Buhari's task is to rebuild business confidence in Nigeria
When the International Monetary Fund (IMF) forecasted in July that the Nigerian economy would contract by 1.8% in 2016, the Minister of Finance, Kemi Adeosun, told the Senate to ignore the IMF's incredulous projections. She said although Nigeria was in a technical recession, the definition of a recession was not so important, even as she used the opportunity to encourage Nigerians, while asserting her confidence in the direction of the government's economic policy. Nigeria's recession was speculative at the time, but official figures have confirmed it. More crucial is what the second quarter GDP figures have shown: A deepening contraction from 0.36% in Q1 to 2.06% in Q2 of this year.
Real issues can never be addressed by being dismissive as the Finance Minister did during her Senate briefing. Macroeconomic data provided by the National Bureau of Statistics (NBS), notwithstanding the agency's delay in releasing the figures, show that socio-economic conditions have tightened. Workers are being retrenched as a result of the decline in productivity; quite a number of businesses have shuttered, leading to a rise in the rate of unemployment from 12.1% in the first quarter to 13.3% in the second quarter. Low confidence in an economy typically reduces inflation expectation. However, inflation rate in Nigeria has risen from 9.6% in January 2016 to 17.1% in July.
The removal of petrol subsidy at an inauspicious time led to a rise in fuel prices. Apart from this, a major inflationary pressure has been the devaluation of the naira. The repricing of the local currency, as well as foreign currency shortages, have led to sharp increases in the cost of imports. Unfortunately, the promise that a weaker naira would attract foreign investors into the country and make exports more attractive has so far proved to be illusory. The inflation conundrum and the economic recession indicate a significant policy misalignment, and astute observers say weak investor confidence has thus held sway in Africa's second largest economy.
South America's largest economy, Brazil, has been in a recession since 2014 due to similar reasons of poor policy responses to economic challenges and weak investor confidence. Following the suspension of former President Dilma Rousseff in May (and her eventual impeachment from office by the Senate on August 31), economic data released last month showed total investment in the second quarter grew for the first time since mid-2013. The rebound in investment has been linked to the probusiness agenda of the new Brazilian President, Michel Temer. Within two months of being acting president, the Brazilian real gained 21% against the dollar. Temer boosted confidence by putting together what Goldman Sachs has called an economic “dream team.”
Amid a palpable sense of despair in Nigeria given that the NBS' data on the economy will foster negative sentiments, a frank conversation by the government about how it plans to address the current challenges is the first step it needs to take. Definitely, uncertainty and flip-flopping on policy decisions do not exude confidence in the market. Recently, Moody's and Fitch downgraded Nigeria's credit rating to B1 and B+, respectively. These are two of the lowest investment-grade ratings. Fitch, in particular, gave the reason for its downgrade as the Nigerian government's weak policy response to mitigate the impact of low oil prices. Lacking the conviction to talk about “change” nowadays, the government's response to the economic difficulties has been to offer “hope” to the people. Unfortunately, Nigerians need succour, not platitudes and campaign promises after the election that cannot get us out of the recession.
The truth is that in spite of the fall in oil prices, there are undisputable opportunities for investment in Nigeria. The GDP data for Q2 shows there were areas in the non-oil sector of the economy that saw positive growth, namely; agriculture (4.53%); information and communication (1.35%); water supply (8.46); arts, entertainment and recreation (1.80%); professional, scientific and technical services (1.07%); education (2.88%); and other services sectors (4.32%). Among the only two sectors whose output actually expanded on a quarter-on-quarter basis, the agriculture sector saw the fastest rate of productivity expansion. Yet, this is the sector that has seen another tepid policy response, receiving less than 2% of budgetary allocation in 2016.
After betting the success of its policies on an expansionary budget, capital spending in the 2016 budget is at risk of not meeting implementation targets, thereby kicking the can of infrastructure investment farther down the road. The Buhari administration increased capital expenditure by 185% from N557 billion in the 2015 budget to N1.59 trillion in 2016. Latest figures provided by the Minister of Finance suggest that less than 30% of this year's capital expenditure has been disbursed as at last month. Ironically, the government has failed so far in the area it wanted to succeed the most. Construction industry GDP contracted by 5.37% in Q1 and 6.28% in Q2.
The verdict that Nigerians passed on President Goodluck Jonathan when the country voted for President Muhammadu Buhari was largely informed by the dissatisfaction with the sense of rampant corruption under the past administration. President Buhari will ultimately be judged by his economic policies and what they have achieved in terms of transforming the business environment and providing opportunities for the growing youth population and improving the social conditions of the people. There are not many people left who would accept platitudes in the face of the worsening economic hardship.