Nigeria’s ebbing growth and re-launch strategies

With glitz, glamour and razzmatazz the rebasing of the nation’s economy in April 2014 was greeted. Though a laudable exercise, the outcome and impact benchmarked against the celebration of the figures have not been justified till date in terms of growth.

Following the conclusion of the Gross Domestic Product (GDP) rebasing exercise, Nigeria overtook South Africa to become the biggest economy in Africa, with the economy worth N80.3 trillion or $510 billion, compared to South Africa’s $370.3 billion.

Were the figures sensible enough? The answer was relative. On the one hand, “yes”, for the purposes of academic exercise, theoretical perspectives and economic planning (for development conscious governments). It was also of interest to some economists. Of course, certain ratios changed. For example, the debt-to-GDP ratio declined and till now, though huge, but is not enough compared to the new status. It improved the country’s balance sheet, its credit rating and promoted it from being a low-income economy.

On the other hand, “no”, especially to the man on the street, whose life has remained the same, with no conscious effort on the part of government to translate the real message of the figures into transformational change in the environment for him. For example, Nigeria remained under pressure in terms of infrastructure deficit, lingering ports’ reforms, bad roads and unending struggle for stable electricity supply system. Yes, the figure did not make any difference at all.

Some economists also quickly pointed out that Nigeria’s economic agents are underperforming at an estimated 180 million people- three times larger than South Africa. On per-capita basis, South Africa’s numbers have been about three times larger than Nigeria’s. So, while Nigeria claimed the crown of Africa’s largest economy then until it was overthrown recently, there have been certain caveats.

While the exercise showed that previously uncounted industries like telecommunications, information technology, music, online sales, airlines and film production, diversified the economy than imagined, the irony was that further development in their diversification processes was stunted.

Since the last GDP rebasing exercise in 2014, significant changes have taken place in the Nigerian economy. For example, growth has slowed down from the average of six per cent witnessed over the last 10 years to 2.11 per cent as at the end of 2015 before contracting by -0.4 per cent in the first quarter of 2016.

This was driven by lower oil prices (heavy dependence) and depressed government spending, since it is the biggest spender in the Nigerian economy. This has led to a drag in consumer spending and corporate investment.

“We expect official second quarter GDP figures, when released later this month, to show that the economy has slumped into a recession,” analysts at Afrinvest Securities Limited said.

Following the decline in Nigeria’s foreign exchange reserve due to the fall in global oil prices and the eventual introduction of a flexible exchange rate, the Naira has depreciated by about 60 per cent against the dollar since June. But given the state of the economy, financial experts have said the floating of the exchange is the best option.

A currency expert and Research Analyst at FXTM, Lukman Otunuga, said while Nigeria’s latest change of status to Africa’s second biggest economy did not come as surprise given recent big moves in the Naira exchange rate, it is worth noting that the status quo is unlikely to be maintained in the medium to long term.

“Both the Nigerian and South African economies remain under intense pressure and are expected to contract this year, having contracted by 0.4 per cent and 1.2 per cent respectively in the first quarter of 2016.

“However, growth prospects remains high in Nigeria compared to South Africa given the peculiarity of the challenges facing the two economies,” he said.

For Nigeria’s situation, the macroeconomic challenges have been accompanied by rising prices and worsening domestic conditions. Consequently, latest International Monetary Fund (IMF) data using 2015 GDP figures and current naira-dollar exchange rate affirmed that Nigeria’s economy, in dollar terms, is now worth $296 billion – difference of $214 billion, two years after the rebased GDP.

Conversely, the South African Rand, buoyed by increased capital inflow, after escaping a downgrade, rallied by about 20 per cent since the year. Again, IMF using current ZAR/USD exchange rate and the 2015 GDP numbers, estimated that the South African economy is now worth $301 billion. As a result, Nigeria moved into second place as the second largest economy in Africa, ahead of Egypt.

“We are of the view that further output contractions, particularly in South Africa, would likely see the country lose her investment grade credit ratings which could trigger reversals in capital inflows and weaken the Rand.

“At the same time, the anticipated increase in foreign investments’ inflows into Nigeria in the second half of the year, owing to the liberalised foreign exchange market, could serve to firm up the Naira and improve Nigeria’s GDP standing in dollar terms.

“This will however, largely depend on the pursuit of the appropriate fiscal and monetary policy choices, enough to shore up investor confidence and stimulate growth. Thus, in the near term, currency movements will determine who will lead as Africa’s largest economy. While in the medium to long term, a lot will depend on growth,” Afrinvest said.

Recently, the Vice President, Prof. Yemi Osinbajo, who also chairs the National Economic Council (NEC), unveiled immediate economic objectives of the government in the fight against looming recession.

Also highlighting major challenges confronting the economy as well as policy actions being taken to address these, it was impressive by content, but of course, recurring implementation inertia and ongoing fiscal challenges remain factors to consider.

Fiscal Developments
While capital spending priority and non-oil revenue focus remain quite on track judging from the time the budget was approved, both unsurprisingly, have fallen short of target in actual terms. The Federal Inland Revenue Service (FIRS) achieved 73.2 per cent of its revenue target in first half of the year, with substantial loss of 26.8 per cent. The Customs revenue target was probably fared worse due to economic challenges in the period, aggravated by foreign exchange scarcity.

“These, in addition to oil production shock – arising from militancy in the Niger Delta – have impacted revenue profile of governments at all levels, with sub-nationals as the worst hit. The Minister of Budget and National Planning in a presentation earlier in the week reckoned that N600 billion in domestic borrowings (61 per cent of projected domestic borrowings for 2016 budget) have been raised in H1:2016 to fund budget deficit.

“This is much higher than N332 billion fund releases so far this year to cash-back capital projects, suggesting borrowings might have been used for recurrent spending in the period,” Afrinvest report noted

However, a confidence building point is the fact that state governments are now committing to the Fiscal Responsibility Plan as a condition to benefit from N90 billion intervention fund aimed at addressing the fiscal crisis at the sub-national level creating a drag on aggregate economic performance. Also, the FIRS has reportedly brought in additional 700,000 companies into the tax net as compared to the targeted 500,000.

Diversification Mantra
From all indications, the economic agenda of the government to stimulate economic recovery and deepen diversification is anchored on agriculture and solid minerals development. Particularly noted is the seeming roadmap tagged “The Green Alternative”. The roadmap essentially has an import-substitution strategy at its heart with the major objective being to achieve self-sufficiency in food production. Achieving this would help reduce the huge import bill and pressure on the national reserve.

Structural Reforms
The advent of the Treasury Single Account (TSA) in terms of implementation is a major shift in structural reform achievements of the current administration. It has been mainly cost-saving initiative in the public sector. The Integrated Payroll and Personnel Information System (IPPIS), which pruned an estimated N8 billion off monthly operating expenses of government, with another N14 billion projected savings by year end to be achieved by the newly setup Efficiency Unit, will support fiscal plans.

Strong forays into implementing more difficult reforms to ease conditions of doing business with the establishment of the Presidential Council on Ease of Doing Business will be laudable, if pursued. Plans to reduce fiscal and foreign exchange imbalances, boost dollar liquidity, curb inflation, lowering interest rate and ensuring lending to the real sector cannot be overemphasised.

Analyst at Afrinvest added: “While these are indeed pro-business objectives, belated pro-market responses to supply side shocks might have created a confidence gap in policy making, thus setting back implementation time-frame of the objectives.

“We are positive on the government meeting its spending goals and believe recent policy shifts from the fiscal and monetary authorities are beneficial in buoying confidence to the economy.

“This is crucial to ensuring access to international capital market & multilateral funding and re-igniting growth. Yet, restoring oil production to previous levels and fast-tracking structural reforms – especially in getting electricity, paying taxes, access to credit and registering property – will be key in navigating the economy out of the trough and putting it on a sustainable growth pedestal despite low oil price environment.”