IMF and Nigeria’s shrinking economy

It is difficult to situate the International Monetary Fund (IMF) and its observation, the other day, that Nigeria’s economy is likely to contract in 2016. The IMF notes that while the economy should look better in the second half of the year, growth will probably not “be sufficiently fast, sufficiently rapid to be able to negate the outcome of the first and second quarters.”

This observation is in sharp contrast to the growth projections of 3.2 per cent and 2.3 per cent that the IMF had made respectively in February 2016 and in April 2016, when it released its Article 4 Consultation Report on Nigeria. Then, the IMF had noted that “Growth in 2016 is expected to decline further (from 6.4 per cent in 2014 and to 2.7 per cent in 2015) to 2.3 per cent, with non-oil sector growth projected to slow from 3.6 per cent in 2015 to 3.1 per cent in 2016 before recovering to 3.5 per cent in 2017, based on the results of policies under implementation – particularly in the oil sector – as well as an improvement in the terms of trade.

While this may have demonstrated the uncertainties of economic projections and forecasting, there is no doubt that the Nigerian economy is facing substantial challenges as the IMF already noted in its April Report. The decline by 0.4 per cent of the country’s Gross Domestic Product (GDP) in first quarter of 2016 reflected the economic headwinds of cut in oil production from projected two million barrels per day to 1.4 million barrels per day and the slump in oil prices to as low as $27 per barrel in February of 2016. The delays in the approval of 2016 budget and spending plans, and fuel, electricity, and foreign exchange scarcities further compounded the impacts of oil prices and production shortfalls on the economy.

In spite of the shift in policy regimes towards fuel deregulation and flexible foreign exchange in the second quarter of 2016, the economic headwinds are not likely to subside in the short term. It has been projected that the Nigerian economy technically entered into a recession by the second quarter of 2016. Inflation is projected to continue its upward trend and possibly reach an upper limit of 20 per cent.

The new flexible foreign exchange regime is still being tested, with the parallel market naira rate, which initially appreciated has now resumed its upward climb to 365 naira to the U.S. dollar. Several manufacturers now contemplate exiting as production costs rise on the back of rising capital costs with looming higher interest rates, higher foreign exchange costs with significantly depreciated naira, and rising import duties align with new foreign exchange regime. Households and the industrial sector have to contend with rising prices of kerosene, diesel, and electricity.

There appears to be no easy ways for policy makers to deal with the economic challenges and headwinds. Announcing and operationalising a new flexible foreign exchange rate regime are the easier parts. More difficult policy choices are ahead. The Central Bank of Nigeria (CBN) and its Monetary Policy Committee (MPC) still face the monetary policy trilemma.

The CBN and the MPC now have to contend with dealing with both declining economic growth rate and higher inflation rate; with the inconsistencies of an accommodative monetary policy and a more flexible exchange rate regime; and with raising interest rate to attract foreign portfolio investors while dampening inflation and reducing interest rates to support manufacturers and economic growth. It has to maintain not only price stability but financial stability as well as the impacts of weaknesses in the corporate sector on rising non-performing loans of banks.

On the fiscal side, the impacts of the delay in the approval and execution of the budget on the economy is already being compounded by the reality of oil revenue shortfalls. The Secretary to the Government of the Federation already attested to this, with implications for the administration’s ambitious social plans. The Federal government’s deficit is projected by the IMF to widen to 4.4 per cent in 2016 before improving 4.0 per cent in 2017, while state and local governments face a further deterioration in their finances.

In the midst of these economic headwinds, and attempts to reflate the economy which now hovers around $350 billion from over $500 billion in 2015, long-term economic productivity would need to be addressed. While the move towards market-oriented policies should be welcome, there is still need for rolling development plans articulating strategies, policies, programmes, projects and financing requirements and sources to tackle the productive sectors of agriculture, manufacturing, mining, as well as power and transportation infrastructure deficits. The administration is encouraged to put in place a strong national economic advisory team, while the National Assembly should also become more proactive in presenting economic ideas and solutions.