Seeking Economic Growth Amid Anxious Wait for 2019
2018 would be eventful for business, as stakeholders continue to strive for survival under a slow economic recovery process and brace themselves for political aftershocks. Vincent Obia, Kunle Aderinokun, Bennett Oghifo, Emma Okonji, Chineme Okafor, Olaseni Durojaiye, Solomon Elusoji, and Bamidele Famoofo report
Having come out of a protracted economic crisis in 2017, regarded as worst economic situation in recent years, Nigerians look into this year with hopes and aspirations. Policy analysts and stakeholders chart the way forward for the economy as they churn out their projections. 2018 has ushered in an economy replete with hopes of better deals for Nigerians, having surmounted the challenges that bedeviled it for a long period of time. As it is, the economy appears to be recovering from the quagmire as the performance indicators are now positive and still on the upswing. After five quarters of contraction, in the second quarter of 2017, the economy exited recession, which it entered in the second quarter of 2016. Since then, the economy turned the corner, maintaining the upward streak.
The gross domestic product (GDP) growth rate rose to 1.74 per cent (year-on-year) in the third quarter of 2017 from 0.72 per cent (revised from 0.55 per cent) in the second quarter . The Q2 2017 GDP growth rate represented an increase of 2.04 per cent over the contraction of 1.49 per cent recorded in the corresponding period of 2016.
Similarly, the consumer price index (CPI), which measures inflation, has consistently been on the decline for 10 months. The CPI dropped to 15.90 per cent in November from 15.91 per cent in the previous month, after it decreased from 15.98 per cent in September.
The volatility, which hitherto characterised the foreign exchange market has simmered down and stabilised. With a couple of interventions by the Central Bank of Nigeria (CBN), the exchange rate of the dollar to the naira has not only stabilised at the inter-bank segment of the market at N360/$, it has also converged with the rate at the parallel end of the market. The ingenuity of the monetary authority led the foreign reserves to accrete to a 39-month high of $38.2 billion last December.
Now in 2018, the federal government is saddled with the responsibility to continue to keep the economy on the path of recovery, stability and growth. In fact, the economic managers have the arduous task to ensure the economy not only maintain the upward streak, but record strong and inclusive growth. While it is apparent that politicking would characterise this year, preparatory to 2019 elections, the expectation, however, from the managers is to consolidate the gains of the out-gone year, so as to meet the set budgetary and economic targets as the government also makes frantic efforts to fulfill the campaign promises of the President Muhammadu Buhari administration.
The federal government has proposed an appropriation of N8.6 trillion for the fiscal year, which represents an increase of 16 percent over the 2017 budget. Nigerians would not accept any excuse for further delay in its passage into law and poor Implementation. The executive and the National Assembly should therefore quickly address the grey areas and harmonise their positions so that the appropriation bill could be passed into law.
As part of its strategy to mobilise revenue, the federal government has created Voluntary Assets and Income Declaration Scheme (VAIDS), a tax amnesty, which is expected to rein in tax revenue from evaders. The scheme, which has a nine-month duration, commenced on May 1, 2017. By the end of the scheme, the federal government estimated that it would realise $1 billion as tax revenue hitherto hidden from government records and unpaid to the treasury.
Besides, Nigeria’s exemption from output cut when OPEC and non-OPEC members agreed to extend the cut to the end of 2018, would aid the revenue projection of government in the 2018 budget, especially as the prices of crude oil, which stood at about $64 per barrel, continue to rally and remain well above the budget oil price benchmark of $45 per barrel.
Below is a quick look at what 2018 holds for business.
OIL AND GAS
The oil and gas sector witnessed topsy-turvy conditions in 2017, which were accentuated by low prices and oil production levels. There were slight increases in both price and output. But the real challenge was the country’s abysmally low refining capacity, which left it dependent on imported fuel.
The Niger Delta issue, which the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, described as “the big elephant in the room”, funding for joint venture oil exploration, and commercialisation plans for gas – all of which should be addressed by the Petroleum Industry Bill – are among matters the federal government and relevant stakeholders are expected to deal with this new year. The PIB has remained in the works for a long time and would need some accelerated push to make it a reality for the good of the country’s oil industry. This is even more urgent as the government plans to open bids for marginal oil fields in 2018.
A troubled Niger Delta would derail the government’s new joint venture funding plans, which are somewhat built on incremental production. Similarly, gas would have to be given some more attention to power the economy, considering the volatility of oil and the global push for cleaner energy sources.
In 2018, Nigeria would be expected to address the challenges in its downstream petroleum sector, which have proved intractable overtime.
POWER
In 2017, Nigeria’s power sector had challenges that threatened its sustainability. It struggled to survive, but not without some defining scars that constitute a hindrance to the business end of the electricity market. In the year, revenue shortfalls that accumulated due to the refusal of the Nigerian Electricity Regulatory Commission to allow the 11 electricity distribution companies charge what they feel are cost reflective tariffs for electricity supply to their customers, shot up to N460 billion. NERC has conducted up to three tariff exercises, but it has refused to allow the Discos to operate them, and this among other indecisions of the government, affected the commercial values of the market.
The government has taken significant steps to address the operational challenges of the sector – initiating among others, the Power Sector Recovery Programme with the supports of the World Bank and N701 billion financial support for electricity generation. But the government would be expected to effectively implement the PRSP in order to address the distribution and commercial ends of the power market in 2018. Many experts believe the PSRP is a remarkable policy, but its execution would determine how productive it would be in addressing the market’s troubles.
Helping the Discos get over their debt overhang would be a big boost for the sector. But 2018, being close to an election year, could make it tricky in terms of the government taking hard decisions needed to get the sector back on track.
AGRICULTURE
Operators in the country’s agricultural sector have identified government’s commitment to fast-tracking the export process, deepening a seamless fertiliser distribution among farmers, as well as reviving the Export Expansion Grant as some of the issues that will help the industry’s growth in the new year. Some insist that government must also encourage operators in the sector to increase stakes in produce processing. Experts say there is a huge foreign exchange potential in agricultural produce export but government must put in place a seamless export process at the seaports to unlock the latent benefits.
“Government has promised to reform the ports as part of its ease of doing business initiative. If government can do that the country stands to reap huge foreign exchange from the export of agricultural produce. Another thing is that government should commit to reviving the Export Expansion Grant, as many exporters would leverage it
and it would boost the country’s foreign exchange receipts and deepen the government’s economic diversification initiative,” stated Managing Director of Dada Incorporated, a major trader of cashew and Cocoa exporter, Adedapo Dada.
MANUFACTURING
How the manufacturing industry fares in the coming year may be dependent on the fiscal and monetary policies adopted by the federal government, particularly, as regards the cost of capital, infrastructure and the construction of the proposed industrial parks by the federal government.
The country’s power problem will also impact the performance of the sector in this year. As at May 2017, Nigeria’s power generation peaked at 5,222.3 MW in December 2017, while electricity demand is expected to reach 50,000MW by 2022. Most manufacturers have resorted almost entirely to the use of generators and inverters, and this has significantly increased the cost of doing business. Many manufacturers with large plants requiring steady power supply solely rely on their own generating sets to avoid operational losses resulting from frequent power outages.
AUTOMOBILES
The country’s auto industry is expected to grow by about five per cent this year, after the market closed with a drop of 48 per cent in sale of brand new vehicles in the third quarter of 2017, from about 14,500 units in 2016 to about 7,000 units at the end of the third quarter of 2017. Managing Director of Toyota Nigeria Limited, Mr. Kunle Ade-Ojo, gave these figures at the company’s quarterly review of the country’s auto market, held at its headquarters in Lagos recently.
According to Kunle Ade-Ojo, “In 2018, we hope to see a bit of balancing with the recovery of passenger vehicles. This year, a lot of companies were very careful because of the economic recession. They buy vehicles that would help improve productivity of their businesses. As the economy improves, so will there be balancing of sales across the models and vehicle segments. A more realistic growth will be experienced next year. However, there are risks. As 2018 budget is signed into law, we might begin to see some marginal activities in businesses. We are hoping that there will be an improvement generally.”
TELECOMS
Occasioned by its weak financial status, and its desire to expand its network operations, Etisalat, now 9mobile, had in July 2013, took a loan from 13 local banks, worth $1.2 billion. The telecoms company, however, struggled to repay the loan, citing economic downturn of 2015-2016 and naira devaluation, which negatively impacted on the dollar-denominated component of the loan.
Its inability to repay the loan, forced it to change its brand identity from Etisalat Nigeria to 9mobile, after the banks threatened to take over the operations of the telecoms company.
The threat from the banks, triggered the withdrawal of Emirates Telecoms Group, and the resignation of every member of the former Etisalat Board and its former management staff.
In order to get a credible investor that will inject the needed funds to revamp the telecoms company, Barclays Africa was appointed the financial adviser for the acquisition of 9mobile, and five firms were shortlisted from over 16 local and international firms that initially indicated their interests to acquire 9mobile.
The final five include Teleology Holdings Limited, promoted by Adrian Wood, the pioneer CEO of MTN Nigeria; Smile Telecoms Holdings, with operations in Nigeria, Tanzania, Uganda, Congo DR and South Africa; Helios Investment Partners; Bharti Airtel and Globacom, the telecoms company owned and operated by a Nigerian, Mike Adenuga Jnr.
Barclays Africa, which is managing the bid process, had the initial mandate to complete the exercise and hand over 9mobile to its new investor or group of investors, on or before December 31, 2017. But citing delay in submission of Expression of Interest (EoI) by the bidders, Barclays wrote to the Nigerian Communications Commission (NCC), the telecoms industry regulator, asking for extension of date for the completion of the bid exercise, and January 16, 2018 was approved as the new date to conclude the sales and handing over of 9mobile to its new owners. Citing the rise in technological activities around Financial Technology and Artificial Intelligence in 2017, technology experts have predicted that FinTech and AI would drive activities across all sectors of the global economy in 2018, Nigeria inclusive. While FinTech has brought a whole lot of disruption in the financial services sector, using latest technology solutions to change the face of financial services delivery in the banking sector, technology experts are using AI to create robots that will deliver multi-tasking jobs in the future.
Accenture, a global technology solution company with presence in Nigeria, penultimate week in Lagos, showcased its latest technology capabilities that will enable businesses across different sectors in the country boost their productivity and efficiency through its recent innovations and investments in AI, Virtual Reality, robotics, and blockchain.
Managing Director, Accenture Nigeria, Mr. Niyi Tayo, said recently that AI and robotics will rule the world in 2018. He strongly advised organisations to act fast on developing their AI journey for 2018. Managing Director, Huawei Nigeria, Mr. Kevin Li, advised the federal government to begin aggressive investment in broadband in order to boost broadband penetration across the country, since FinTech and AI largely depend on broadband accessibility.
LABOUR
2018 promises to be a big year for Nigerian workers. In 2018, it is expected that a new minimum wage will be set, a decision that will have reverberating effects across the economy. Also, the fight over the sale of Nigeria’s national assets will continue, as more labour unions come out to protest the move.
Meanwhile, the barrage of strikes experienced through 2017 is not expected to subside. Although the economy has shown some improvements since its emergence from recession, analysts believe government’s notorious reputation for reneging on agreements will serve as fodder for increased agitations. Labour movements, such as the Academic Staff Union of Universities and the Petroleum and Natural Gas Senior Staff Association of Nigeria, are expected to return to the negotiating table with the federal government in the new year to avert more industrial strike actions.
But, as the year winds down, analysts also predict that government would work to minimise such strike actions with an eye on 2019, an election year. To avoid political disaffection, sweet deals that benefit Nigerian workers, at least in the short term, are expected to be struck in late 2018.
MARKETS
Activities both on the capital market and money market in Nigeria closed on a stable note in 2017. The capital market, especially, has enjoyed some good patronage from both domestic and foreign investors in the outgoing year, which is a clear departure from the lull the market experienced in 2015 and 2016. The All Share Index stood at 37,858.33 points as at December 19, 2017, though analysts believe it may close around the 36,000 marks. Meanwhile, Foreign Direct Investment and capital inflows, which were believed to boost activities in the country’s bourse in 2017, are likely to continue in 2018, as more FDI and capital inflow are projected by analysts.
Trading Economics in its economic forecasts on Nigeria, which covers the period between 2017 and 2020, projected that FDI in Nigeria will move up to about $1.21 billion by third quarter of 2018, from $852 million in Q4, 2017. It said though capital inflow in 2018 will fluctuate, it will close on a positive note in Q3, 2018. The FSDH Research unit also stated that a speedy passage of the 2018 budget with the current attractive valuation of equities in the Nigerian bourse were factors that will boost investment in the market in 2018. Other factors that FSDH said will help investment in the equities market in 2018 are corporate earnings and the economic policy direction of the federal government.
Meanwhile in the money market, it is expected that fixed income instruments will become less attractive to investors, as interest in treasury bills and bonds is expected to drop. Inflation rate, which consistently dropped in the last 10 months of 2017 and stood at 15.90 per cent as at November, is expected to drop further, according the Central Bank of Nigeria and FSDH. FSDH puts average inflation in 2018 at 8.93%, while adjusted inflation is expected to be 10.80%. CBN expects inflation to come down to lower double digit in 2018, but says a single digit figure is feasible in 2018.
Monetary Policy Rate is expected to remain at 14% and Cash Reserve Ratio for banks is likely to drop marginally to 21.13% by Q3, 2018, while deposit rate is projected to improve to encourage saving. 9.82% is projected by Q3, 2018 as against 7.5% at the moment, as lending rate by banks is likely to drop only marginally from average 17.88% to 17.43% by Q3, 2018.