• With Q4 2016 GDP Report, Economic Recession Slows

The latest growth indicators may have signified reduction in the depth of the current economic recession, but experts also note persistent macroeconomic constraints, Kunle Aderinokun and James Emejo write.

Nigeria’s real Gross Domestic Product (GDP) growth rate stood at -1.30 per cent in the fourth quarter of last year (Q4 2016) compared to -2.26 per cent in the previous quarter.

Though GDP growth contracted by -1.51 per cent in full year, the growth figures in Q4 was indicative of gradual movement away from the economic quagmire, given that the economy recorded much negative contraction in the third quarter and given that all the quarters in the year under review recorded declines in growth.

According to the National Bureau of Statistics (NBS), in its GDP Growth Estimates for the Fourth Quarter 2016, though the decline in Q4 was less severe than the contraction in the previous quarter, it was nevertheless lower than the 2.11 per cent growth rate recorded in Q4 2015.

The NBS noted that the contraction in the quarter under review reflected, “A difficult year for Nigeria, which included weaker inflation- induced consumption demand, an increase in pipeline vandalism, significantly reduced foreign reserves and a concomitantly weaker currency, and problems in the energy sector such as fuel shortages and lower electricity generation.”

In monetary terms, real GDP was valued at N18.29 trillion in Q4 and N67.98 trillion in 2016 as a whole.

Though oil production improved to 1.90 million barrels per day (mbpd) in Q4, indicating a 0.27 mbpd higher than the 1.63 mbpd production volume in the previous quarter, oil sector contracted by -13.65 per cent in the year, representing a more significant decline more than the -5.45 per cent in 2015.

Oil sector share of real GDP also reduced to 8.42 per cent in 2016 compared to 9.61 per cent in 2015.

According to the NBS, “This reduction has largely been attributed to vandalism in the Niger Delta region. As a result, the sector contracted by -13.65 per cent; a more significant decline than that in 2015 of -5.45 per cent.”

On the other hand, the non-oil sector declined by -0.33 per cent in real terms in Q4 but increased its share of GDP to 92.85 per cent from 91.94 per cent in Q4 2015.

Essentially, Mining and Quarrying contributed 7.32 per cent to real GDP in Q4, representing a decline of 0.89 per cent relative to the corresponding quarter of 2015 and also a decline of 1.02 per cent points relative to the third quarter of 2016.

Agriculture contributed 25.49 per cent to overall GDP in the quarter under review, higher than its share of 24.18 per cent in Q4 2015, but less than its share in the previous quarter of 28.65 per cent.

For 2016 as whole, agriculture increased its share relative to 2015 to 24.43 per cent due to its relatively strong growth rate.

However, the contribution of manufacturing to Nominal GDP was 8.34 per cent lower than the 9.09 per cent recorded in the corresponding period of 2015, and 8.59 per cent in the third quarter of 2016.

Real GDP growth in manufacturing remained negative in Q4 2016; a contraction of 2.54 per cent was recorded (year-on-year).

According to the NBS, this reflected a number of challenges faced by manufacturing in 2016, such as higher costs of imported inputs as a result of the exchange rate, and higher energy costs as a result of a fall in electricity generation, and more expensive fuel.

Although, economic analysts see the slowed contraction as positive signs for exiting the recession, current macroeconomic indicators including lack of infrastructure, foreign exchange crisis, high unemployment rate and inflationary pressures remained major challenges to future economic prospects.

Nevertheless, the recent appreciation in oil prices and relative peace in the Niger Delta region as well as recent success achieved in the foreign exchange management by the Central Bank of Nigeria (CBN) appear to offer further hopes of prosperity in the first quarter of the year.

Specifically, analysts said notwithstanding the seeming improvement in growth figures, relative to previous abysmal performances in preceding quarters, it would be too early to roll out the drums in celebration of improved condition in the economy.

Director General, West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo, noted that the -1.5 per cent growth of GDP in 2016 confirmed that the economy was deep in recession last year.

“Even if a marginal positive growth in GDP takes the economy technically out of a recession, the structural problems remain,” he pointed out.

Ekpo, however, added that, “The visible hand of government via spending would enable the economy exit the recession. If 80 per cent of the projects in the 2017 budget are implemented growth would be restored and a robust monetary policy would further enhance growth.”

But, the renowned economist and former CBN director cautioned, “The slight increases in oil prices should not derail the policies, strategies and programmes meant to diversify the economy, “ stating that, “The real sector particularly manufacturing must be revamped.”

An Associate Professor of Finance and Head, Banking and Finance Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, expressed concerns over the persistent inflationary pressure amid growth prospects.

According to him, “In view of the GDP growth rates of -2.06 per cent and -2.24 per cent recorded in Q2 and Q3 of 2016 respectively, the Q4 figure of -1.30 per cent simply suggests that the recession is becoming less severe and the country may well be on the path of recovery. It is interesting to note that the 2016 full year figure of -1.5 per cent is lower than the forecast of -1.7 per cent earlier made by the IMF.

“ As you well know, the fall in oil revenue is largely to blame for the economic recession given the mono-product nature of the economy. I think that the current positive developments in the international oil market and the relative peace in the Niger Delta region if sustained will combine to improve revenue for all tiers of government and in particular put the state governments in a stronger position to regularly pay workers’ salaries.”

“This will boost demand for goods and services and generally increase the tempo of economic activities. So, I see the country exiting the recession in a few months’ time. However, there is the inflationary pressure to tackle. Even when GDP eventually turns positive, a high rate of inflation as we have it today (a little shy of 20 per cent) will rubbish any favourable impact the GDP figure may have on an already high misery index.

“No doubt, the end of recession will be good news for the Central Bank not least because monetary policy implementation will be made a lot easier. Be that as it may, the fight against inflation should not be left to the CBN alone in view of the fact that the key drivers of inflation in Nigeria today, as confirmed by the NBS (high cost of fuel, transport, electricity, housing, food), are largely non-monetary factors. More than ever before, sound fiscal policies are required to address these challenges.”

Also, economist and former acting Managing Director of Unity Bank Plc, Dr. Muhammad Rislanudeen, said coupled with current GDP growth prospects, the CBN needed to bring much more clarity to forex management and as well curb inflation to keep current hope of recovery alive.

He said: “Even though year on year GDP growth rate contracted to -1.51 per cent in 2016 from 2.11 per cent in 2015, it looks like with reduced pace of both contraction in GDP from -2.24 per cent in third quarter 2016 to -1.30 per cent in fourth quarter 2016, we have seen the worst of the current recession. Also, the pace of month on month increase ininflation has started displaying decreasing rate of increase like from 18.55 per cent in December 2016 to 18.72 per cent in January 2017.

“In response to National Economic Council’s advice to CBN to change its archaic foreign exchange policy, massive injection of liquidity of USD370 million, USD230 million and USD180 million has done the magic of bringing down the black market rate from about NGN520 to about NGN450.

“This is positive as it will significantly help to tame down imported inflation and minimise activities of speculative demand as well as rent seeking. However, sustaining this positive trend require increased clarity in CBN foreign exchange policy, closing other forex windows thereby encouraging private investors to provide more liquidity in the market.”

According to him, “With six months foreign exchange forward contracts quoted at NGN381 and maturing three months at NGN354, Bloomberg quoted JP Morgan Chase and Renaissance capital as saying that without free floating currency, Nigeria will still struggle to lure back foreign investors.

“We had a fire brigade approach on foreign exchange policy beginning last week, which in part, worked to close the exchange rate gap. However to consolidate on this, CBN need to close other forex windows and leave only CBN quote and Interbank which can be allowed to partially float with intermittent intervention by CBN to provide stability and liquidity. This will incentivise private investors especially foreign investors where emerging markets are a good investment destination given the low interest rate in developed world. For example, rates in Bank of England is 0.25 per cent, 0.5 per cent in U.S. Federal reserve and almost zero in Eurozone while Japan’s economy is still in deflation with negative interest rate.”

“With the right forex policy, investment by foreign portfolio investors in Nigeria’s fixed income market is attractive with current tax free interest rate of about 18.44 per cent. Fiscal authorities should also work with CBN to ensure both monetary, fiscal and trade policies complement rather than contradict each other within the context of proposed economic recovery and growth plan due to be launched soon by the President.”

Similarly, economist and ex-banker, Dr. Chijioke Ekechukwu said a lot of work is still needed to be done especially at the macroeconomic level to achieve and sustain growth.

He said: “With a daily oil production of 2.1million barrels of Oil, arising from a relaxed Niger Delta restiveness within the period under review, and with the Crude Oil Price hovering between $54 to $56 per barrel, it is expected that we should achieve some level of marginal GDP growth within the 1st quarter.

“This growth can be sustained in the 2nd quarter. It is however, not time to roll out drums yet. A lot of work still needs to be done to improve on the other Macro Economic indicators of Inflation, Foreign Exchange Price and its stability, Employment, Balance of Payment etc. Frantic efforts therefore should be made towards improving on all the foregoing indices by putting a self-driven machinery in place.”

Also, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola said the economy may be headed to the inflexion point where growth will turn positive but added that it is important to await positive economic growth before celebrating a possible exit from recession.

According to him, “The overall news is that the economy contracted in the 4th quarter and in 2016 generally. However it is consoling that the decline is lower than expected and lower than the previous quarters.

“This may be an indication that we are getting to the inflexion point where growth will turn positive. The improvement in oil production and higher oil price can help economic growth.

“Increased spending on infrastructure can also help growth in the first quarter of 2017 and thereafter.

We need to wait for positive economic growth before rolling out the drums.”

To the Managing Director and Chief Economist, Global Research, Africa, Razia Khan, “A contraction in GDP last year was a foregone conclusion. The real issue is the nature of recovery that the Nigerian economy now sees. Do we see the economy ambling along, with a return to positive but still-low growth because the base from last year was so weak? Or do we see strong reformist momentum, that is able to drive higher investment levels and a much more robust growth rate? The latter is likely to be possible only with reliance on foreign flows in the near-term. That will require some measure of market determination of the FX rate.”

Besides, Director, Union Capital Markets Ltd, Egie Akpata, who noted that, “The results are largely in line with most analyst forecasts,” believed, “After a sustained contraction, there is likely to be a rebound as the economy adjusts to the new exchange rate and other variables.”

Akpata, however, pointed out that, it is interesting that most forecasts show very marginal growth in GDP for 2017. “In order to see significant growth in GDP this year, the authorities will need to fix the FX situation and drive down interest rates. It is unlikely that a number of key sectors can grow meaningfully without access to FX or borrowing from banks at 30 per cent.”

“CBN MPC decisions in the next 2 meetings will have a big impact on the level of growth to be achieved in 2017. Same for the ability of the Federal Government to quickly implement the 2017 budget,” he added.

Reasoning along the same line, analysts at Renaissance Capital, pointed out that, notwithstanding the Q4 2016 report, their outlook for 2017 is predicated on foreign exchange policy and resolution of the crisis in Niger Delta.

According to them, “Our 2017 growth projection of 0.5 per cent is premised on an improvement in capex, agriculture sustaining c. 4 per cent growth, and oil output stabilising at c. 2mbd. The $1.5billion in foreign loans that the government has secured since November for the budget, and those to come suggests we should see a lift in capex in 2017, compared to 2016. The recent narrowing of the spread between the official and parallel FX rates is positive.

“However, this policy is premised on the central bank sustaining sizeable net FX inflows. For a sustained improvement in liquidity, we believe the central bank needs to ease FX controls, unify the FX rates and allow for price discovery. This would help key sectors like trade and manufacturing recover. We think a resolution in the Niger Delta would allow for oil output to stabilise at c. 2mbd and support a recovery in FX liquidity.”

However, analysts at FBN Capital expressed disappointment at the performance of the economy in the review period. “Our expectation was modest GDP growth in Q4 on the basis of some recovery in the non-oil economy with help from the usual, seasonal boost. This did not materialise, and the slump in real oil output was worse than we anticipated. That fall was slower than the previous quarter yet still in double digits (-12.4% y/y),” they said.

The analysts pointed out that, “FGN has a major role to play in economic recovery on the fiscal side. Construction contracted for the sixth successive quarter, by 6.1 per cent y/y, and stands to benefit from the planned acceleration in capital releases to spending ministries.”