By Kelechi Mgboji
Assistant Business Editor
When President Muhammadu Buhari assumed office on May 29, 205, there were high hopes the economy was going to witness robust improvement considering his populist economy dispositions.
But one year after, harrowing tales of pains and anguish trail the economy still in a sorry pass, with current economic indices and outlook of foreseeable future pointing towards recession.
Latest statistics released by the National Bureau of Statistics (NBS) show that Gross Domestic Product (GDP) contracted by 0.36 per cent in the first quarter (Q1) this year, against 3.96 per cent growth in the same period of last year, two clear months before Buhari took over the reins of leadership, and 2.11 per cent growth in Q2 2015.
According to the NBS report, the biggest falls in growth came in the industry and manufacturing sectors which shrank 5.5 per cent and 7 per cent respectively in Q1, helping to push the economy near 0.4 per cent contraction, its worst performance in years.
According to World Bank statistics, the negative growth of 0.36 recorded in Nigeria’s GDP in Q1 2016 was last recorded in 1995. Experts said the nation would likely record another negative GDP growth in Q2, plunging it into recession.
Many contractors have been laid off as tens of thousands of businesses have either closed down or shelved investment plans.
Analysts believe they are being squeezed by an inflexible foreign exchange (forex) policy believed to have made a bad situation worse.
Inflationary pressure has consistently quickened pace in the last one year. At 13.7 per cent as of April 2016, up from 8.4 per cent a year ago, annual inflation fuelled by sustained pressure on the naira has hit the highest level in six years.
And there are strong indications that the galloping inflation rate may exceed 15 per cent in the next couple of months considering the government’s recent removal of whatever was left of its subsidy of petroleum products.
The NBS also said oil production stood at 2.11 million barrels per day (bpd) in Q1 2016, lower than the 2.16 million bpd in Q4 2015.
With the resurgence of attacks on pipelines and oil facilities in the Niger Delta, Minister of State for Petroleum, Ibe Kachikwu, said oil production has further dropped to 1.4 million bpd, the lowest level for more than 20 years.
The 2016 budget assumes oil production of 2.2 million bpd at $38 per barrel (pb). The implication is that crude oil earnings, which are already very low, are further severely threatened due to prolonged fall in commodities prices and outages in output.
Economy Buhari inherited
Admitted that the economy Buhari inherited was battered, no improvement in any parameter has registered since his assumption of office.
He inherited a forex reserve of $29.77 billion though local and international debt profile stood at $60 billion and a 2015 debt-serving bill of N953.6 billion, 21 per cent of the 2015 budget.
But one year after, dollar reserves were down 10.7 per cent to $26.5billion as of May 20, 2016, because Buhari’s government, like its predecessors, settled on the well worn policy of naira defence with scarce hard currency.
Given the fact that more money has been borrowed by the government through its usual monthly debt instruments issuance (bonds and treasury bills) the country’s total debt profile of about N12 trillion as of May 29, 2015 could have shot higher than he met it.
Apart from the pending Chinese $6 billion infrastructure financing loan, it is estimated that Nigeria has accessed over N1 trillion loans in bonds and treasury bills since Buhari assumed office.
Besides, the country owes $3 billion this year in oil repayments to big oil companies such as Shell and Exxon Mobil, according to industry sources.
These companies have helped the country fund its share of joint oil field development repayable in oil to companies.
Unfortunately, the government is facing steep production declines occasioned by resurgent attacks on oil installations by Niger Delta militants.
The naira to dollar exchange rate that stood at N180 per dollar on the parallel market today exchanges for N346 per dollar, which seriously stokes inflationary pressure expected to worsen in the months ahead.
Vice President, Yemi Osinbajo’s comments on the same day fuel price was increased by 67 per cent to remove costly fuel subsidies, intensified dollar demand pressure. This in turn weakened naira value against the dollar, and it is expected to have spill-over effects on the prices of goods and services.
Due to frequent shutdowns of oil and export terminal pipelines and depressed crude prices, gross revenues distributable to the three tiers of government – federal, state, and council – hit a five-year low in April 2015, leading up to May 29, 2015 when Buhari assumed office, and has maintained lower earnings.
Money market
A sharp plunge in oil prices which ate deep into the foreign reserves forced the Central Bank of Nigeria (CBN) to introduce currency controls.
The CBN applied rules and restrictions to stabilise the naira after it declined to a record low in February as the price of oil, the nation’s major forex earner, fell by a half in the second half of last year.
The CBN had devalued the naira twice; in November 2014 and February 2015. It also prevented banks from buying dollars on the interbank market without matching orders, measures that stabilised the exchange rate while reducing liquidity.
It excluded importers of 41 items from accessing forex from the official window where the exchange rate is pegged at N197.50 to the dollar.
Rather than help the situation, these hotly criticised measures frustrated businesses, and caused the economy to contract, having denied it of needed dollar inflows in investments that could help to pay for imports of essential commodities, including from fuel.
On the black market, the naira is trading 40 per cent below the official rate as manufacturers and importers pay massive premiums to avoid hefty official currency curbs now blamed for tipping the economy towards recession.
Bank’s de facto peg of N197 per dollar had become increasingly unsustainable due to a shortage of hard currency stemming from the slump in oil revenues.
Consequently, the CBN last Tuesday announced it would introduce new guidelines for forex management.
Announcing the decision after the Monetary Policy Committee (MPC) meeting in Abuja, CBN Governor, Godwin Emefiele, admitted that it was high time more flexible forex management was introduced after foreign reserves depleted further by 10.7 per cent, ostensibly used up to prop the naira and prevent a free fall.
But the more CBN tries to support the currency, the more it realises the hard way the futility in so doing.
Analysts and key banking sector players insisted that there was an urgent need for further devaluation of the naira to reflect its true value and situation of the economy.
Chief executive officers (CEOs) of banks added their voice to the deafening call for further devaluation and raised the alarm over “disappearing” flow of funds into the banking sector.
Those who spoke at bank CEOs’ roundtable organised by the Nigerian Stock Exchange (NSE) in conjunction with Bloomberg urged the CBN to find ways to restore liquidity to the forex market, as banks are suffering from forex trading restrictions.
First City Monument Bank (FCMB) CEO, Ladi Balogun, told Bloomberg News that banks are paying for restrictions in foreign currency trading, which pose the biggest risk to banks as they struggle against a slump in oil prices and a weak naira.
“It is important we restore liquidity in the foreign exchange market as quickly as possible,” Balogun told Bloomberg News.
Investors are fleeing in droves.
Dissatisfied by the government’s forex policy at a time the economy is battered from all fronts, investors are concerned about refusal to devalue the naira and adopt a flexible exchange rate system. Outflows of investments rather than investment inflows spur growth.
But like a people who took to geology the morning after an earthquake, the government on Tuesday, May 24 decided on a more liberal exchange rate policy, one year after it resisted calls for devaluation.
A flexible system allows the exchange rate to be determined by market forces of supply and demand.
The implication of this is that with a high demand for the dollar, the naira will invariably depreciate further to about N400 or N500 per dollar. This partly explains why Emefiele expressed concern that the economy may go into recession.
Equities market
The NSE All Share Index hit its 2015 peak of 35,728.12 basis points on April 2, the day after Buhari was declared the election winner, and former President Goodluck Jonathan conceded defeat.
Investors had hoped for a sustained rally after smooth elections in March and a peaceful handover of power on May 29.
However, the rebound could not be sustained as the new government was perceived as being too slow to tackle economic crisis, and monetary policy issues (with naira seen as overvalued) that kept foreign investors on the sidelines.
There were also sustained massive shares sell offs by foreign investors whose strident calls for naira devaluation was rebuffed by the government.
Data released by the NSE on June 18, 2015 showed that the capital market depreciated by N238 billion or 2.07 per cent just three weeks after Buhari’s inauguration.
The money market was not spared either as the naira which had strengthened at about N180 to the dollar in the first week after Buhari’s electoral victory gave up the initial gains both at the official interbank market (where it traded at N199.40) and the parallel market (where it had tumbled from N222 to N225) a month after Buhari’s inauguration.
Shares were down 6.5 per cent in October and posted a further 7.1 per cent loss in November as active foreign investors took flight for fear of further losses after consistent decline between June and September.
October, November, and December witnessed further bleeding of shares.
The first one week in January this year at the stock market was worse as investors lost over N1 trillion in one bearish week, sending a clear signal that the economy was very ill.
Several companies, especially banks, consumer goods firms, and oil and gas companies, have posted weak profits they attributed to regulatory and economy headwinds, effects of currency controls which have raised costs, and impact of the sharp fall in crude oil prices.
Forte Oil, one of the highly capitalised oil firms quoted on the NSE, lost over $400 million in price value after the stock crashed from a high of about N300 per share to less than N170 per share in less than six months.
Bank stocks were heavily off loaded because of the heavier regulatory burden that clipped returns on investment.
Stanbic IBTC Holdings crashed from a high of about N30 per share to less than N10 per share in less than one year.
Other high cap stocks which opened the year at higher prices consistently shed prices and a large segment of stocks, especially in the banking, oil and gas sectors, are currently traded at give away prices having touched their bottom levels, far below their intrinsic value.
With inflation rate at 13.7 per cent in April compared with year to date (May 2015 to May 2016) inflation adjusted return at the equities market at about -23.5 per cent, investors have lost more 60 per cent of the real value of their investments in the equities market.
The Nigeria’s capital market is dominated by foreign investors which had withdrawn more than N1 trillion in 2014 and another N534.84 billion between January and June 30, 2015.
Spooked by fears over possible devaluation of the naira, shares traded on the NSE have further lost over N3 trillion between June 2015 and May 25, 2016 as foreign investors pulled out.
With the All Share Index standing at 27, 231.50 as of Tuesday, May 24, 2016, the equities market has depreciated by 8, 496.62 basis points or 23.78 per cent between April 2, 2015 when the index hit its 2015 peak of 35,728.12 basis points after Buhari was declared the election winner, and Jonathan conceded defeat and today.
As inflation quickens pace, coupled with more pressure expected to ensue from a new regime of flexible exchange rates, investors’ equities holdings may turn valueless in real terms of purchasing power.