Nigeria in 2017: Separating Expectations from Realities

The year 2016 went down as one of the toughest and most challenging years for most Nigerians. The challenges experienced by most citizens and business operators in the country in 2016 may not be quickly forgotten. Their effects may even linger for the foreseeable future. This is due to the far-reaching implications of some underlying factors in the macro environment such as the devaluation of the naira, high inflation, amongst others.

A negative fourth quarter 2016 GDP growth figure would mean that the year recorded one of the worse GDP slumps in 12 years. Data from the National Bureau of Statistics (NBS) show a consistent decline in the country’s aggregate output in the first three quarters (Q1 = -0.36%; Q2 = -2.06%; Q3 = -2.24) of the year, with the country officially entering a recession in the second quarter of the year. The decline recorded in aggregate output was in stark contrast with a prolonged 5%-7% GDP growth rate recorded annually between 2005 and 2014. During the presentation of the 2017 budget to the national assembly, President Buhari himself characterized the current situation as the worst economic crisis in the history of Nigeria. Who will argue with that?

If 2016 was dismal in terms of economic performance, what can we expect in 2017? How realistic are our expectations that 2017 will be better? Let’s look at some pointers and try to decipher these questions. True, the shock waves arising from the crude oil price drop and the slide in domestic output were the major factors responsible for the recession. Nevertheless, the weak policy response from the government made macroeconomic conditions worse. But there seems to be some silver linings. Based on a projection by the International Monetary Fund (IMF), the current negative trend is expected to reverse in 2017 as Nigeria’s economy is expected to grow at 0.6% compared to an estimated -1.7% GDP growth rate in 2016.

Also, the International Energy Agency (IEA) has said that the glut in the international oil market will gradually begin to recede. This will lead to price recovery that is projected to reach $60 per barrel of crude oil. Prices have edged up to $56-$57 per barrel. This price level is supported by the production cuts agreement reached by the Organisation of the Petroleum Exporting Countries (OPEC) – an agreement that has been long overdue but that is also contingent on some non-OPEC members agreeing to production cuts.

On the home front, what factors can we expect to influence economic growth and impact lives in 2017? It is quite normal that following a difficult 2016, most people would hope for a healthy rebound as fast as possible. Unfortunately, we might have to wait for much longer. Whereas Nigeria is expected to grow in 2017, the pace of growth will only be marginal. Only in 2018/2019 can we realistically attain positive economic growth rates that would get close to what the country used to have in the 10 years before 2015. The reason we need to temper our expectations is we have to take into account lost productivity and foregone investment opportunities. Sectors of Nigeria’s economy such as agriculture, mining, IT/telecommunication, financial services, news media and music/movie industries would experience accelerated recovery than say construction, housing, manufacturing, transportation/logistics, oil and gas, power, etc.

A persistent high interest rates regime, coupled with high exchange rate plus forex scarcity, could conspire to throw a monkey wrench into any potential rapid rebound. By the time we enter into the second quarter of 2017 and beyond, it is possible that conditions would normalize. But this scenario would depend on whether the Central Bank of Nigeria (CBN) would lower its Monetary Policy Rate (MPR) from the current high of 14% and if inflation reverses course from the current uptrend. The caption of the 2017 budget proposal that was submitted to the National Assembly in December was: “Budget of Recovery and Growth.” An important development was that the budget was submitted about one week earlier (December 14, 2016) compared to the date the 2016 Appropriation Bill was submitted (December 22, 2015). The size of the budget at N7.2 trillion is also quite encouraging. Over 30% is earmarked for capital expenditures, which is a shift from previous budgets. The Ministry of Power, Works and Housing is getting N527 billion, and Transportation N262 billion. The impetus does exist for massive infrastructure spending that could catalyze growth and job creation.

The proposed benchmark oil price of $42.5 per barrel and target output level of 2.2