Thursday, February 04, 2016 07:56 PM / NBS
The turmoil in global commodity markets, witnessed in the second half of 2014 brought their full weight to bear on the Nigerian economy in 2015. Oil prices fell 66.8% from $114/barrel recorded in June 2014, to $38.0 by December 2015. Prices fell even further in 2016, to $32.6 as at 3rd February, 2016. Beyond commodity markets, recent developments in the global economy created a trifecta of headwinds that the nation has to contend with.
The return of Iran to the global economy implies substantially larger crude oil supplies are to hit the global market in the near term, and thus the current consensus that oil prices are likely to remain “lower of longer”. The issue of lower commodity prices has been further compounded by the United States Federal Reserve (FED) raising key interest rates, after several years of a very accommodative monetary policy as a result of the global recession which began circa 2008.
In December 2015, the FED raised the Federal Funds Rate by a quarter-point. Furthermore, the economy of the Euro Area, a key importer of Nigerian exports is still on the mend. According to recent statistics from the European Commission 1 the Euro Area is expected to grow by 2.0% in 2016, up from 1.9% in 2015.
Interestingly, economists love these times, and thus the phrase; “never let a crisis go to waste”. Few instances give governments the opportunity to take hard decisions. Accordingly, the government is using the 2016 budget as an opportunity to reset and redirect the macroeconomic dynamics of the country.
The attempt to consolidate expenditure using the Treasury Single Account to plug leakages (even if this is only at the federal level) is a welcome first step. The proposed 1.6 trillion to be invested in capital projects, and other initiatives in particular in Power, Works and Housing are likely to bode well for the economy. In addition, the establishment of the Efficiency Unit to identify and surgically eliminate inefficiencies without hampering productivity is also another development.
In the near term, the reset may not yield fruits as quickly as Nigerians expect. Economic growth in 2016 is expected to increase to 3.78% from 2.97% in 2015, an increase of less than 100 basis points.
Beyond 2016 however, growth is expected to jumpstart averaging 5.41% yearly between 2017 and 2019 as infrastructure developments take shape and provide support for both the oil and non-oil sectors.
While upward pressure on inflation is expected, meaning that the Headline index may rise from 9.55% to 10.16% in 2016, rates are expected to moderate beyond this period and average 9.01% between 2017 and 2019.
The value of total trade is expected to slow in 2016, increasing by 2.41% as a result of moderations in imports and exports. Beyond 2016, both import and exports are expected to increase and Total Merchandise trade is expected to Average 15.61% growth during the period.