As Economy Maintains Resilience amid Challenges

The positive Gross Domestic Product numbers achieved in the third quarter of 2019 calls for more complementary fiscal and monetary policy to enhance macroeconomic growth, writes Obinna Chima

Last week, the National Bureau of Statistics (NBS) released the Gross Domestic Product (GDP) report for the third quarter (Q3) of 2019, which showed that GDP expanded to 2.28 per cent (year-on-year), in real terms, in the period under review, compared to the 2.12 per cent recorded in the preceding quarter.

The latest GDP performance was the second highest quarterly rate recorded since 2016.

The report also showed that aggregate GDP for Q3 2019 stood at N37.80 trillion in nominal terms, which was higher than the N33.36 trillion in Q3 2018, representing a year-on-year nominal growth rate of 13.30 per cent.

The NBS stated that the growth rate was however lower relative to rates recorded in Q3 2018 by 0.28 per cent and the rates recorded in the preceding quarter by 0.71 per cent.

The economy continued to be driven by the non-oil sector, accounting for 90.23 per cent of GDP while the oil sector contributed 9.77 per cent in the quarter under review.

Daily oil production, however, increased to 2.04 million barrels per day (mbpd) in Q3 compared to 1.94 mbpd, representing its highest in more than three years.

The real growth of the oil sector was 6.49 per cent (year-on-year) in Q3, indicating an increase of 9.40 per cent relative to rate recorded in the corresponding quarter of 2018.

The sector contributed 9.77 per cent to total real GDP compared to 8.98 per cent in the preceding quarter.

In real terms, the sector contributed 90.23 per cent to growth, slightly lower than the 91.02 per cent in the previous quarter.

However, agriculture, which is the mainstay of the economy, contributed 29.25 per cent real GDP during the quarter, compared to 22.78 per cent in the preceding quarter.

According to the NBS, industries further contributed 22.17 per cent to growth while the services sector accounted for 48.59 per cent of the GDP.

But despite the cheering news from the NBS, economic growth remains weak as the country is still far from the growth target of 4.5 per cent it had set in its Economic Recovery and Growth Plan (ERGP).

In addition, presently, population growth at about three per cent, remains far above the GDP growth rate, and should be a source of concern to policymakers.

Furthermore, insecurity, poverty, joblessness, the country’s weak revenue base, lack of infrastructure, among others, are some of the factors that have continued to hinder economic growth in the country.

To analysts at Afrinvest West Africa Limited, structural constraints, given slow pace of reforms in priority sectors and improved fiscal conditions remain a concern.

They argued that the current pace of growth considering the sluggish performance of the elastic and interest rate sensitive sectors presents no respite to the high unemployment rate at 23.1 per cent and increasing level of poverty in the economy.

“Notwithstanding improved growth seen in the quarter, we maintain our growth forecast for 2019 although we expect improved oil production to support growth amid slower rise in the non-oil sector.

“In the agriculture sector, there is scope for improvement due to the harvest season in Q4:2019 but prolonged security issues continue to cloud performance in the sector.

“We expect a tepid but sustained recovery in the manufacturing sector due to still weak but slowly improving consumer spending while growth in the trade sub-sector remains partly threatened by the FG’s decision to close the land borders and is expected to weigh on the services sector despite moderate growth in the ICT sub-sector.

“In the oil sector, we expect growth to be sustained, backed by a lower 2018 base and our expectation of better output in Q4:2019. We expect growth in oil production Year-onYear, with slight Quarter-on-Quarter increase given persistent challenges to oil production. Notably, a further deterioration in security as well as a weaker-than-expected performance in oil production and oil price are the major downside risks to our expectations,” the Lagos-based financial advisory firm stated.

On their part, analysts at CSL Stockbrokers, held the view that the recent 65 per cent minimum loan-to-deposit ratio (LDR) policy by the central bank to improve lending and support growth in the real sector appears to be kicking in.

The firm stated that implementation of the LDR guideline early enough in the quarter, compelled banks to lend to the real sectors and had a multiplier effect on output from both the real sectors and the financial and insurance sector and by extension aggregate economic output.

“In the near term, we expect the Nigerian economy to remain in a cycle of secularstagnation, but we believe the central bank will continue to implement unconventional policies to improve economic growth in the long-term.

“Although rising inflation expectations remains a risk, we expect the CBN to remain on hold in the short-term: hiking rates, in recognition of increased upside risks to inflation and mounting external sector pressures would further constraint economic growth; while a rate cut is likely to intensify risks to NGN stability resulting, in increased capital outflows,” CSL analysts stated.

In the same vein, the Financial Derivatives Company Limited, noted that while the latest GDP figures were positive, the growth rate was still way below the ERGP target.

According to the firm, the development was an indication that the economy was in need of more fiscal incentives.

“The expansion in Q3 GDP can be partly attributed to the government’s anti-smuggling strategy and its positive effect on domestic production.

“Output growth was further supported by the harvest season and increased activities in the construction sector,” the FDC added.

It further pointed out that a breakdown of the report showed that most of the interest rate sensitive and employment elastic sectors showed slight improvement.

This, it stated, suggested that various government policies were having medium term effect.

“Economic growth is a function of fiscal policy and can only be complemented by monetary policy. While the Q3 GDP numbers showed that the recovery path is sustained, corporate earnings are still suffering.

“The inability of companies to pass on higher costs to consumers weighed on profitability and revenue growth. Consumer demand was also constrained by low disposable income.

“The economy needs more fiscal incentives to ensure that growth reaches its potential and full employment levels. “Hence, it is expedient that the CBN’s current intervention strategy is supported by more investment friendly policies in order to attract more foreign investment which is a catalyst for growth.

“Fiscal policies can however be complemented by monetary policy to enhance macroeconomic stability,” the FDC added.

A former bank chief executive, Mr. Chika Mbonu, said the GDP figures showed that the economy was on the path of growth, driven by positive developments in both the oil and non-oil sector.

“The growth does not take away the challenges in the economy. They are still there and even the ones that are coming shortly.

“You know the Senate has just passed the second reading of the Value Added Tax Act, which basically is going to increase VAT collection from five per cent to 7.5 per cent. You would expect that when an economy is sluggish, what they should be doing should be to reduce tax rate.

“We also have the issue of the implementation of the new minimum wage and there is going to be an inflation impact,” Mbonu, who is also an analyst at Arise Television added.

In a recent presentation, the Managing Director, Afrinvest West Africa Limited, Mr. Ike Chioke, said there was need for the country to stop doing certain “wrong things.”

Some of these he listed to include to change from a constitution that encourages indolence whereby states go to Abuja for monthly allocation; exaggerating population numbers for higher revenue share; excessive borrowing for consumption; subsidising unavailable electricity; end the paradox of borrowing while maintaining huge subsidies; and also put an end to subsidising petrol consumption.

On the other hand, he called for the decentralising policing and security apparatus in the country; enforcing enrolment of primary school age children; building additional seaports away from Lagos for security and logistical efficiency; removing minerals from the exclusive list; cutting the cost of governance; and to make health insurance mandatory.

In addition, he listed other growth enhancing measures the country should adopt to include leveraging annual capital expenditure allocation in partnership with private sector to target critical infrastructure development on a long-term basis; rapid adoption of technology to fast-track human capital development; driving broadband penetration by easing rights of way challenges; and prioritising and building rails to connect major commercial hubs in the country.