Not Yet Uhuru for Nigeria’s Economy

Despite a two-percent growth forecast for Nigeria in 2018 by the International Monetary Fund (IMF), the reality may be different as the largest economy in Africa remains susceptible to impact of oil shocks. This is especially because government’s efforts to diversify the economy through the non-oil sector, agriculture and tax have so far yielded few successes. Bamidele Famoofo writes

Whilst Nigeria, the largest economy in Africa, has been projected to expand its economy by two percent in 2018 and 2.3 per cent in 2019, both forecasts by the International Monetary Fund (IMF) are based on probability that global oil prices remain stable. According to the IMF team, which visited Abuja on its routine economic review mission recently, the country remains vulnerable to oil price and production shocks, in spite of the respite it has enjoyed as a result of higher oil prices and shortterm portfolio inflows in recent times.

Oil

It has been about 60 years since Nigeria found crude oil in its land. Since then, the oil and gas sector has become one of the sources of the country`s economy. Available information shows that Nigeria gets about 90 per cent of its foreign exchange earnings from oil. Also, at least 20 per cent of GDP comes from oil. Therefore, it is no wonder that the oil and gas industry is one of the most crucial in Nigeria. At the beginning of the 1950s, crude had an insignificant amount in the total export. According to the statistics, it covered about two per cent (2 per cent) of export products. The real rise of crude oil started between 1960 and 1970. Nigeria could provide only about 5 million barrels per year in the 1960s. However, at the beginning of the 1970s, this number rose to 600 million barrels. Therefore, governmental revenues from the petroleum industry increased from N66 million in the 1970s to N10 billion in the 1980s. With increased production capacity, revenue from oil sales has risen significantly since the 1980s. Between 1999 and 2016, Nigeria has earned N77.348 trillion from the oil and gas industry, according to data compiled by the Central Bank of Nigeria (CBN). But that, according to economic pundits, has not translated into good livelihood for its citizens. In 2017 alone, Nigeria raked in N7.3 trillion from sales of oil products according to figures from the Nigeria National Petroleum Corporation (NNPC).

Non-oil

Statistics made available by Financial Derivatives Company Limited, a leading economic research and analysis company, says non-oil exports increased by 55 per cent to $1.26billion in the third quarter of 2017. “This represents a paltry 2.6 per cent of total exports projected at $48billion for 2017 and implies that the country is still heavily dependent on oil and gas”.

“Non-oil revenue has remained below expectations, with yields from tax administration measures – including the Voluntary Asset Income Declaration Scheme (VAIDS) and increased tax audits – yet to fully materialise,” IMF disclosed. The lacklustre performance of non-oil was linked to weak performances in the sector as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending.

“Corporate tax collection efforts improved but revenue shortfalls and the late adoption of the 2018 budget impede its implementation,” the fund added.

Recommendations

The IMF team led by Senior Resident Representative and Mission Chief for Nigeria, Amine Mati, which visited Nigeria between the latter part of June and early July to discuss recent economic and financial developments, update macroeconomic projections, and review reform implementation with top government officials, admonished government to take urgent action “on a coherent set of policies to reduce vulnerabilities and increase growth over the medium term remains.” The IMF recommended specific and sustainable measures to increase the currently low tax revenue – including through avoiding new tax exemptions – and ensuring budget targets are adhered to even in an election year. According to the fund, this process should be supported by keeping monetary policy tight through appropriate monetary policy tools that will help contain inflationary pressures and support a move towards a uniform market-determined exchange rate.

It pointed out that moving ahead with structural reforms was needed to invigorate inclusive growth, particularly in the power sector, where it noted that faster progress would be needed to ensure financing shortfalls in the sector are met in a sustainable manner.

Achievements

The statement added: “Higher oil prices and short-term portfolio inflows have provided relief from external and fiscal pressures, but the recovery remains challenging. International reserves remained stable at about $47 billion, supported by some convergence in existing foreign exchange windows, and despite some reversal of foreign inflows since April.

“Inflation declined to its lowest level in more than two years. Real Gross Domestic Product (GDP) expanded by two per cent in the first quarter of 2018 compared to the first quarter of last year.

It stated that current public spending in Nigeria had remained in line with expectations, stating that carryover from 2017 to 2018, helped increase capital spending in the first four months of 2018, despite delayed approval of the 2018 budget. It added: “Lower yields have kept interest payments within the budgeted envelope, but the federal government’s interest-to-revenue ratio is expected to absorb more than half of revenues this year. “Reforms to improve the business environment are progressing, including through identification of priority investment projects and the adoption of the Company and Allied Matters Act (CAMA) – a legislative landmark for private sector development.

“The implementation of the Power Sector Recovery Plan is advancing through a mini-grid policy and regulations on eligible customers and meter asset providers. “Under current policies, the outlook remains challenging. Growth would pick up to about two per cent in 2018, weighed down by lower than expected oil production and relatively weak agriculture growth.

“The fiscal deficit would narrow slightly, with higher oil revenues offsetting increased spending, including those planned in a supplementary budget. Inflation would pick up in the second half of 2018 as base effects dissipate and higher spending and supply constraints in agriculture put pressure on prices. “Increased oil exports would keep the current account in surplus, helping stabilise gross international reserves even if the current pace of foreign portfolio outflows continues.”

Growth Initiative

In a frantic move to diversify the economy from oil, the federal government in April 2017, launched its economic blue print christened Economic Recovery and Growth Plan (ERGP). It was a medium-term plan that spans 2017 to 2020. Integral to the ERGP is an ambitious roadmap to return the economy to the path of growth and achieve seven per cent growth rate by 2020. The driver of the ERGP is the Focus Laboratories on power, agriculture and manufacturing which was inaugurated by the Vice President, Prof. Yemi Osinbajo.

According to Prof. Osinbajo, the Focus Laboratories would further boost economic growth and ensure continuity in Nigeria’s determination to build a competitive economy.

“The labs will operate by bringing together all private and public sector officials to achieve the ERGP’s objective of reaching seven per cent economic growth by 2020”, Osinbajo said. Budget & National Planning Minister Udoma Udo Udoma, said the government would improve power generation and its operational capacity to 10 gigawatts by 2020. But two years to the deadline, the federal government has only succeeded in generating four gigawatts.

The minister said the removal of the bottlenecks has become imperative because $245.1 billion would be required to implement the ERGP, out of which $195.98 billion would be sourced from private sector and $49.15 billion from the public sector.

“The objectives are restoring economic growth, investing in the people, and building a globally competitive economy”, Udoma disclosed. Deputy Senate President Ike Ekweremadu who represented Senate President Bukola Saraki at the launch of the Lab, commended the move by the executive arm of government at ensuring the implementation of the plan. He remarked that government had become serious about developing the economy.

Dr Idris Jala, Head of the Malaysian Performance Management Delivery Unit (PEMANDU) said the Malaysian economic history has a lot of semblance with the Nigerian experience. He however recommended transformational leadership at all levels, which entailed taking actions that might be painful in the short-term but beneficial in the long-run to the people. “Malaysia also used the lab process with great success as a tool for the transformation of its economy”, he said.

Nevertheless, analysts warned that the level of commitment from the government and private sector would determine the possibility of generating $24 billion worth of investment for the country from the labs.