Nigeria begins slow climb out of slump

FOLLOWING a rather devastating 2016 during which the economy found itself in the grip of recession, Nigeria’s growth prospects are turning around.

The economy is expected to expand by 1% this year as a higher oil price provides some relief. However, structural constraints such as geopolitical tension, corruption, policy uncertainty, tough business conditions and infrastructure shortages will constrain the extent of the growth improvement.

It is nevertheless encouraging that recent developments support an expectation of a growth pickup this year. At the core of the improvement is a 25% increase in the value of oil output from a year earlier. Although this increase is attributable to higher oil prices, there are signs that oil production volumes may be stabilising.

Apart from the direct impact on economic activity, the higher value of oil production has positive spillover effects on other parts of the economy.

First, it has boosted government revenues. This should provide some reprieve to government spending, which took a serious hit last year. Second, it has eased pressure on the balance of payments. This observation is supported by a rise in the Central Bank of Nigeria’s foreign-exchange reserves to a 17-month-high of $30.3-billion (about R413billion).

Furthermore, the longawaited Economic Recovery and Growth Plan for 2017-2020 published by Nigerian authorities in March should bode well.

Unlike previous plans, this one is grounded on focused implementation and incorporates the existing National Industrial Revolution Plan and Nigeria’s Integrated Infrastructure Master Plan. It also signals a closer partnership between the public and private sector, with a strong focus on improving the business environment.

Another development is a gradual fall in the inflation rate. Inflation seems to have peaked in January and stood at an eight-month low of 17.3% year on year in March. This trend is expected to continue over the next two years.

Policymakers have also taken further steps to liberalise the foreign-exchange market.

The central bank issued a circular last month in which it announced the establishment of a special foreign-exchange window for investors, exporters and end users.

This window allows specific participants to access foreign exchange at a “marketdetermined rate”.

Nigeria effectively runs a multitier exchange-rate regime, where certain participants are subject to different exchange rates. What makes this most recent initiative different is that it allows market participants to determine the exchange rate — an important step towards a fully flexible exchange-rate system. Unfortunately, it also adds to the complexity of the multiple-exchange-rate

❛ Significant structural reforms are needed

environment.

While these developments provide comfort that the worst for the Nigerian economy is likely behind us, the unfortunate reality is that most of the positive developments are cyclical in nature and will not provide a meaningful lift to the economy.

Significant structural reforms need to be implemented to provide a sustainable and significant boost to economic activity. These will have to include policy certainty, foreignexchange-market liberalisation and simplification, improved business conditions and infrastructure development.

Unfortunately, there is currently little meaningful progress on this front.

Nxedlana is FNB chief economist