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Nigeria and 2017 - The Limit of Expectations

Proshare

Thursday, January 05, 2017 9.49AM / Jayaike Ukoha-Kalu*

It’s the beginning of a new year and 2016 will be a year the country as a collective will be in a hurry to forget. The country’s macroeconomic space prior to and during 2016 was consistently battered by shock after shock. Generally speaking, these shocks have been largely exogenous in nature, with some of the greatest blows coming from the economic externalities caused by the new normal of Crude Oil trading between the $40-$55 threshold for the better part of last year (and the foreseeable future), along with the political tensions in the South Southern region of the county causing intermittent Crude Oil Production. These two have arguably been the biggest reasons for the consecutive quarter on quarter declines in the country’s GDP, the disturbing disconnect between monetary and fiscal policy during the period can be also be named as a contributory factor. 

The Nigerian Federal Government on its part looked on helplessly as the country tail spun into a recession that was expected by many, and then confirmed in late 2016. Slow implementation of the expansionary 2016 budget on the fiscal side, extended capital controls coupled with reactionary policy instruments on the monetary policy side exacerbate the effects of the shocks the country faced. 



Record levels of inflation, increasing unemployment, poor manufacturing, business operating conditions and the abrupt decrease in capital accumulation are some of the effects of the county’s poor performance in 2016. The news was not all bad in 2016 as last July, the country’s apex bank tried, albeit halfheartedly to abandon a currency peg that had deterred investors for long, the Federal government also announced in October that it was planning on borrowing as much as $30bn over a period of three years from multilateral bodies to support its capital spending programs. An example being the $1bn budget support loan from the African Development Bank (AfDB) currently being discussed. Thankfully, Nigeria’s low debt profile means that investors might be interested, as the figure stands below 15% of its GDP, the country sought to adopt an aggressive borrowing plan to address its huge infrastructure and trade gap. In 2016 also, the 600,000 bbl/d refinery by the Dangote group was commissioned for construction and this development will likely have positive effects for the country’s current account upon completion over the next few years.

What may happen in 2017?
Nigeria’s economic recovery will be slow and most likely flat through 2017 for many reasons, one of such being that the import substitution rhetoric peddled by the Nigerian government during the 2016 period failed to garner much interest or reach any real milestones. Furthermore, the infrastructure boost to the economy promised by the expansionary 2016 budget proved problematic and has failed to materialize till date. Any guaranteed real growth in this year is going to be on the back of improved efficiency and output in the Oil & Gas sector. This can only happen if Crude Oil domestic production returns to the levels of early 2016, when production peaked at 2.15mbpds. Crude Oil domestic production contracted significantly in 2016 even though the spot price of the Bonny Light blend appreciated throughout the year. Sadly, the country failed to reap the net benefits of inadvertently hedging the year’s budget by pricing its premium blend at $38 a barrel. 



Eyeing the Fiscal 
All eyes will be on the Federal Governments efforts towards Fiscal support in this year as Monetary policy is likely to remain largely unchanged from late last year’s trend. The MPC in its most recent meeting last September had acknowledged the inefficiency of its policy tools at managing Nigeria’s deteriorating situation. Underperformance in 2016 according to the committee could not be effectively managed by monetary policy because robust fiscal support was lacking. In its Communiqué, the committee asserted that “While stimulating economic growth and creating a congenial investment climate always is and remains essentially the realm of fiscal policy; monetary policy in all cases only comes in to support sound fiscal policy” and although the committee further stated that “The Bank shall continue to deploy its development finance interventions to complement the overall effort of fiscal policy towards reinvigorating the economy”, it is easy to come to the conclusion the MPC has run out of options. 2017 will have mostly repeat prescriptions by the MPC seeing as there’s not much left in the country’s arsenal of policy tools. The Federal Government of Nigeria has its work cut out this year because there are no easy ways or quick fixes out of the current situation. The practicality, precision and swift execution of fiscal support are critical to slowing the descent towards any further declines, talk less of a push towards growth. A common example of such practicality can be a shift from the unreality of immediate import substitution, to making Nigeria a more attractive place for foreign investment. 

Foreign Exchange in Nigeria is still a heavy challenge because access and availability of fx has proved either too costly or problematic.  Business operations have been hampered by the burden of dealing with increases in the Country’s multiple currency rates.
 


Year 2016 saw the Naira officially depreciate a large 181.5% to the Dollar, falling from in 168N/$ in January 2016, to a torrid 305N/$ by December. In similar fashion, the unofficial rates followed suit, moving from N183/$ in January 2016 on the black market to N399/$ by the end of the year. This instability had unprecedented effects on all sectors of the economy, most especially the Manufacturing and Financial services sectors. This is seen with the Manufacturing Purchasing Managers index, the country’s manufacturing sector performed below the 50 point benchmark throughout the year save for the final month where the figure peaked at 52 index points.

The Nigerian Stock Exchange’s ASI at the end of 2016 became the fifth worst performing asset-class in the world, value traded dropped by over 40% and the number of equities listed dropped by 7%, one positive point worthy of mention concerning the exchange in 2017 is the fact that MTN will sometime in this year launch an IPO as part of its obligation with regards to the sanctions placed on the company by the Federal Government of Nigeria. Going forward, availability and easy access to fx can be a huge boost to the economy but these are closely tied with steady crude oil export receipts and an effective fx system that is strictly governed by market forces only. 



In short, and concerning Nigeria and 2017, all that can be done to at least offset, halt or prevent the underperformance in 2016 of Nigeria’s economy from seeping into this year and to further push towards stability, lies within the purview of the Nigerian Government and its ability to achieve the N6.7tn expansionary budget. The Federal government has to realise its maximum spending target for the year and this process has to begin with immediate effect as there is no more time to spare, this point cannot be reiterated further.

*Jayaike Ukoha-Kalu is an economics student of Babcock University and fmr intern at Proshare. He can be reached via  ukohakalujaya@gmail.com

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