Project LINK Meeting (September, 2017) Country Report for Nigeria ECONOMIC OUTLOOK AND FORECAST (2017-2019) S. O. Olofin, O. E. Olubusoye, A. A. Salisu, K. O. Isah, T.F. Oloko and A.E. Ogbonna Centre for Econometric and Allied Research [CEAR] University of Ibadan, Ibadan, Nigeria www.cear.org.ng info@cear.org.ng 1.0 SOME RECENT DEVELOPMENTS After sustaining an impressive decade of economic growth, the advent of economic recession has seen Nigeria breaking a number of downside records among the notables, which are: the contraction of GDP over the three quarters of 2016 for the first time in the last 25 years; the upward inflationary trend from one digit rate of 8.7 per cent to 18.63 percent, being the highest in the last eleven (11) years as at December 2016, and the surge in unemployment rate to a record high of 13.9 per cent in the third quarter of 2016 1. Moving from a low trade deficit of about US$4 million in the quarter four (4) of 2014, the steady rise of the average trade deficit to US$37 million as at the fourth (4) quarter of 2016 was on record as hitherto longest period of negative trade balance. The trade deficits have been particularly harmful for the country s external reserves. At the inception of the current Oil crisis in 2014 for example, Nigeria s external reserves stood at about US$37 billion, but as at December 2016, the external reserves had fallen drastically to about US$27 billion. The spillover effect from the deficit trade balance prompted by the 2014 global oil crises also induced record breaking currency depreciation making Naira one of the worst currency performers in the world. A number of import control measures have been instituted to improve the country s trade balance in order to ease the pressure on foreign reserves, yet the unfavorable trade balance persists, thus prompting a downward pressure on external reserves and consequently foreign exchange scarcity. This in turn resulted in sharp decline in the value of the Naira which has seen the official Naira-Dollar exchange rate rise from N168/US$ recorded in January 2015 to N306.4/US$ as at March 2017 2. This is an unprecedented decline in the value of the Naira, leading to a rise in the price of imported goods and increases in energy price with shortages of agricultural produce 3. These in turn have worsened the inflationary problem in the economy. Acknowledging the fact that the economy is likely to remain in prolonged recession if nothing was done to change the trajectory, the Ministry of Budget and Planning launched the path to recovery programme in March 2017 via an initiative tagged Economic Recovery and Growth Plan (ERGP). The ERGP is a medium-term comprehensive strategy meant to facilitate the 1 National Bureau of Statistic (NBS, 2016) 2 See: https://www.cbn.gov.ng/rates/exchratebycurrency.asp 3 See Central Bank of Nigeria Communiqué No. 106 of the Monetary Policy Committee Meeting of Monday and Tuesday, March 21 and 22, 2016 1
gradual restoration of economic growth to its pre 2010-2011 levels of around 7 percent by 2020. With a renewed focus on economic diversification, the recovery trend at the moment is far from the ERGP projected level of 2.19 per cent growth rate in 2017. However, the sign that the economy is on the recovery path as anticipated is already reflected in the deceleration of the negative growth, increased capacity utilization, and consecutive decline in the inflation rate, among others. As highlighted in its first quarter report for 2017, the National Bureau of Statistics (NBS) shows that Nigeria s GDP contracted by 0.52 per cent (year-on-year) in real terms, indicating five consecutive quarters of contractions since the first quarter of 2016. This by implication was 0.15 per cent higher than the figure for Q1, 2016 which was revised to 0.67 per cent from 0.36 per cent. Also, it is higher by 1.21 percentage point from the rate recorded in the preceding quarter, which was again revised to 1.73 per cent from 1.30 per cent. As a follow up to the consistent decelerating of negative growth, the GDP finally grew by 0.55% in the second quarter of 2017. It was based on this positive growth rate that Nigeria was in the first week of September, 2017 officially pronounced as being out of recession. This positive growth and the recovery from recession have been attributed to positive growth in both the oil and non-oil sectors. For example, growth in the oil sector, which had been negative since the fourth quarter of 2015, was positive in the second quarter of 2017. It rose by 1.64 per cent as compared to -15.60 in the first quarter of 2017, accounting for up to 17 percentage point increase. In a similar manner, the non-oil sector grew by 0.45 per cent in the second quarter of 2017, which is a second successive quarterly positive growth after growing by 0.72 per cent in the first quarter of 2017. Essentially, the improvement in the non-oil sector was particularly driven by strong growth in agriculture and solid mineral sectors, and reversal in the previous contraction of the manufacturing and construction sectors. This is an indication that the government's economic diversification programme is beginning to result in positive growth in agriculture and the manufacturing sectors. Also, industry, which grew by 3.72% in 2016, performed even better and grew by 11.67 per cent in the first quarter of 2017. Another positive step at easing the economy out of recession has been the increase in budgetary allocations for 2017 fiscal year relative to 2016 fiscal year. The increase in the proposed budget not only reflects improvements in revenue accruing to government, as an indication of the government s commitment towards diversifying revenue base, there is also remarkable planned increase in capital expenditure by 10.7 percent while recurrent expenditure is to decrease by 3.4 percent as a gradual step towards the anticipated recovery from recession. Going forward, there have been consecutive decline in the inflation rate attributable to the Central Bank of Nigeria (CBN) decision to retain the Monetary Policy Rate (MPR) at 14 per cent alongside all other policy parameters. The target is to bring inflation rate down to about 11 per cent by the end of the year and under single digits by 2020. As at the second quarter of the year, it has only marginally declined from 18 per cent to 16 per cent. Likewise, the external reserves of the country have continued to rise as the price of oil at the global market improves gradually. Nigeria s external reserves hit a 30-month high of $31.5 billion in July 2017, thus reversing the trend in decline when it dropped to US$23.89 billion in October 2016. The steady upward trend in the country s external reserves buoyed by positive developments in crude oil prices has also resulted in significant appreciation of the value of the Naira. Also, due to the continuous intervention by the CBN and improved Foreign Portfolio and Foreign Direct Investment flows, and following the introduction of the Investors & Exporters foreign exchange window, the value 2
of the Naira against the US dollar particularly in the parallel market has appreciated from N520/$ as at February 2017 to N392/$ in April and further to about N362/$ as at 17th of August 2017, while the official exchange rate has stabilized around N305/$. 2.0 ASSUMPTIONS FOR SHORT TO MEDIUM TERM DOMESTIC AND EXTERNAL OUTLOOK Although the emerging economies have continued to grapple with the impact of commodity price shocks on their external accounts, the global economy activity level is projected to pick up in 2017 and 2018 by 3.4% and 3.6% respectively. However, the down side to this anticipated improved global economic performance includes the US Protectionist stance which is capable of inducing trade wars and by implication influence the global economy negatively. Also capable of weighing on economic activities across Europe are some of the subsisting political concerns such as Brexit, and nationalistic populism. While central banks in developed economies have responded to the lackluster growth with increased monetary stimulus which pushed yields across developed world close to record lows for a sizable part of the year, the economic landscape in SSA largely mirrored activities in the continent s biggest economy, Nigeria, resulting in IMF s prediction 4 of a downward revision for Nigeria s 2017 economic growth. Specifically, growth has been projected to expand by 0.6 percent relative to the 1.1 percent earlier projected. Compared with the IMF s pessimistic growth projection attributed to the Nigeria s vulnerability to potential external and internal risks/shocks, the ERGP appears overly optimistic in its projection that the economy would grow by 2.19 percent in 2017 and rising to 7 percent by 2020. While the contrasting projections may not be unconnected to the underlying assumptions used in the forecasting process, the ERGP projection is mainly premised on expected growth in the key sectors of the economy which include oil (9.41%), agriculture (6.92%) and industry (6.99%). These projections appear to have ignored the various bottlenecks faced in these sectors such as; policy inconsistency, access to finance and more recently access to foreign exchange.. In the case of the manufacturing sector for example, the major constraints are related to the availability and/or non-availability of energy and poor infrastructure. Even though the ERGP highlights various policy options to mitigate these challenges, it must be noted that it may take a considerable time for ERGP s impressive projections to be realized. Put differently, the Nigerian infrastructural gap at around US$20 billion and the weak global economic growth implying weak demand for Nigerian goods and services are all indications that the ERGP optimistic growth projections may be too optimistic. While the ERGP shows improvements in certain areas compared with previous policy documents, it has areas which need to be further strengthened if it is to realize its ambitious projections. By way of illustration it is expected that the ERGP 4 IMF (2016). World Economic Outlook. Retrieved from, http://www.imf.org/external/pubs/ft/weo/2016/02/pdf/text.pdf 3
Real GDP Growth Rate (%) framework would lay out a clear exchange rate policy that can provide quick win for government to stabilize the economy, but one of the weak areas in the document has to do with it less than well-articulated exchange rate policy. FORECAST SUMMARY In addition to the gains made in the conflict with Boko Haram in the North East Nigeria and the intensification of dialogue with militants in the Niger Delta, the ERGP has the vision of achieving and sustaining inclusive growth for Nigeria. However, since it is the implementation and delivery of the ERGP that would determine its level of success, the present administration should focus on efforts at restoring growth through the pursuit of macroeconomic stability, diversification of the economy. Emphasis should also be placed on enhancing global competitiveness of the economy through investment in infrastructure, improving business environment, promoting a digital-led growth, investing in the Nigerian people through programmes on social inclusion, job creation, youth empowerment and improved human capital. Thus, our forecasts for 2017 through 2020 are shown to be relatively optimistic (see Figure 1). Real GDP for example is expected to grow by 1.21 per cent in 2017, 1.62 per cent in 2018, 2.01 per cent in 2019 and 2.42 per cent by the year 2020. Meanwhile, figure 2 below suggests that the rising inflation trend may remain even in the year 2020. This may be expected due to the anticipated increase in government expenditure as the 2019 General election draws near. However, the likelihood is that if all forms of domestic unrests are resolved leading to considerable decline in the domestic and imported inflation rates, and the current administration remains as conservative in spending as expected, this trend could be reversed. Figure 1: Real GDP growth rate (%) forecast 7.00 6.00 5.00 5.49 6.22 4.00 3.00 2.00 1.00 2.79 1.21 1.62 2.01 2.42 - (1.00) 2013 2014 2015 2016 2017f 2018f 2019f 2020f Time Period (Year) Source: Actual values NBS, Forecasted values CEAR 4
Figure 2: Inflation Rate (%) forecast Source: Actual values NBS, Forecasted values CEAR 3.0 POLICY ISSUES AND DOWNSIDE RISKS Given the prevailing economic conditions and the failure of a number of the past equally ambitious economic policies and strategies, the recently released economic recovery growth plan has also raised some issues and questions. The central questions therefore include; whether the proposed recovery plan and policies match the realities regarding the prevailing economic environment and whether the set objectives and projections are realizable given existing local and global economic fundamentals. Restoring macro-economic resilience and growth cannot be divorced from internal and external stability considerations. Thus any positive gains made in the course of implementing the economic recovery programme are likely to be undermined by the challenges of armed conflict in the northeast, a restive insurgency in the Delta region, and the perennial inter-communal violence across the middle belt. At the root of the security challenges are high levels of poverty, joblessness, growing number of frustrated youths, and environmental degradation. 5
4.0 SUMMARY TABLE FOR THE FORECASTS The table below shows the summary forecasts for the growth rates of key macroeconomic indicators in the context of the Nigerian economy. Table 1: Forecast of growth rate of key Macroeconomic indicators Year 2013 2014 2015 2016 2017f 2018f 2019f 2020f Private Consumption 39.28 9.52 14.73-4.82 2.74 7.27 2.64 3.79 Government Consumption -5.11 0.27 7.14-4.47 0.63 2.79 4.83 0.58 Export of Goods and Services -35.94 16.70-36.13 33.68 30.00 5.78 8.02 5.46 Export of Goods 14.70 7.42-45.21 29.96 26.28-2.00 6.31 3.75 Export of Services 3.46 7.32-9.12 43.22 38.67 22.31 10.94 8.23 Gross Fixed Capital Formation 11.63 18.45 3.80-0.85 0.68 0.11-0.13-0.14 Import of Goods and Services 12.08 7.32-9.12-2.85 1.92 0.35-0.08-0.13 Import of Goods 4.46 5.11-5.10 11.71-11.28 4.59-1.38 3.99 Import of Services 47.70 11.72-16.67-34.00 17.31 16.50 3.11-9.81 Real GDP 5.49 6.22 2.79-1.51 1.21 1.62 2.01 2.42 Inflation 8.48 8.06 9.02 15.62 17.06 16.78 17.02 16.52 Source: Compiled by CEAR. Actual values from CBN, NBS. 6