To much relief, Nigeria exited recession in the second quarter of 2017, growing by 0.6%, after five consecutive quarters of contraction from Q1 2016, with the penultimate one recording negative growth of 0.9%.
This was not surprising: the governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, predicted in April 2017 that “by the end of the second quarter, or latest the third quarter, [Nigeria] should be out of recession.” The economy only needed to be lifted a little and the year-on-year metric would turn positive.
But there is no evidence as yet of more money in the pockets of the predominantly poor population. And as the IMF’s envisaged growth of about 1% for 2017 is well below population growth of above 2%, any potential wealth impact is still far off.
Ogho Okiti, chief executive of Time Economics, an Abuja-based consultancy, put it succinctly: “Factoring in population growth, the average Nigerian will still be worse off in 2017 than they were in 2014,” when growth was above 6%.
Unsurprisingly, President Muhammadu Buhari was quick to urge caution, saying “until coming out of recession translates into meaningful improvement in peoples’ lives, our work cannot be said to be done.” He was probably taking a cue from the consensus view among economists about the fragility of the recovery.
He was also likely mindful of mistakes by his administration that contributed to the slump in the first place: his cabinet was not in place for almost six months after he took office in May 2015, a fuel crisis in early 2016 was mishandled, and the CBN was not quick to adjust its fixed exchange rate regime when its foreign exchange reserves became depleted.
In 2016, Nigeria entered its first recession in more than 25 years. Q1 saw a contraction of -0.7%, in contrast with a 2.1% expansion in the previous quarter. Later quarters would record even deeper contractions, with the worst in Q3 at -2.3%, while the full-year 2016 headline figure showed a contraction of -1.6%. This contrasted with expansion of 2.8% in 2015, down from 6.2% in 2014. But such heady growth is not likely again for some years.
The authorities are targeting 7% growth by 2020 in the latest four-year Economic Recovery and Growth Plan (ERGP), but Okiti considers this to be unrealistic: “The only way this will be achieved with the current set of policies will be if oil prices increase above $100 per barrel again”– an unlikely possibility.
This would also have to be accompanied by increased crude oil production, but the country is coming under increasing pressure from OPEC to cap production at 1.8m bpd, which falls short of the 2.2m bpd target on which the 2017 budget is based. The rise in crude oil prices to above $50 in Q2 2017 from as low as $29 in early 2016 is a major reason the economy has come out of the doldrums. Should oil prices return to the depressed levels of the past two years, the recovery may be short-lived.
The agricultural sector, which has been growing and accounts for about a quarter of output, may suffer a beating in the fourth quarter of 2017, as flash floods in key farming areas in early September have probably put the September–November harvest in jeopardy. Continued insecurity in the northeastern part of the country and attacks on farmers in the central and southern parts by Fulani cattle herdsmen are expected to weigh on food supply. All this plus government-backed exports of food crops means that price pressures are likely to persist.
Some of the effects are already showing in the data. Food price inflation was 20% in July 2017, from 18% at the beginning of the year, and this may be why agricultural production has proved resilient. However, growth in the sector slowed to 3% in Q2 2017 from 3.4% in the preceding quarter.
Should these constraints remain, the authorities’ stimulus programmes in the agriculture sector, such as the CBN’s $140m anchor borrowers’ programme, may have limited long-term impact. Improvements in manufacturing provide some hope, though. Industry insiders say capacity utilisation has risen to 60–70%, from about 20% during the recession.
Increased foreign exchange supply, as the CBN’s reserves were boosted by better crude oil prices, played a significant role, as manufacturers are now able to procure vital spare parts for their equipment and import vital inputs to their production processes.
Foreign exchange remains key
Renewed interest by foreign portfolio investors owing to the setting up of a market-based foreign exchange platform, the Investors’ and Exporters’ (I&E) FX Window, would if sustained, provide the CBN with additional buffers to mitigate any potential oil price slump in the outlook period. Five months since its inception in April 2017, it has recorded $9.3bn in turnover.
Bola Onadele, chief executive at FMDQ OTC Securities Exchange which organises the CBN-enabled platform, says “investors have been able to repatriate their funds via the I&E FX Window,” which probably explains the increased confidence among foreign investors.
He acknowledges there were delays at the initial stages due to the size of the FX demand vis-à-vis the market depth. And now? “With improving liquidity, execution of repatriations has become seamless,” he says. More important is whether the I&E Window will lead to the much-sought-after free-floating FX regime of one market, one rate.
Onadele says that “as liquidity improves in this market, it will complement the CBN official window and the FX market will become self-funding, making the [I&E] rate the benchmark.” But how soon before this happens? “It is difficult to foretell a timeframe… [but] the outlook is very positive.”
President’s health still an issue
President Buhari’s health status remains a key risk to the economy. Although now supposedly recovered, after more than three months abroad for medical treatment, he remains fragile.
On the day the positive Q2 2017 GDP data was released in early September, for instance, he announced the cancellation of the week’s cabinet meeting for the second consecutive time since he got back. The excuse was that ministers were not able to adequately prepare owing to the Muslim Eid celebrations.
Such misfortune in the past was precisely what punctured whatever confidence was built in the early days of his administration. Should the pace of governance now again depend on the president’s health, it may be only a matter of time before things deteriorate again.
This need not be the case. His deputy, Yemi Osinbajo, who demonstrated utmost diligence in managing the country, especially the economy, while President Buhari was away on medical leave, is ably qualified to step in when his principal is either indisposed or unavailable. The fragile economy will need all the help it can get.