Nigeria’s economy hits new lows on strings of misfortunes

Nigeria has had a fair share of the unsavoury developments in the face of domestic and international headwinds. CHIJIOKE NELSON writes.
It appeared to be long coming. And finally, it dawned on the economy. This is about the strings of economic challenges that have befallen the country over the years, which took drastic turn in the last one year. From the effect of low oil prices, to its consequences on the national revenue profile, foreign exchange reserves and exchange rate crisis, it has been heart-rending.

Still, the socio-economic and political developments of petroleum products’ availability and distribution, policy direction and communications, as well as persistent uncertainty about the value of the naira are telltale signs of what has happened and those that may happen. Of course, it appears not over yet.

Nigeria’s economy grew in fourth quarter at the slowest yearly pace since 2010, according to report by Bloomberg Intelligence, and oil production was the biggest drag. Already, there is a projection that the Gross Domestic Product (GDP) growth could be weaker still or even negative in the first half of 2016 because of the reduction in oil production after recent attacks from militants.

In fact, analysts have said that Nigeria’s economic growth may remain stunted till the end of the first half of the year (June) with macroeconomic headwinds- budget delay, sustained foreign exchange challenges, out-of-target rising inflation and the trickling effects of petrol scarcity persisting.

“With other parts of the economy already struggling, the full-year expansion might be the slowest in decades. A devaluation of the naira would add to risks for growth this year, but boost the medium- term economic outlook,” the Sub-Saharan Africa and Middle East Economist, at Bloomberg Intelligence, Mark Bohlund, said.

Nigeria’s real GDP growth slowed to 2.1 per cent year over year in Q4 from 2.84 per cent in Q3, the worst quarterly reading since at least Q1 of 2010. The deterioration was largely due to an 8.3 per cent year-on-year contraction in oil-sector output, which the Nigerian Bureau of Statistics attributed to the decline in oil prices, while growth in the non-oil sector was 3.14 per cent, marginally stronger than the 3.05 per cent in Q3 of 2015.

The agricultural and wholesale and retail trade sectors, which grew by 3.3 per cent and 4.7 per cent, respectively, were the largest contributors to headline growth, adding 0.7 percentage point and 0.8 percentage point. Cement production grew by 21.3 per cent, but this was still a slowdown compared with average growth rates of 22.4 per cent in the first three quarters of the year, 29.7 per cent in 2014 and 39.2 per cent in 2013, illustrating a rare successful example of import substitution.

The Q4 report of real GDP growth brought the whole of 2015 growth to approximately 2.8 per cent, the weakest since 1995, when the economy expanded 2.24 per cent.

The United States of America’s Census Bureau estimated Nigeria’s population growth in 2015 at 2.5 per cent, showing how living standards have stagnated in the country since the era of $100- per-barrel oil ended in mid-2014.

The new challenge is no longer that the country is still dependent on the revenues from oil sources nor that the oil prices are low, but that militancy may be renewing their struggle. This has an implication on maintaining oil production levels. Shell declared force majeure on shipments from its Forcados terminal on February 21- a week after an oil pipeline explosion suspected to have been carried about by militants. Three pipelines were bombed in January and there is a risk of further attacks because the situation looks unlikely to be resolved by the government in the near term.

Repairs to the pipeline, according to Bloomberg, could keep Forcados out of operation until May, as well as reduce oil production by 300,000 barrels per day. This alone could push the contraction in the oil sector into double-digits in the first half of 2016 and could reduce headline GDP growth by as much as 1.5 percentage points. With oil production accounting for about a tenth of GDP and other sectors of the economy slowing, a negative overall growth reading is a possibility.

“The reduction in oil exports will further constrain government revenue and foreign exchange earnings in the near term, resulting in second-round effects on the non-oil sector. While that will be economically significant, it may still not be enough to convince authorities to abandon their policy of limiting access to U.S. dollars,” Bohlund said.

The Presidency dismissed advice from the International Monetary Fund to devalue the currency, while only one member of Monetary Policy Committee in January meetings was in favour of a weaker naira.

President Muhammadu Buhari said that devaluing the naira would cause further hardship for the country’s poor, but investors are arguing that while a weaker naira would undoubtedly weigh on domestic demand and growth in the near term, it would spur foreign investment and increase the competitiveness of domestically produced goods and support growth over the medium to long term. The truth is that the economy is currently facing challenges.

The Nigerian Stock Exchange in its January 2016 report on domestic and foreign portfolio participation showed a 23.9 per cent month-on-month decline.

There was also a fall in total value of transactions in January to N84.1 billion from N110.56 billion in December 2015, while it also lost 55.7 per cent from N189.72 billion year-on-year.

Foreign inflows, though declined at a slower rate of 0.2 per cent to N17 billion compared to the 30.2 per cent decrease in outflows to N26.4 billion from N34.3 billion in December 2015.

“Although, foreign portfolio investments, also known as ‘hot money’ are mainly invested in financial instruments, the direction of capital and the performance of the local stock market reflect the wellbeing of the economy, an investment researcher and analyst at Afrinvest, Ayodeji Eboh, said.

Recent macroeconomic numbers have been painting challenging a picture for the economy and its investment landscape, with key issues like high unemployment, weakening consumer spending, alleged poor monetary and fiscal responses and waning financial market sentiments headlining.

An analysis of the non-oil and oil divisions of the economy indicated that while the non-oil sector grew 3.8 per cent year-on-year in 2015, the oil sector declined 5.5 per cent after recording a single growth for the year in the third quarter.
“Weaker performance of the Industry sector suggests that the sector remains pressured by unfavourable monetary and fiscal policies despite government’s intentions to engender domestic productivity,” he added.

Amid low output growth, headline inflation rose to 11.4 per cent in February, the first double-digit rate in almost 42months, which is beyond CBN’s inflation target of six per cent–nine per cent and attributed to rising food prices, cost of imported goods, as well as replacement costs.

The President and Chief Executive Officer of Time Economics Limited, Dr. Ogho Okiti, said policy makers are now “caught between the devil in slow growth and the deep blue sea in rising inflation,” adding that there are limited tools to spur growth and enhance economic activities presently.

The Managing Director of Highcap Securities Limited, David Adonri, said the only thing that would excite the market is the reversal of all the market unfriendly policies, especially with regards to foreign exchange developments.
“The market currently runs on dual system with different rates. We need a radical change, where market rates would be driven by dynamics and formalised,” he said.

The Associate Research at Eczellon Capital Limited, Mustapha Suberu, said the prospect for the Nigerian economy in the first quarter of 2016 is still unclear, as GDP growth may come lower than the 2.11 per cent achieved in the fourth quarter of 2015.
“This is on the back of record low oil prices at the beginning of the year and oil production challenges witnessed so far in the year. Similarly, the foreign exchange crisis coupled with rising inflation and the inability of some states to meet their salary obligations would depress consumer demand further and thus, weaken the non-oil segment of the economy.

“We however expect a gradual rebound in economic activities in the second quarter, largely on the back of the start of the implementation of the 2016 budget, which should spur economic activities in targeted sectors,” he said.

He said that it has become imperative economy managers to provide guidance on the management of the nation’s currency, which would entail the development of a roadmap that would allow for flexibility in the pricing of the naira, preferably through a managed floating system.

“Added to this would be the need for adequate support from the fiscal authorities to complement monetary policies. This support has largely been absent in recent times. This would invariably attract the needed investment into the country and set the economy on a sustainable growth path,” Suberu added.