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Green Shoots in the Non-oil Economy – Coronation Merchant Bank

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Non oil

The latest national accounts released by the National Bureau of Statistics (NBS) show that GDP grew by 4.0% y/y in Q3 ’21 compared with 5.0% y/y recorded in Q2 ’21.

This growth can be partly attributed to positive base effects, steady progress in stemming the spread of the coronavirus and resumption of economic/business activity. The oil economy contracted by -10.7% y/y in Q3 ‘21 compared with a contraction of -12.7% y/y recorded in Q2 ’21. Meanwhile, the non-oil economy grew by 5.4% y/y compared with 6.7% y/y recorded in Q2 ‘21.

In our chart, we highlight the top seven performing sectors in the non-oil economy, among those accounting for at least 1% of GDP.

The best performer was the finance and insurance sector which posted a growth rate of 23.2% y/y compared with a contraction of -2.5% y/y recorded in Q2 ’21. Meanwhile, within the sector, the financial institutions segment grew by 25.5% y/y compared with a contraction of -4.5% y/y in Q2 ‘21. This healthy improvement is also reflected in the strong performance of tier 1 banks as seen in their respective Q3 ’21 earnings report.

The second-best performer was the transportation and storage sector which grew by 20.6% y/y compared to 76.8% y/y posted in Q2 ’21. The sector contributed 1.0% to GDP. The major drivers of the sector were rail transport segment (59.9% y/y) and air transport segment (33.3% y/y). This was largely due to positive base effects and improvements in air and rail passenger traffic as global economies lifted lockdown measures. Road transport, which makes up 79% of the entire sector, grew by 21.1% y/y.

The trade sector grew by 11.9% y/y in Q3 ‘21 compared with 22.5% y/y recorded in the previous sector. The sector contributed 14.9% to GDP. We suspect that the release of pentup demand, particularly for consumers within the middle-income bracket may have supported trade activities.

The information and communications sector grew by 9.7% y/y in Q3 ’21 compared with 5.6% recorded in Q2 ‘21. Its major contributor, telecommunications, posted a growth rate of 10.9% y/y compared with 5.9% y/y recorded in the previous quarter. This expansion is mainly due to an increase in demand for voice, data, and digital services.

Additionally, entertainment via streaming services has picked up significantly and contributed to the segment’s growth.

The manufacturing sector grew by 4.3% y/y in Q3 ’21 compared with 3.5% y/y recorded in Q2 ’21. The sector contributed 9.0% to total GDP. Growth was significant in the chemical and pharmaceutical products segment (10.0% y/y), due to sustained demand for pharmaceutical products by the health sector. Its largest segment, food, beverages, and tobacco grew by 6.1% y/y, and the cement segment expanded by 5.7% y/y in Q3 ’21.

The African Continental Free Trade Area (AfCFTA) is expected to impact domestic manufacturing positively. However, to maximise the benefits of the agreement, local manufacturers need to significantly improve their service delivery and product standards.

The construction and real estate sectors grew by 4.1% y/y and 2.3% y/y in Q3 ’21 respectively. The growth registered in both sectors could be attributed to development activities on the back of recommencement of delayed projects which were paused due to the slowdown triggered by the pandemic. The World Bank has estimated that Nigeria would need to invest USD3trn in infrastructure to reduce the infrastructure deficit in the country.

Based on the FGN’s 2022 budget proposal, N5.4trn (USD12.9bn) has been earmarked for capital expenditure. From this allocation, N1.5trn has been set aside for expenses on infrastructure. This includes provisions for works and housing, power, transport, water resources and aviation.

Looking ahead, we expect growth of 1.5% y/y in Q4 ’21

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Economy

IMF Urges Nigeria to End Fuel and Electricity Subsidies

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IMF global - Investors King

In a recent report titled “Nigeria: 2024 Article IV Consultation,” the International Monetary Fund (IMF) has advised the Nigerian government to terminate all forms of fuel and electricity subsidies, arguing that they predominantly benefit the wealthy rather than the intended vulnerable population.

The IMF’s recommendation comes amidst Nigeria’s struggle with record-high inflation and economic challenges exacerbated by the COVID-19 pandemic.

The report highlights the inefficiency and ineffectiveness of subsidies, noting that they are costly and poorly targeted.

According to the IMF, higher-income groups tend to benefit more from these subsidies, resulting in a misallocation of resources. With pump prices and electricity tariffs currently below cost-recovery levels, subsidy costs are projected to increase significantly, reaching up to three percent of the gross domestic product (GDP) in 2024.

The IMF suggests that once Nigeria’s social protection schemes are enhanced and inflation is brought under control, subsidies should be phased out.

The government’s social intervention scheme, developed with support from the World Bank, aims to provide targeted support to vulnerable households, potentially benefiting around 15 million households or 60 million Nigerians.

However, concerns persist regarding the removal of subsidies, particularly in light of the recent announcement of an increase in electricity tariffs by the Nigerian Electricity Regulatory Commission (NERC).

While the government has taken steps to reduce subsidies, including the removal of the costly petrol subsidy, there are lingering challenges in fully implementing these reforms.

Nigeria’s fiscal deficit is projected to be higher than anticipated, according to the IMF staff’s analysis.

The persistence of fuel and electricity subsidies is expected to contribute to this fiscal imbalance, along with lower oil and gas revenue projections and higher interest costs.

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Economy

IMF Warns of Challenges as Nigeria’s Economic Growth Barely Matches Population Expansion

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IMF - Investors King

The International Monetary Fund (IMF) has said Nigeria’s growth prospects will barely exceed its population expansion despite recent economic reforms.

Axel Schimmelpfennig, the IMF’s mission chief to Nigeria, who explained the risks to the nation’s economic outlook during a virtual briefing, acknowledged the strides made in implementing tough economic reforms but stressed that significant challenges persist.

The IMF reaffirmed its forecast of 3.3% economic growth for Nigeria in the current year, slightly up from 2.9% in 2023.

However, Schimmelpfennig revealed that this growth rate merely surpasses population dynamics and signaled a need for accelerated progress to enhance living standards significantly.

While Nigeria has received commendation for measures such as abolishing fuel subsidies and reforming the foreign-exchange regime under President Bola Tinubu’s administration, these reforms have not come without costs.

The drastic depreciation of the naira by 65% has fueled inflation to its highest level in nearly three decades, exacerbating the cost of living for many Nigerians.

The IMF anticipates a moderation of Nigeria’s annual inflation rate to 24% by the year’s end, down from the current 33.2% recorded in March.

However, the organization cautioned that substantial challenges persist, particularly in addressing acute food insecurity affecting millions of Nigerians with up to 19 million categorized as food insecure and a poverty rate of 46% in 2023.

Moreover, the IMF emphasized the importance of maintaining a tight monetary policy stance to curb inflation, preserve exchange rate flexibility, and bolster reserves.

It raised concerns about proposed amendments to the law governing the central bank, fearing that such changes could undermine its autonomy and weaken the institutional framework.

Looking ahead, Nigeria faces several risks, including potential shocks to agriculture and global food prices, which could exacerbate food insecurity.

Also, any decline in oil production would not only impact economic growth but also strain government finances, trade, and inflationary pressures.

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Economy

Nigeria’s Cash Transfer Scheme Shows Little Impact on Household Consumption, Says World Bank

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world bank - Investors King

The World Bank has said Nigeria’s conditional cash transfer scheme aimed at bolstering household consumption and financial inclusion is largely ineffective.

Despite significant investment and efforts by the Nigerian government, the program has shown minimal impact on the lives of its beneficiaries.

Launched in collaboration with the World Bank in 2016, the cash transfer initiative was designed to provide financial support to vulnerable Nigerians as part of the National Social Safety Nets Project.

However, the latest findings suggest that the program has fallen short of its intended goals.

The World Bank’s research revealed that the cash transfer scheme had little effect on household consumption, financial inclusion, or employment among beneficiaries.

Also, the program’s impact on women’s employment was noted to be minimal, highlighting systemic challenges in achieving gender parity in economic opportunities.

Despite funding a significant portion of the cash transfer program, the World Bank found no statistical evidence to support claims of improved financial inclusion or household consumption.

The report underscored the need for complementary interventions to generate sustainable improvements in households’ self-sufficiency.

According to the document, while there were some positive outcomes associated with the cash transfer program, such as increased household savings and food security, its overall impact remained limited.

Beneficiary households reported improvements in decision-making autonomy and freedom of movement but failed to see substantial gains in key economic indicators.

The findings come amid ongoing scrutiny of Nigeria’s social intervention programs, with concerns raised about transparency, accountability, and effectiveness.

The cash transfer scheme, once hailed as a critical tool in poverty alleviation, now faces renewed scrutiny as stakeholders call for comprehensive reforms to address its shortcomings.

In response to the World Bank’s report, government officials have emphasized their commitment to enhancing social safety nets and improving the effectiveness of cash transfer programs.

Minister of Finance and Coordinating Minister of the Economy, Wale Edun, reaffirmed the government’s intention to restart social intervention programs soon, following the completion of beneficiary verification processes.

As Nigeria grapples with economic challenges exacerbated by the COVID-19 pandemic and other structural issues, the need for impactful social welfare initiatives has become increasingly urgent.

The World Bank’s assessment underscores the importance of evidence-based policy-making and targeted interventions to address poverty and inequality in the country.

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