Nigeria’s economy jostles for confidence amid headwinds
From a six per cent Gross Domestic Product (GDP) five years ago, to recession in 2016, and post-recession’s fragile recovery below two per cent till date, it’s been no respite for both the citizenry and economy.
But more worrisome is that in the near term, the outlook remains uncertain, an indication that the search for respite by stakeholders may not come sooner.
First, the Bretton Woods institutions- the International monetary Fund (IMF), last week, reversed earlier growth projection for the country to two per cent, from 2.3 per cent.
The downward forecast was based on assessed challenges that would assail the economy, basically from the country’s major revenue and foreign exchange earner- crude oil, as the renewed uncertainty in the price of the commodity is capable of distorting all economic projections.
Already, a global accounting body- the Association of Chartered Certified Accountants (ACCA), in its latest study, said the country faces its lowest economic confidence scores in a year, after a fall in the final quarter of 2018.
The study tagged: “Global Economic Conditions Survey (GECS)” by ACCA and Institute of Management Accountants (IMA), noted that given the poor near-term outlook, a fall in oil prices would weigh on exports and government revenues, saying that 82 Nigerian accountants polled affirmed it.
The Head of ACCA Nigeria, Thomas Isibor, said: “The report finds that despite an improvement in the non-oil economy, consumer demand is soft, restrained by a 23% unemployment rate.
“Overall GDP growth in 2019 is likely to be very modest at between two per cent and 2.5 per cent. Presidential election in February increases uncertainty in the near term, but the outcome may result in more business-friendly policies.”
But the Head of Business Insights at ACCA, Narayanan Vaidyanathan, added: “Economic confidence over 2018 has been turbulent, with end of calendar year results downbeat, compared to the start of 2018.
“It’s been interesting to look back at the GECS from the start of 2018, when we recorded economic confidence at its highest since the first survey was issued, assessing first quarter of 2009. Last year was clearly a roller-coaster ride and the outlook for 2019 is also uncertain.”
The nation’s interest rate environment will remain hawkish, at least in the near term, meaning that expectations of reduced funding costs would prolong.
Two things will drive the apex bank’s persistent hold on the rates. First is the potential of increased interest rates globally, followed by the country’s quest to attract foreign investments, as a foil to capital flow reversal induced by the interest rate hike in developed economies.
The U.S. Federal Reserve has already planned three interest rate hikes in 2019 to a range of three per cent-3.25 per cent, which will lead to capital flow reversal.
“The appropriate policy response to curtail capital flights is to adopt a tight monetary policy stance in the form of an increase in the yields of government securities, not rate cut,” the Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, said.
To address the ensuing risks to possible increase in inflation rate in Nigeria and the weak exchange rate, a research by FSDH Merchant Bank Limited noted that CBN will continue to use the sales of government securities to influence interest rates and yields.
Consequently, the possibility of yields on fixed income securities to increase marginally from the current levels in coming weeks is high.
So, interest rate cut in Nigeria is not in the cards soon and funds will remain costly.
Worrisome too is the fact that the increase in the interest rate in the international financial market may lead to higher interest expense than usual any time this year, when government wants new foreign borrowings.
Oil Price dynamics
With a gloomy outlook for the global economy in the short-term, leading to uncertainty in the crude oil price, the nation’s quest for increased foreign exchange reserves and earnings to support budget implementations are sure to get some setbacks.
Already, the nation’s oil production quota has been reduced to 1.6 million barrels per day, leaving a shortage of 700,000 barrels per day in the budget benchmark of 2.3 million barrels per day, while price is forecast to average $60 per barrel in 2019, lower than $71.7 per barrel in 2018.
A significant decline in crude oil price will have negative fiscal and monetary implications for the Nigerian economy.
The global oil cartel’s production cut will reduce government’s revenue if crude oil price does not rise as much to compensate the output cut.
This will increase fiscal deficit, also put pressure on exchange rate, inflation rate and interest rates.
Currently, the county’s crude oil grade offering, at the weekend, is $61.94 per barrel, just $1.94 above the 2019 budget proposal benchmark, but when multiplied by 700,000 barrels per day, which were cut off by the oil cartel, it means that Nigeria will be losing $43.4 million everyday.
Nigeria must implement policies that will diversify the Nigerian economy, create sustainable foreign exchange stability and assist in lifting aggregate demand in the domestic economy.
But it appears that discussions of this nature are more of lip service and paper work.
Investment in critical infrastructure will grow the key sectors of the economy and allow for stronger buffers against external shocks.
It is also important to invest in human capital, quality education and healthcare to increase productivity in the country. These are still at preliminary stages, at best.
A financial analyst had told The Guardian that despite the fact that the economy is showing signs of recovery, there was also need for coordination of fiscal and monetary policies to achieve strong growth and reduce potential negative impacts.
Unfortunately, the fate of the 2019 budget, which proposal is currently in the “coolers”, given the political atmosphere that is highly charged, remain uncertain and will surely tell on the economy sooner.
First, the outcome of the elections has much to do with pace of the work needed on the document when the elections are over in March.
The actual passage and implementations, as usual, has its own drama of absurd order. At the moment, the fiscal expectations from the budget can only be speculated.
Martins Uzor queried the continued fashion of not approving budgets early, saying the fiscal policy side has always lagged behind and delayed investments in critical infrastructure and human capital, which are necessary to jumpstart productivity and growth in non-oil sector of the economy.
“CBN should sustain its unconventional policies as a way to boost credit creation and support business expansion in the near absence of the fiscal side. They should also consider all the impending risks in the economy before taking a decision,” he said.