Report hinges Nigeria’s growth potential on long-term economic model

TO mitigate economic shocks devoid of deterioration of the political and security landscape, Nigeria’s policymakers must encourage a more resilient economic model, fit to harness the country’s strong growth fundamentals.

In its latest Nigeria Economy Watch report titled “What next for Nigeria’s economy? Navigating the rocky road ahead”, PricewaterhouseCoopers noted that despite the uncertainties generated by the volatility in oil prices and the significant drop in government revenue, the Nigerian economy will continue to grow, even if oil prices fall to $35/bbl and average just $45/bbl in 2015, provided there is no deterioration of the political and security landscape.

According to the report, a large services and agriculture sector has developed independently of the oil sector, and this should help to insulate the real economy from a downturn in oil prices.

The report however stated that any deterioration of the political and security landscape could unnerve investors and tip the country into recession.

“If a ‘medium’ political shock occurs against the backdrop of a severe oil price scenario, the report predicts that Nigeria’s economy could see zero growth or even contract in 2015 and again in 2016.

“PwC’s economic scenarios for the country for 2015 and 2016 and draws on three possible economic scenarios developed by the firm’s economic team to help both public and private sector organisations prepare for an uncertain environment in 2015 and 2016”, the report added.

Partner and Chief Economist at PwC Nigeria, Dr. Andrew S. Nevin in his comments on the outcome of the report said: “We explored two types of shocks in the report: an oil price shock and a political shock.

The first scenario looks at oil price averaging $55/bbl over 2015 and stabilising at $70/bbl in 2016 with a smooth transition and maintenance of political stability in the country.

“Scenario 2, envisages the re-emergence of Iran oil production in Q2 of 2015 which could drive oil prices to as low as $35/bbl and reaching a new equilibrium level of $60/bbl in 2016 consistent with the most bearish forecasts from analysis.

The third scenario follows a similar pattern as scenario 2 with oil prices averaging $45/bbl in 2016 in addition to severe political or security shock arising from escalation of Boko Haram insurgency and/or resurgence of restiveness in the Niger Delta.

“Our modelling and forecasts show that while the economy will continue to struggle even under the most benign scenario, it will be able to realise growth averaging 4.0% for the period. “These scenarios present important issues to consider for all organisations exposed to Nigeria.

We are already supporting several public and private clients across a range of sectors to help them understand what these scenarios could mean for them and how they can build preparedness through their business planning processes.

” On why further fall in the oil price even to as low as $35/bbl will not slow the economy, Dr. Nevin noted that the growth of large services and agricultural sectors has fuelled economic development, with active fiscal and monetary policies encouraging this trend adding that only a relatively small proportion of oil revenue flows through to the real economy.

In terms of projections, PwC stated: “In the short-term, Nigeria’s policymakers have relatively little ability to influence which scenario the country may enter (particularly relating to the oil price).

However, policymakers can take actions that will help mitigate the potential impact on the economy if a crisis does materialise.

“On the monetary policy side, the central bank will need to take the lead in closely scrutinising the evolving risk environment, particularly around market, credit and liquidity risks.

It should stand ready to intervene with a wide-ranging toolkit including extensive liquidity facilities and contingency plans for maintaining the cash money supply in regions inflicted by bouts of instability.

“The Government can also take responsibility for developing a set of priorities for federal and state expenditure, aligned to the national development plan.

A policy principle might be to protect and support a few strategic industries during a crisis period, such as agriculture and MSMEs, which provide a large number of jobs to citizens.

“In the longer-term, Nigeria’s policymakers should aim to encourage a more resilient economic model, learning the lessons from this period and building an economic strategy fit to harness the country’s strong growth fundamentals, particularly that of a young, entrepreneurial and increasingly well-educated workforce.

A first priority should be restoring fiscal credibility by widening the tax base and distributing the benefits of the country’s oil endowment more evenly across the population. ”