentiment remains bearish towards the dollar, with investors currently questioning the Federal Reserve’s ability to raise rates again.

To what extent will foreign exchange play a destabilising role in the ongoing economic rebound?
While the Central Bank of Nigeria may be commended for its attempt to stabilise the naira by repeatedly injecting dollars into the foreign exchange markets to maintain liquidity, this method seems unsustainable. Depressed oil prices have the ability to create instability in the Nigerian foreign exchange, as drops in the commodity will most likely reduce dollar supplies. Rather than using the foreign exchange reserves to prop up the naira, the CBN should strive to abolish the multiple exchanges, while allowing the natural forces of supply and demand to determine the real value of the naira.

Do you harbour any reservations about the recently released economic blueprint?
While the recently released Economic Recovery and Growth Plan has the power to break Nigeria away from its recessionary chains, it behoves the question of how effective the plan is implemented. Another question and a potential challenge is how Nigeria finds a solution if oil prices remain at depressed levels. The seeds of diversification have already been planted and Nigeria as the patient farmer, must strive to nurture the various non-oil sectors in its quest to becoming sustainable and self-reliant.

How would you score the nation’s fiscal policy regime?
The bitter truth is that Nigeria’s fiscal policy has long been a gray area, with the nation’s long-running infrastructure problems compounding 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 is in dire need of robust infrastructure as major roads are in bad condition; the power sector remains a cause for concern, while both health and education sectors are in dire straits. Rectifying these issues would have the possibility to not only create jobs but also support economic growth.

Do you not see anything wrong with the country’s rising debt profile?
Nigeria’s total debt has surged to N19.16 trillion as of March 31, 2017 and remains a cause for concern. Although the nation’s current debt to GDP ratio is roughly 19 per cent, which is still lower than the 40 per cent suggested for emerging market economies, this is the last thing needed during a period when the economy is facing many internal and external challenges. While borrowing may be necessary to finance infrastructural projects and potentially support economic activities, it becomes a question of how the funds are managed and if it is reflected on output.

So how really sustainable is the debt package?
Time will tell if the country’s rising debt profile is sustainable. There have been discussions about the nation generating revenue by other means, including the selling of national assets. While such a method could provide some cash for Nigeria, this has been labelled a short-term fix, which may have punishing impacts in the longer term.

So, can you rank Nigeria’s greatest challenges to growth and development?
Nigeria’s greatest challenge to growth and development is being trapped in the past and failing to see that the era of high oil is in the distant past. Although the oil boom came as a blessing, which provided supernormal profits for the nation, the opportunity was misused and ended up as a curse. While the pain of falling oil price is the route of Nigeria’s woes, this wakeup call could turn into a blessing and force the largest economy in Africa to transform. It is better late than never as the steps to diversify and break away from oil reliance have already been taken. If Nigeria is true to itself and makes good on its efforts to stabilise and invest in non-oil sectors to become self-sustainable, then the end result may shock the world stage. But will Nigeria be true to itself and the world? 

What do you make of the country’s economy in the next 12 to 18 months?
The path to recovery for Nigeria is slow and steady, with sentiment towards the nation slowly taking a turn for the better. If inflation continues to cool in the next 12 to 18 months and economic data follows a positive trajectory, then the Central Bank of Nigeria could be prompted to cut interest rates. While the foreign exchange issue is a problem that Nigeria will eventually have to face, markets seem content with the methods of the CBN in the short term and such could attract foreign investments consistently.

Much attention will be directed towards Morgan Stanley Capital International (MSCI) decision on Nigeria’s Index and the pending GDP reports, which should offer further insight on how the nation is faring. Oil prices may play a part in where Nigeria finds itself in a year’s time with low oil dishing out downside pressures.

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