Big problems await Nigeria’s economy and finance ministers

by PATRICK ATUANYA:

 The new ministers of Finance and economy for Nigeria face an economy with huge structural problems that is decelerating at a fast clip.

Nigeria’s economy where growth had averaged 8 percent per annum between 1999 and 2013 recorded GDP growth of 3.96 percent in the first quarter (Q1) of 2015 and 2.35 percent in the second quarter (Q2) of 2015.

Research firm Financial Derivatives Company (FDC) forecasts growth of 2 percent and 1.8 percent in the third and fourth quarter of 2015 respectively.

The FBN Purchasing Managers Index (PMI) shrank in August to 49.2 from an earlier low of 50.6, indicating contraction.

The manufacturing sector, which accounts for 10 percent of GDP, is already in recession as it contracted for a second consecutive quarter, by 3.8 percent year on year in Q2 2015, compared to growth of 14 percent a year earlier.

Inflation for August printed at 9.3 percent, outside the bank’s target band of 6 to 9 percent.

Nigeria’s unemployment rate rose to 8.2 percent in the second quarter of 2015 from 7.5 percent in the earlier quarter, according to data from the National Bureau of Statistics (NBS).

The NSE – all share index, a broad benchmark of Nigerian stocks has returned a negative 9.92 percent this year.

Meanwhile JPMorgan last month announced the removal of Nigeria from its influential emerging markets bonds index (GBI-EM), amid concerns about the country’s economic management.

The decision to remove Nigeria means investment funds tracking the index will sell Nigerian bonds, adding to upward pressure on national borrowing costs.

“It is important to proceed rapidly with any reforms…and this urgency  is driven more by the state of the economy, and the need to proceed rapidly, rather than any considerations of political capital,” Razia Khan, managing director, chief Economist, Africa Global Research at Standard Chartered Bank, said.

Nigeria’s economy is grappling with dollar shortages, power cuts, the Boko Haram insurgency, and shrinking purchasing power.

Nigeria’s population growth rate of 3 percent combined with sub-par economic growth at the 2 percent – 3 percent range implies negative per-capita income growth, which acts as a drag on the consumer sector, according to Renaissance Capital economist, Yvonne Mhango.

The slowdown in leading economic indicators prompted Central Bank Governor, Godwin Emefiele to say at last week’s monetary policy committee (MPC) meeting that the economy was at risk of slipping into recession in 2016.

A recession is typically defined as two consecutive quarters of negative growth.

Africa’s largest economy, derives 90 percent of export earnings and 70 percent of government revenue from oil, and is struggling with Brent crude prices having halved since June.

The new economy minister would have to focus on diversifying Nigeria’s economy and reducing the unhealthy dependence on hydrocarbons.

An opportunity presents itself in the non-oil sectors, which account for 90 percent of total GDP.

Trade, Information and Communication and Agriculture accounted for 17 percent, 12 percent and 20 percent of GDP in 2014.

Standard and Poor’s (S & P) said recently in its ratings update on Nigeria, that the outlook on was “stable”, reflecting the view that Nigeria’s non-oil economy will continue to support growth.

“A series of reforms, including in agriculture and the rapid growth of sectors such as telecoms and financial services, have contributed to non-oil growth momentum in recent years,” S&P said in the statement.

The oil sector has consistently posted negative growth in recent times and has shrunk to only 10 percent of Nigeria’s GDP, from as high as 30 percent a decade ago.

Amid the gloom, Goldman Sachs forecasts that oil prices may fall as low as $20 a barrel, with a persistent surplus requiring prices to remain lower for longer to rebalance the market.

The Finance Minister would have to tackle the lack of any significant savings by Nigeria, despite pumping significant amounts of crude oil for the last 40 years.

The result has been that Nigeria has only been able to accumulate $1 billion in its Sovereign Wealth Fund and $30 billion in dollar reserves, compared to other oil producers such as Qatar with $43 billion, Malaysia ($94 billion), and Russia ($366 bn) in dollar reserves and significantly higher savings in their respective Sovereign Wealth Funds.

The country has also not undertaken any major reforms to unlock its growth potential since the foreign debt payback and write-offs of 2004 and banking sector consolidation and Pension reforms the following year.

This must be tackled by the economy minister to unleash the next growth phase.

A scandalously inept and corrupt petrol subsidy regime that costs up to $5 billion a year remains in place despite the sound economic arguments to remove it.

Daily blackouts are still the norm because a privatisation effort undertaken in 2013, failed to give free market pricing to gas suppliers meaning generated output has never risen above 5,000 megawatts, which is about a third of peak demand.

Nigeria’s gas reserves were equivalent to 182 trillion cubic feet (tcf), representing the eighth largest in the world and foremost in Africa.

Despite this ranking, domestic demand for gas far outweighs supply due to inadequate infrastructure as a lack of a market based pricing template.

“The insufficient power supply emerged as the leading constraint in the most recent Business Expectancy Survey by the CBN (Q1 2015). Other constraints included inaccessibility to credit, an unfavourable economic climate and unclear economic laws,” FBN Capital analysts led by Gregory Kronsten, said in a September 10 note.

A power poll recently released by NOI Polls revealed that between April 2015 and June 2015, Nigerians typically spent a maximum of N3,726 ($19) on actual electricity supply and as much as N12, 351 ($62) on running alternative sources of power supply.

The average power supply was 4.9 hours in the second quarter of 2015.

Eleven of the twenty-two business lines for which the Central Bank of Nigeria (CBN) reports non-performing loans (NPLs) breached the 5 percent limit in June as well as seven of the ten largest borrowing lines, according to minutes from the bank’s July 23/24 Monetary Policy Committee meeting released last week.

The unorthodox policies of Nigeria’s Central Bank (CBN) Emefiele and his refusal to devalue the naira again — it has already been devalued twice in the past year — has alarmed investors, and probably slowed growth and economic activity in the real sector.

The CBN which is battling to maintain macro stability has little room to support the economy as a rate cut from a record high of 13 percent would fuel inflation and temper appetite for naira assets.

The new economy minister would have to coordinate with the CBN governor to see areas where there can be some relaxation of the tight rules and easier access to FX by Nigerian companies.

Jan Dehn, head of research at Ashmore, the emerging markets-focused asset manager says:

“Nigeria needs to acknowledge that oil prices have fallen and that prices including the FX, must adjust accordingly, even if it hurts in the short term. This is vastly preferable to entering a heterodox system that creates perverse incentives and results in permanent and ever-worsening distortions.”

The appointment of a sound cabinet and direction for the economy under the new President Muhammadu Buhari would be a huge factor in the tackling these challenges.