By Rafiq Raji, PhD
This week, I share edited views I presented on the state of the Nigerian economy and outlook for 2017, at the Bonds, Loans and Sukuk Nigeria Briefing Day held in Lagos on 21 November 2016. You can download my presentation via this link: http://www.gfcmediagroup.com/africa/bonds-loans-nigeria
Macroeconomic vs geopolitical woes: What is hurting the economy the most?
In the Nigerian case, they are interconnected. Attacks by Boko Haram, a terrorist group, in the northeast hitherto weighed significantly on agricultural output, as logistics and other parts of the agriculture value chain were significantly disrupted. In any case, farmers couldn’t plant for fear of being killed. Some of those fears have abated, in light of successes recorded by the Nigerian military. But a significant number of able men in the region are still not farming, because they are displaced, fighting with Boko Haram or in hiding to avoid arrest by the military on suspicion of being Boko Haram sympathizers. Attacks by Fulani cattle herdsmen on farming communities also affected agricultural production. As some of these troubles remain, insecurity in these areas remains concerning.
In the Niger Delta, attacks by militants on oil and gas infrastructure have disrupted crude oil production and gas supply to power stations. And even though these attacks are motivated in part by a desire for more control over resources, there is a corruption dimension as well; as erstwhile treasury looters feel squeezed by the administration of Muhammadu Buhari, Nigeria’s president. There is also likely a political motivation. A supposedly competent President Buhari, in the security sphere at least, would be hard-pressed to explain why he failed to curtail militancy in the Niger Delta come 2019, when elections are due. The casualties? Economic growth, inflation, and the fiscus. To a great extent, these negative geopolitical events contributed to the recession, double-digit inflation, and budget deficit.
Still, poor economic management made these troubles worse. The actions of the monetary authorities in light of dwindling foreign reserves were quite frankly irresponsible. To have kept the exchange rate artificially strong for so long, meant that even the little that had been saved was pilfered away to speculators and the like. And fiscal policy? You are all privy to how problematic the 2016 budget process was. Bizarrely, it seems history is about to repeat itself: the 2017 budget process is eerily following the same timeline.
More fundamentally, the main issue with the Nigerian economy is one of confidence. Authorities need to be clear on policy direction and be consistent. The government’s fundraising efforts have faced some pushback from multilateral institutions in part because of a lack of these. Though, it is surprising the authorities have not considered potentially much more effective ways of stimulating the economy. A 2-3 year tax holiday for households and businesses, whose expenditure constitutes at least 90 percent of economic activity, is one example.
Short-term suffering vs long-term gains: What does the end of the commodities super-cycle reveal about Nigeria’s economic fundamentals?
It is not the economy that is not diversified. It is government finances – 70 percent of which are crude oil-based – that are not. Unlike the popular commentary, Nigeria is not a mono-economy. 90 percent of the economy is non-oil related, based on 2015 data. At 23 percent of GDP, agriculture has a greater share of output than oil’s 10 percent. Then there is the dominant and varied services sector (53 percent of GDP), with telecoms, banking and other financial services accounting for not only significant tax revenue but are also major sources of employment. Only recently, Nigerian authorities raised an alarm about a potential famine next year, as farmers now find they could get more value for their produce abroad. One wouldn’t want to belabour the point about how unwise it was on their part for raising that alarm in the first place; after all authorities could better monitor the borders or quietly buy up grains needed for the strategic reserve. Even so, it highlights the likely underestimation of the agriculture sector and its potential as a source of foreign exchange; if in addition to producing for domestic consumption, farmers are able to export as well. Other sectors are probably underestimated as well.
What is pushing the currency down and how much further is it going to fall?
The main source of foreign exchange inflows to the Nigerian economy is not crude oil. Autonomous sources or so-called invisibles (ordinary domiciliary accounts, over-the-counter purchases, and so on) account for 60-70 percent of FX inflows. Crude oil? 20-30 percent. To encourage these suppliers, it is important for the Central Bank of Nigeria (CBN) to indeed let the naira float. It does not make sense for a central bank to keep supporting a currency when the extent of its firepower is in the full glare of the public. Then there is still pent-up demand. And just recently, the unthinkable happened. The country’s spy agency went after bureau-de-change (BDC) operators, ordering them to sell their foreign exchange stock at a certain price. Such actions discourage market participants.
There are other ways the government could increase FX supply. It is likely a significant sum of the money stolen during past administrations, foreign exchange especially, may still be domiciled within the country: It is not likely there was just one case of an ex-government official hiding dollars in a specially-built soakaway at his house. There are probably numerous others who have similar repositories of cash in safes and elsewhere. A way to formalise that money might be to issue a domestic dollar bond, like Ghana did. The Buhari administration may need to look the other way in the event. It is better to have stolen funds put to use in the domestic economy, than have them rot in some hideaway. So would the naira depreciate some more? It probably would. Unless the CBN allows the naira to trade freely long enough to re-gain the confidence of market participants, who have been disappointed by what has been a CBN-manipulated market thus far.
Is there more volatility ahead or will 2017 see a return to stability?
The recession would probably be over in Q1-2017. After likely negative growth of 1.5 percent for 2016, the Nigerian economy would probably record positive growth in the first quarter of 2017; 2.9 percent year-on-year is my reckoning. Inflation would also likely be in the single-digits by end Q2-2017, about 9 percent in June, say. Crude oil prices would also likely recover. Authorities’ economic stimulation efforts – to be proposed in a National Economic Recovery and Growth Plan (NERGP) – add to one’s optimism. In any case, base effects alone may buoy growth towards good numbers. But would that change the feeling of a go-slow economy among Nigerians? To the extent that likely positive growth figures in Q1-2017 changes the currently depressing commentary of government officials, the mood may turn around.
Hopefully, the Buhari administration would also adopt a pragmatic approach to current regional agitations. In the event, stability is likely. The Niger Delta issue has to be resolved by peaceful means certainly. And quickly. The Boko Haram issue should also be resolved once and for all. And to fend off other brewing regional agitations, authorities have to adopt a more inclusive style. It does not at the moment. And the CBN needs to make data-dependent decisions, consistently. Yes, it is under political pressure to cut rates. Still, a reduction should not be contemplated at this time. Thankfully, the CBN governor, Godwin Emefiele, has signalled as much. And the fiscal authorities need to get their acts together: pass the budget on time, borrow prudently, and explore untapped revenue sources. Ironically, it is the external environment that might make for a turbulent 2017. A Trump-led America, Brexit uncertainties, US Fed policy tightening and so on. But on balance, there is good reason to be cautiously optimistic.
Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/make-a-fuss-its-your-economy-too/