Shaping the Direction of Buhari’s Economic Policies

advisory firm, Renaissance Capital, last week called the attention of the incoming managers of the Nigerian economy to emerging economic realities.

For instance, Rencap said “When we consider the impact of low oil prices and paralysing polls on GDP by expenditure (consumption, fixed investment, and net exports) in 2015, we see greater potential downside to Nigeria’s growth than our GDP-by-production derived forecast suggests. We think 2015 growth could fall to 3.4 per cent (vs. 4.5 per cent previously).

There is no doubt that Nigeria has entered into a stage when the impact of the oil slump and the attendant fall in consumption will start to manifest in the economy. Consequently, economists believed there is need for those to be picked for the job of economic management to consider the challenges ahead in order not to be found wanting.

Raising an alarm over the impending slowdown in spending and the corresponding impact on the economy, Rencap noted that “Nigeria’s rebased GDP, measured via expenditure, is only available over a short period (1Q13-1Q14), implying limited history to forecast from. “However, when we consider the impact of lower oil and activity-stalling elections on expenditure, we think there is significant downside risk to our 2015 growth projection of 4.5 per cent (vs 6.2 per cent in 2014),” the report said.

One of the scenarios that may play out immediately the new administration settles down for business is agitation for higher wages by civil servants. However, Rencap, which predicted negative real wage growth, said with the planned cut in government consumption and the fear of higher inflation, economic management would not be a tea party for the new administration.

The report said, “In particular, we see household consumption – which accounts for 70 per cent of GDP – slowing sharply in 2015, mainly due to negative real wage growth. The proposed cut in the FY15 budget oil price to N53/bbl., vs. N77.5/bbl. in FY14, means government consumption, which accounts for eight per cent of GDP, could be slashed by one-third (assuming oil output and non-oil revenue remain flat). We believe this implies a wage-freeze (at best) for government workers. That, coupled with rising inflation, signals that negative real wage growth could deepen. In addition to a fall in demand for imported consumer goods owing to naira weakness, the consumer may also be hit by a VAT hike to 10 per cent (vs. 5 per cent). The wholesale and retail trade – a good proxy for consumption – last saw growth plummet in 2012 to 2.2 per cent (vs. 7.2 per cent in 2011), largely on account of a c. 50 per cent petrol price hike. We expect a similar slowdown in 2015.” Slashed Investment Plans The FY15 budget presented to the National Assembly in December, proposed slashing Capital expenditures (capex) by two-thirds to N387bn (0.4 per cent of GDP).

The Rencap report therefore said that the recent cut in the proposed budget oil price suggests capex could fall further. This, according to the report, implies a decline in business for government-dependent contractors. “Moreover, some corporates have announced that they are slashing their FY15E capex plans; Flour Mills, for one, plans to halve its capex. All this indicates a fall in fixed investment (15 per cent of GDP), which is negative for real GDP growth,” the report said. Low single-digit growth Rencap’s leading researcher, Yvonne Mhango, in the report believes consumption and fixed investment look set to slow sharply in 2015, adding that a slowdown in net exports is likely to be tempered by a weaker-naira induced decline in imports. This should mitigate the fall in exports.

“Given the headwinds expenditure is likely to face in the short term, we think GDP growth could turn out softer than our initial projections. We thus downwardly revise our real GDP growth forecasts to 3.4 per cent and 4.0 per cent in 2015 and 2016, respectively, from 4.5 per cent and 5.0 per cent previously,” she said.

She explained that Rencap was revising its GDP forecasts “not because of the policy platform of President-elect Buhari, but because we believe austere policies justify a weaker GDP outlook. We do note, however, that the transition may add some further delay to government investments.” IMF’s New Projections Rencap’s position was in line with the latest position of the International Monetary Fund (IMF) which projected that the slump in crude oil price will have severe impact on the Nigerian economy as well as other oil producing countries in the continent in 2015.

Therefore, given the weaker economic outlook for the continent, the fund revised downward Africa’s projected growth in 2015 to 4.5 per cent, from five per cent in 2014.

The IMF stated this in its latest 2015 World Economic Outlook titled: “Uneven Growth: Short- and Long-Term Factors,” released on Tuesday.

The price of a barrel of crude oil has almost