After oil, returning Nigeria's economy to growth


Friday, November 25, 2016 6:00pm / FBN Quest

Nigeria was once poised as Africa’s largest economy - today it is not in the best form. The country is in a recession, largely due to the unpreparedness for the slide of the oil price, not creating a large enough buffer for recovery, and also not allowing the Excess Crude Account (ECA) to become a sovereign wealth fund.

As an oil rich state, Nigeria has the largest hydrocarbon reserves with crude oil and natural gas production accounting for less than 10% of the nation`s GDP. Hydrocarbon exports have been the source of up to 70% of the government’s revenues and 90% of its foreign exchange receipts. The increased supply of oil from Iraq and Iran, as well as the decrease in demand from the US, Europe and China has contributed to a global pressure on oil prices leading to a significant drop of 33% in Brent Crude oil prices over a 2 year period.

The Honourable Finance Minister, Mrs. Kemi Adeosun, in an interview with Mr. Gregory Kronsten, Head of Macroeconomic and Fixed-Income Research atthe2016 FBNQuest Investor Conference stated that the federal government’s philosophy in relation to the fiscal strategy is to move the Nigerian economy from being a consumption driven economy to and an investment driven economy; seeing as in the past the economy has mainly been extractive. The fall in oil prices has exposed the vulnerability of this approach, hence the decision to reposition the economy to be investment led.

According to FBNQuest Research, gross federally collectible non-oil revenues could and should grow substantially. As can be seen from the most recent quarters of 2016, the Nigerian non-oil inflows have actually risen above oil inflows. According to the Finance Minister, there have been up to 700,000 company registrations in the last year that have not paid any tax at all. By using technology and data driven initiatives, there will be an increase in the number of businesses that pay VAT and this would be a key instrument of sustainable revenue generation.

Mr. Gregory Kronsten, speaking on the economy at the conference, acknowledged that Nigeria facesa critical FX supply issue, as the buffer of reserves is currently “not great”. He further alluded to the fact that “the challenge is how to bring about a large FX inflow, restore market confidence and secure the autonomous flows for a fully functional market.

The market driver was previouslythe FX. Now however, the driver has become the squeezed demand for foreign exchange, soon to be complemented by the FGN’s policy in the form of an expansionary budget. Albeit the fact that this year’s release of the budget has been latent, capital releases will begin to pick up as funds are disbursed and allocated to the bigs pending ministries. Results of these will be seen in contractors resuming work on infrastructure projects once again.

Investors seek certainty and stability. Some of the policies that are being put in place are in the right direction, and if consistent in the application will boost participation in the country’s economic growth and development. The important element is to bring about a large enough FX inflow to restore market confidence and secure the autonomous flows for a fully functioning market.

Olubunmi Asaolu, CFA, Head of Equity Research at FBNQuest delivered a presentation on the markets, highlighting that banking stocks are getting cheaper but investors must remain cautious when making their investment decisions. He also stated that the strong revenue and PBT reported by the banks were primarily attributable to FX gains, and in the 2016 financial year banks are poised to make higher FX gains.

The HonorableMinister of Industry, Trade and Investment, Mr. Okey Enelamah’s address at the FBNQuest forum was clear and encouraging, stating that the ministry has been strategizing and devising a plan - now it is all about implementation. The pivot towards getting the private sector more engaged is necessary.

The situation in the Nigerian context has changed fundamentally, the new reality is that we must begin to adjust despite the challenges and find a way to navigate in the new environment. There may be solutions unique to the Nigerian environment but there are examples to learn from internationally and we must seek ways that the private sector can engage effectively.

We cannot transform structurally overnight, and change may be generational but it is fundamental that the journey must begin today.

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