• Analysts React as IMF Says Threats to Nigeria’s Economic Recovery High

The International Monetary Fund has predicted that the Nigerian economy will be out of recession this year with growth of 0.8 per cent though it says risks to the recovery remain high.

It, however, said the growth would not be sufficient to reduce unemployment and poverty in the country.

It said its staff team, led by the Senior Resident Representative and Mission Chief for Nigeria, Mr. Amine Mati, visited the country from July 20 to 31 to discuss recent economic and financial developments, update macroeconomic projections, and review reform implementation.

After shrinking by 1.5 per cent in 2016, the nation’s economy contracted by 0.52 per cent in the first quarter of this year, which is the fifth consecutive quarter of contraction.

According to Mati, the economic backdrop remains challenging despite some signs of relief in the first half of 2017.

He said following four quarters of negative growth, the non-oil economy grew by 0.6 per cent (year-on-year) on the back of a rebound in manufacturing and continued strong performance in agriculture.

He stated that various indicators suggested an uptick in activity in the second quarter of the year, adding that the headline inflation, which decreased to 16.1 per cent in June, remained high despite tight liquidity conditions.

Mati said, “Preliminary data for the first half of the year indicate significant revenue shortfalls, with the interest-payments to revenue ratio remaining high (40 per cent at end-June) and projected to increase further under current policies. High domestic bond yields and tight liquidity continue to crowd out private sector credit.

“Given Nigeria’s low growth environment and the banking system’s exposure to the oil and gas sector, non-performing loans increased from six per cent in 2015 to 15 per cent in March 2017 (eight per cent after excluding the four undercapitalised banks).”

He noted that the government had started implementing a number of important measures, with the Economic Recovery and Growth Plan driving the diversification strategy, and security in the Niger Delta improved through strengthened engagement.

He said the new Investor and Exporter FX window of the Central Bank of Nigeria had provided impetus to portfolio inflows, helped increase reserves above $30bn, and contributed to reducing the parallel market premium.

Mati added, “However, near-term vulnerabilities and risks to economic recovery and macroeconomic and financial stability remain elevated.

“Concerns about delays in policy implementation, a reversal of favourable external market conditions, possible shortfalls in agricultural and oil production, additional fiscal pressures, continued market segmentation in a foreign exchange market that remains dependent on central bank interventions, and banking system fragilities represent the main risks to the outlook.”

According to him, in the near term, a stronger push for front-loaded fiscal consolidation through a sustainable increase in non-oil revenues will be needed to create space for infrastructure spending, social protection and private sector credit.

He said this should be simultaneously accompanied by a monetary policy “that avoids direct financing of the government and is kept sufficiently tight, a unified and market-based exchange rate, and rapid implementation of structural.”

“Pursuing these policies would help reduce macroeconomic vulnerabilities and create an environment for a diversified private-sector led economy,” Mati added.

Reacting to the IMF’s position, the Board Chairman, Nigerian Economic Summit Group, a private sector think tank and policy advocacy group, Mr. Kyari Bukar, said the NESG had, at the start of the year, predicted that the economy would grow by 0.8 per cent.

He stated, “But we still have lack of clarity of the foreign exchange policy; we still have not coordinated our fiscal and monetary policies; and there is the debt burden.

“It is not just the borrowing that is the problem; if you’re borrowing for investment, that’s fine. We need to pay attention to our debt servicing, which is increasing.”

The Managing Director, Financial Derivatives Limited, Mr. Bismarck Rewane, said, “Even though the recovery has started, and we are going to have positive growth, the economy is still vulnerable to many domestic and exogenous variables.

“One major risk is the exchange rate falling below a particular level, and we are leaving the question of growth, the question of output and the question of economic activity, and those things are potent. It is one-dimensional diagnosis, and exchange rate being the critical variable.”

According to him, the government is aware of the risks and it has a team of people who can respond to them.

A professor of Economics at the Olabisi Onabanjo University, Ago Iwoye, Sheriffdeen Tella, said the delay in the passage of the budget had contributed in slowing down the recovery of the economy, adding that inflation had not fallen at the rate it should.

“Also, the Central Bank of Nigeria still retains high interest rate, which is inimical to the demand for credit in the economy; most businesses are still borrowing at very high interest rates, and, therefore, they will not borrow as much as they need to. So, the economy cannot expand on the basis of that,” he said.

He stressed the need for the harmonisation of the fiscal and monetary policies, adding that the CBN needed to bring down the interest rates to “enable investors who want to borrow money to run their businesses properly.”

The Managing Director, Cowry Asset Management Limited, Mr. Johnson Chukwu, said nothing fundamental had changed about the Nigerian economy to give one the assurance of a sustained growth or recovery.

He said the recovery of the economy so far was largely driven by the price of crude oil and volume of oil production, which he described as major risks.

“We know that even the Niger Delta militants are threatening again that they may resume bombing; so that is a major threat to the oil production volume. Once we begin to see growth in the oil and gas sector, which has been on the decline, then the economy should continue to grow.” he added.

Last month, the Monetary Policy Committee of the CBN said available forecasts of key macroeconomic indicators pointed to a fragile economic recovery in the second quarter of the year.

But the committee cautioned that the recovery could relapse into a more protracted recession if strong and bold monetary and fiscal policies were not activated immediately to sustain it.