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2018 Outlook on the Nigerian Economy: The Need for an Even Keel


Friday, December 29, 2017 03:00PM / Temitope Babalola 

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Executive Summary 

The Nigerian economy exited a negative territory in 2017 as Gross Domestic Product (GDP) grew by o.55% in the second quarter of 2017. This was largely attributed to the increase in oil production and a recovery in oil price. However, the real sector especially sectors such as trade, manufacturing, finance & insurance and information technology is yet to recover fully.  Thus growth remains largely volatile, as it remains vulnerable to shocks. 

Though leading indicators such as the Production Manufacturing Index, External reserve, nominal currency and price stability have improved, labour force participation remain weak and this lead to a surge in the misery index. As such Nigeria’s economic story is still blurring with mixed tunes and though policies put in place are gradually getting clearer, discordant tunes are common in a pre–election year.  

The needed precursor for growth is evident, but the possibility of an escape velocity is still in doubt since the real sector remains sluggish and GDP growth lag behind population growth. Therefore as the economy exits the recessionary line, the possibility of a “go slow” economy characterized by tepid growth and rising unemployment cannot be written off especially youth unemployment which could further heighten migration outflows thus denting our growth potential on the long run due to substantial human capital flight. 

In the wake of such reality, this edition of Proshare Confidential takes an in-depth look into the global economy, while highlighting that both advanced and developing economies are expected to grow in sync in a long while. Though, most developing economies have adapted partly to on-going off-shore financial risk. 

The study further took a cursory review into the monetary policy interventions in 2017, having observed that the monetary authority was willing to ensure price stability and exchange stability though this conflicted with attaining economic prosperity simultaneously.  The self-restrictive mandate of the monetary policy made it largely reactionary, while it seemed less concerned about maximum employment, even when there is a profound level of depression in the overall level of well-being. 

In 2018, we see monetary policy slanting towards a mid- point to accommodate growth. Thus we can expect a 100 basis point shave to the monetary policy rate accompanied by a cut to the quantity base.  The root penetration of a rate cut will be shallow without reducing the cash reserve ratio.  

Our outlook which is in line with most analysts is convinced on sustaining the growth momentum in 2018. In specific the dynamic adjustment path will readjust better in 2018 coupled with strong oil production and stability in oil prices. Such will grease both external reserve and exchange rate positively. At the same time external trade will improve but it will take a longer period to diversify fully the external trade universe of the nation. 

The outlook is positive toward the oil sector but retains some aversion to the real sector given both policy inertia and reeling effect from hysteresis. Although the state accrued that margin compression will fall most sectors will be concerned about stabilization rather than expansion.   

The report further pointed out that revenue to states and local government will bolster in 2018, but still leave their fiscal capacity diminished. States are faced with the challenge of improving their internal generated revenue in a new norm, whereby they are constrained by huge debt and flagging output to revenue. States that are more tilted to private public partnership will improve their ease of doing business, review tax laws, ensure a more effective land administration, contain recurrent expenditure and leverage more on more elastic road network to thrive better. Although the outlook on states has improved, the states must be cautious of how the nature of fiscal multipliers is used without structurally adjusting to the new reality.      

Finally, the study takes a detour to the CFA currency zone, taking a look at the macro dynamics of such countries. The currency block has been able to achieve price stability and economic growth at the expense of individual monetary autonomy. At the same growing higher than the average regional growth, more importantly the relatively cooling off in the Euro has left the peg untested for some time. Regardless the fiscal sustainability of each could threaten the peg on the medium term; the lack of individual domestic money market could limit their choices.   

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Proshare Nigeria Pvt. Ltd.

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Previous Proshare Confidential Report (s)

1. Nigeria External Economy and the White Noise of Import Dependency – Nov 2017

2. States and the Rising Weight of Debt – Oct 2017

3. Money Supply: Reeling from Policy Response – Sep 2017

4. How Rail and Energy Will Deliver a Robust Economy for Nigeria – Aug 2017

5. Too Big Government: The Hysteria of Developmental Quagmire – Jul 2017

6. The Nigerian Debt Conundrum and the Need for Automatic Stabilizers – Jun 2017

7. Article IV vs. ERGP - The Third Way – May 2017

8.Lifting The Veil off The Financial Sector – Apr 2017

9.Towards An Economic Model for Nigeria; Going Beyond Symptomatic Responses - The Panama Model – Mar 2017

10. FX Utilisation in January 2017-Symptoms of An Opaque Structure – Feb 2017

 Proshare Nigeria Pvt. Ltd.

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