2017: Year of Healing for Nigeria’s Economy
From its worst foreign exchange crisis and other economic challenges in the first half of 2017, Nigeria’s economy is clearly on the path of recovery and will end the year on a positive note, writes Obinna Chima
As of the end of 2016, the economic outlook for the Nigerian economy was hazy and gloomy given the precarious position of the macroeconomy as well as the recession that plagued the nation.
At the time, GDP had, for the fourth consecutive quarter, contracted. The situation then which became more pronounced in the first quarter of 2017, was worsened by the low crude oil prices which is Nigeria’s major source of revenue. Crude oil continued to drop as the country was confronted with decline in oil production due to frequent shut-ins and shut-down of trunklines at various oil terminals, which also contributed to the drop in revenue.
Also, inflation rate had risen significantly while persistent depletion of the country’s external reserves seemed irreversible.
The stock market was not left out as there were plummeting stock market indicators, sustained net capital outflows and poor doing business indicators all characterised the economy then.
Foreign exchange crisis was also pronounced as the naira was under intense pressure which saw to its decline to an all-time low.
But the story of Nigeria’s economy changed completely in the second quarter of the year as major economic indicators started looking positive showing the capability of the economy to turn the corner.
The second quarter also saw the country exiting a biting economic recession as well as the introduction of an Investors’ and Exporters’ (I & E) foreign exchange window which made its easy for investors to trade the greenback.
Gross Domestic Product
As stated earlier, as of the end of the fourth quarter of 2016, the Gross Domestic Product (GDP) figures looked gloomy as the economy in the full year contracted by -1.51 per cent. The contraction then reflected a difficult year for Nigeria, which included weaker inflation-induced consumption demand, an increase in pipeline vandalism, significantly reduced foreign reserves and a concomitantly weaker currency, and problems in the energy sector such as fuel shortages and lower electricity generation.
But in comparison with the GDP figures for the third quarter of 2017, the nation grew by 1.4 per cent (year-on-year) in real terms, the second consecutive growth since the emergence of the economy from recession in the Q2 2017. The growth recorded in the third quarter of 2017, was 3.74 per cent points higher than the rate recorded in the corresponding quarter of 2016 ( -2.34%) and higher by 0.68 per cent points from the rate recorded in the preceding quarter, which was revised to 0.72 per cent from 0.55 per cent.
External Reserves
Nigeria’s external reserves grew by $13.73 billion in 2017, from $26.09 billion as of January 3, to $39.82 billion presently.
The accretion was driven by increased portfolio inflows, rising in crude revenue as well as the success of the country’s Eurobond offerings.
Purchasing Managers’ Index
Due to the improvement in business confidence in the country, the Manufacturing PMI also recorded significant growth in 2017.
For instance, the Manufacturing PMI in the month of November 2017, stood at 55.9 index points indicating expansion in the manufacturing sector for the eight consecutive months. Twelve of the 16 subsectors reported growth in the review month in the following order: petroleum & coal products; printing & related support activities; computer & electronic products; textile, apparel, leather and footwear; plastics & rubber products; food, beverage & tobacco products; nonmetallic mineral products; chemical & pharmaceutical products; furniture & related products; paper products; cement and primary metal.
However, the situation as of the beginning of the year was different as the Manufacturing PMI stood at 48.2 index points in January 2017, indicating a decline in the manufacturing sector during the review period. Prior to the January figure, the index had averaged 45.2 in the past 12 months, and had recorded declines for 11 consecutive months.
Inflation
Inflation rate maintained a downward slide in 2017, due to the gradual recovery of the Nigerian economy.
In fact, as of November this year, for the 10th consecutive month, inflation rate continued a downward trajectory, recording a marginal decline to 15.90 per cent in November, as against the 18.72 per cent it was as of January 2017.
As of November, the National Bureau of Statistics (NBS) had explained that the Consumer Price Index (CPI), which measures inflation increased by 15.90 per cent (yearon-year) in November, 0.01 percentage points lower than the rate recorded in October (15.91) per cent.
The federal government anticipate that inflation would drop to 12.4 per cent in 2018 as contained in the 2018 Appropriation Bill.
Monetary Policy Rate
The Monetary Policy Committee (MPC) met a total of six times this year and kept the benchmark monetary policy rate (MPR) unchanged at 14 per cent all through the year against the backdrop of challenging external conditions and downside risks in the domestic economic environment.
The Central Bank of Nigeria (CBN) Governor, Mr. Godwin Emefiele pointed out the the MPC took into consideration several factors in arriving at its decisions.
He noted that although tightening would strengthen the impact of monetary policy on inflation with complementary effects on capital inflows and exchange rate stability, it nevertheless could also potentially dampen the positive outlook for growth and financial stability.
Emefiele added: “On the other hand, whereas loosening would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it could aggravate upward trend in consumer prices and generate exchange rate pressures.
“The committee also feels that loosening would worsen the current account balance through increased importation. On the argument to hold, the committee believes that key variables have continued to evolve in line with the current stance of macroeconomic policy and should be allowed to fully manifest.
“Members noted that the developments in output and inflation in particular required effective close monitoring in order to gain clarity on the medium term optimal path of monetary policy.”
Clearly, the CBN continued to maintain a tight monetary policy regime in its quest to continue to attract portfolio inflows.
Also, recent development in the United States might even see the CBN retaining its tight monetary policy regime longer than expected as a key question facing global investors today is what impact the US Federal Reserve’s monetary policy normalisation process will have on capital flows to emerging markets and other economies such as Nigeria that had enjoyed huge flows in recent times.
According to an International Monetary Fund (IMF) report, raising the policy interest rate and shrinking the balance sheet—would likely reduce portfolio inflows by about $70 billion over the next two years, which compares with average annual inflows of $240 billion since 2010.
Forex Management
From a chaotic foreign exchange system in the first half of the year, due to the activities of speculators, currency traffickers among others, which saw the naira dropping to as low as N525 to a dollar, the naira has since stabilised at N360 to a dollar across various segments of the forex market. The stability was majorly driven by a raft of forex policies that were introduced by the central bank which included the I & E window.
The surge in activities at the window has been attributed to offshore investor interest in treasury bills and the primary market auctions (PMA) by the CBN, with the resulting inflows leading to a convergence between the parallel market exchange rate and the Nigerian Autonomous Foreign Exchange Market (NAFEX) rate, also known as the I&E Forex window.
The central bank had introduced the I&E window last April to improve dollar liquidity in the forex market. The CBN has since intervened actively to support the local currency while keeping domestic liquidity conditions tight.
Most activities now occur on the I&E window, with Fitch Ratings recently acknowledging that the rate on the I&E “should now be considered the relevant exchange rate”.
Analysts’ Reactions
The Head of Research, SCM Capital Limited, Mr. Sewa Wusu described the outgoing year as a challenging one for the economy in terms of revenue for government to revamp the economy.
“But 2017 was also a positive one in the sense that it was the year we exited recession. But what took us out of recession was not agriculture or any policy measure, but oil.
“What that means is that we still need to do more and therefore there is need for policy measures to drive sustainable growth,” Wusu added.
On his part, the Director General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, argued that 2017 was not a good year, “even though we had a sluggish recovery towards the end of the third quarter.”
He added: “It was a year that still signals that there is hardship in the land and the macro-fundamentals are still moving in the wrong direction.”
Way Forward
The International Monetary Fund (IMF) has stressed the need for urgent macroeconomic and structural reforms in Nigeria, to place the country on a sustainable growth path as well as help achieve her quest for economic diversification.
This formed part of the recommendations by an IMF staff team led by Amine Mati, that visited Nigeria between this month, to conduct the 2018 Article IV consultation.
Supported by recovering oil prices, the IMF stated that the I & Eforeign exchange window had increased investor confidence and provided impetus to portfolio inflows, which have helped to increase external buffers to a four-year high, and contributed to reducing the parallel market premium.
Furthermore, it noted that “important actions under the Power Sector Recovery Program increased power supply generation and ensured government agencies pay their electricity bills.”
The Fund also welcomed steps “taken to improve the business environment and to address longstanding corruption issues, including through the adoption of the National Anti-Corruption Strategy in August 2017.”
It noted that containing vulnerabilities and achieving growth rates that can make a significant dent in reducing poverty and unemployment requires a comprehensive set of policy measures. “On the fiscal front, the mission welcomes the recent tax reforms aimed at improving tax administration, planned increases in excises, and latest steps taken to lower debt servicing costs and lengthen maturities.
“However, with oil prices expected to remain lower than in the past, upfront actions to mobilise non-oil revenues, including through reforming the VAT and removing exemptions, are needed while safeguarding priority expenditures, including scaling up social safety nets and infrastructure investment.
“Fiscal consolidation should be accompanied by a monetary policy stance that remains tight to further reduce inflation and anchor inflation expectations. Moving toward a unified and market-based exchange rate as soon as possible while continuing to strengthen external buffers would be necessary to increase confidence and reduce potential risks from capital flow reversals,” it added.