Nigeria’s inflation rate has climbed to 16.5 per cent. Unemployment is rising, investor confidence is at an all-time low, and the economy is struggling even to crawl.
Reporter HENRY ODUAH collates the views of analysts on how the country can climb out of recession.
Africa’s second biggest economy by Gross Domestic Product (GDP) has been in the news since last year over a record 50 per cent decline in petro-dollar revenue, now constraining its fiscal managers in financing budget.
Many analysts have been talking to investors about what happened to Africa the last time commodity prices crashed back in the 1980s.
Nigeria’s GDP growth has collapsed. Real incomes have fallen. Nigerians are now more hurt than most.
Between Adeosun and Emefiele
Finance Minister, Kemi Adeosun, spelt out the condition in somewhat confusing terms when she said Nigeria is now “technically” under recession.
Her statement only added credence to what has been the subject of discussion in the polity.
The common man, however, finds the term difficult to grapple with. Economic observers are having a hard time cracking Adeosun’s hard nut.
After Adeosun’s appearance at the Senate, Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, reportedly told the Upper Chamber in a closed session that Nigeria was experiencing frightening cases of both stagnation and inflation (also known as stagflation) at the same time.
But Adeosun’s slightly optimistic approach lightened the mood and tension of the populace who were still trying to swallow Emefiele’s discouraging comment about the economy.
She said: “In economic terms, if you have two periods of negative growth, you are technically in a recession.
“But I don’t think we should spend too much time on labels; we are in a tough situation, whether you call it recession or not, we are in a tough place, but the most important thing is that we are going to get out of it.
“Technically, we are in recession, but I don’t think we should dwell on definitions. I think we should really dwell on where we are going.
“Everything we are doing is moving outside of it, our social intervention programmes have been funded, those of providing reliefs to the very poorest, right down to every single local government would be touched by that programme.
“We have started and we will continue with it. We are not the only country in recession, many countries are doing far worse than us.
“But for Nigeria, what Nigerians want to know is ‘how is that going to affect me?’ and I want to assure everybody that what we are doing is going to work and it is going to turn this economy around.”
Charlie Robertson
Charlie Robertson, global chief economist at Renaissance Capital based in Moscow, said the big challenge now for Nigeria’s economic management team is to deliver on promises of diversifying away from oil revenue, at a time when resources are constrained.
“The next year or more will be tough, but we believe Nigeria is better placed than previously to weather this crisis. Indeed, Nigeria has very little oil per capita, so oil was never likely to drive Nigerian growth in the long-term.
“It is a point recognised by the new APC (All Progressives Congress) government. They want to revitalise agriculture. Their 2016 budget reduces the oil share of government revenues from 2/3 to around 1/3.
“The government will advance market friendly reforms in the electricity, mining, and steel sectors, while welcoming foreign investment into ICT and other sectors,” Robertson enthused.
Alex Ibhade
Alex Ibhade, analyst at Lagos-based Dunn Loren Merrifield Asset, said: “In a market economy, resources tend to flow to activities that provide the greatest returns for the risks the lender bears. Interest rates serve as market signals of these rates of return.
“Although returns will differ across industries, the economy also has a natural rate of interest dependent on factors such as the nation’s rates of savings and investment.
“When economic activity weakens, monetary policymakers can push the interest rate target temporarily below the economy’s natural rate, which lowers the real cost of borrowing.
“Several factors have contributed to the contraction in economic growth which we split into: demand side factors and supply side factors.
“Demand side factors influence growth of aggregate demand while the supply side incorporates factors such as the cost of doing business.
“The cost of doing business in Nigeria is relatively high, perhaps one of the highest in Africa, which supports our argument for a low interest rate regime.
“This argument is based on the fact that the cost of capital is a key component of the total cost of product or service delivery.
“Hence, the overall high cost of production translates to high consumer prices as these costs are passed on to the final consumers as firms strive to, at the minimum, break even.”
Recession
Recession means an economy experiences two consecutive quarters of negative growth as measured by GDP.
Activities within an economy experience significant drop and it can last for months.
Inflation
Inflation is a sustained increase in the general price level of goods and services in an economy. You spend more money to buy fewer goods and services.
In June, the National Bureau of Statistics (NBS) said Consumer Price Index (CPI), a tool for measuring inflation rate for a period, had increased 16.5 per cent, about 0.9 per cent points higher than the 15.6 per cent rate in May.
The increase is the highest in 11 years.
Inflation rate was 9.2 per cent when President Muhammadu Buhari took over power from former President Goodluck Jonathan in May 2015.
Stagflation
Stagflation is when inflation rate is high, unemployment level is steadily high, and economic growth rate brakes.
In simple terms, price of goods and services are high, there are no jobs for people to earn money, and the economy crawls sluggishly.
IMF
The International Monetary Fund (IMF) predicted in its World Economic Outlook (WEO) that the Nigerian economy would contract by about 1.8 per cent this year.
It said the country was expected to experience the biggest contraction after economic growth projection declined from 2.3 percentage points in 2015 to -1.8 in 2016.
It also said the Nigerian economy, projected to grow 1.1 per cent in 2017, was also projected to decline by another 2.4 points in the same year.
Its reason for such projections are that the economy is adjusting to foreign exchange (forex) shortages caused by lower oil receipts, low power generation, and weak investor confidence.
Globally, the IMF said the economy was projected to grow by 3.1 per cent in 2016 and 3.4 per cent in 2017 representing a 0.1 percentage point reduction for both years relative to its WEO in April.
The reduction in global economic growth, it said, is necessitated by growing economic, political, and institutional uncertainty surrounding the unexpected decision of Britain to leave the European Union (EU).
In its reaction to the WEO, FBNQuest, the investment banking and assets management wing of First Bank of Nigeria, highlighted India as the fastest growing economy with a growth rate of 7.4 per cent.
India came ahead of its closest rival, China, which reported growth for Q2 2016 of 6.7 per cent year-on-year, ahead of market consensus of 6.6 per cent and unchanged from the previous quarter.
Benchmark rate hike
Last month, the Monetary Policy Committee (MPC) voted to raise the benchmark interest rate – the Monetary Policy Rate (MPR) – by 200bps to 14 per cent from 12 per cent, a move seen to attract investible funds.
Five members of the MPC voted in favour of the rate hike, three voted in favour of the status quo.
The MPC unanimously agreed to maintain all other variables – Cash Reserve Requirement (CRR) at 22.5 per cent, Liquidity Ratio (LR) at 30 per cent, and asymmetric corridor at +2 per cent and -5 per cent.
Despite being attractive for fixed income investors, the decision to raise MPR came as a surprise to most analysts (10 of 15 economists in a Bloomberg survey predicted no change in the benchmark rate) as the MPC acted decisively in the wake of emergent stagflation.
Emefiele acknowledged key themes present at previous MPC meetings, where he highlighted the growth risks raised as well as the failure to interrupt inflation acceleration when rates were raised in March.
However, he stressed that positive real interest rates are required in the economy to support savings and ease the pressure on the naira by reducing its circulation.
In addition, higher interest rates should encourage foreign portfolio inflows as the CBN signals its determination to sustain the flexible exchange rate regime.
Vetiva Capital
“Weaker global economic performance and a worsening domestic outlook weighed heavily on the deliberations of the MPC.
“In light of new threats to global growth (as underlined by downward revisions in the IMF forecasts), many developed markets opted to maintain rates as they confronted sluggish growth and negligible inflation,” said the Michael Famoroti team of economic analysts at Vetiva Capital Management, Lagos.
Nigeria Economic Society
Nigeria Economic Society President, Ben Aigbokhan, is confident that the measures being put in place by President Muhammadu Buhari would save the economy from further shrinking as predicted by the IMF.
“The government wants to be seen to achieve something and will not allow the economy to be nose-diving as to come to -1.8 per cent in the last quarter of the year.
“I think between now and the last quarter the government is going to release some amount of money for the capital projects.
“So the government will want to be seen doing something, that is why I’m optimistic that the country will come out of recession,” Aigbokhan told the News Agency of Nigeria (NAN).
He was not at par with the projections of the IMF for Nigeria, as it sometimes puts up such alarms to put governments on their toes.
“I am not as pessimistic as the IMF, you know how IMF forecasts do go; sometimes they use them to put pressure on the government to act. So I don’t think Nigeria’s economy will grow at -1.8 per cent. No! things will not be that bad.
“One, oil production is picking up, and the rate of [Niger Delta] Avengers destroying oil pipelines has reduced or at least is reducing. It is reducing with all that but you can see that the economy is still nose-diving as much as well.
“I don’t think it will be that bad because the government is reacting to the criticisms that it’s receiving lately. I’m not holding forth for the government but I don’t know any reason why it will want to do that.
“Also with oil production picking up, some more revenue will be coming in gradually. I don’t expect the government to spend the revenue on social things; it should spend it on developmental projects.”