Nigeria's Uncertain Economic Outlook

23 October 2018

The recent annual meetings of the International Monetary Fund (IMF)/World Bank held in Bali, Indonesia earlier in October 2018 came up with reports that are quite worrisome for keen watchers of developments in the Nigerian economy. Though some of the outcomes of that meeting had been echoed by many including this newspaper, the issues raised can still be further appraised to bring to the fore the enormousness of the work to be done to enhance the growth of the economy.

The IMF particularly stated that the growth prospect for Africa is predicted to be sluggish for 2018 contrary to earlier predictions in the year. According to them, the aggregate growth rate for Africa is being held down by its three largest economies, Nigeria, South Africa and Angola.

For Nigeria, the IMF World Economic Outlook report released in July 2018 indicates that the Nigerian economy was projected to grow by 2.1 per cent in 2018 and 2.3 per cent in 2019. However, due to unfavourable developments in the economy, this growth rate has been downgraded to 1.9 per cent for 2018. This is specifically due to reductions in oil production and contractions in the agricultural sector, a consequence of the so-called farmers-herders clashes, among others, according to the IMF report. The economy is said to be performing poorly.

Apart from these, other issues that call for national economic concern are the capital flow reversals in the economy and the worsening state of the nation's external reserves, the growing and burdensome public debt, the declining state of the equities market and the uncertainties created by the unfolding political tensions in the country.

In the past three months, the nation's external reserves have been on a steady decline, despite rising crude oil prices internationally. The reserves have fallen from $47.8 billion to $43.97 billion indicating a seven-month low. This is a clear case of capital reversal as confirmed by the Central Bank of Nigeria (CBN) due partly to developments in the United States where the benchmark interest rate has been increased for the third time this year. With this development, international capital from developing and emerging markets has been flowing in the direction of the United States of America. Hence if caution and due diligence are not exercised by the CBN on this issue, the external reserve depletion will continue leading to the dollar-naira exchange rate worsening if the CBN becomes incapacitated in boosting supply in the foreign exchange market. This situation certainly creates its own type of uncertainty for the Nigerian economy.

Another sign of a poorly performing economy is the state of the Nigerian equities market where investors have lost over N700 billion as at September 2018 with political uncertainty playing a role in the downward trend of the market. The continual caution exercised by foreign portfolio investors in the market has led to significant sell-offs, which have also impacted negatively on the foreign reserves. This scary nature of the continual fall in many stock prices has affected the desire by many to invest in the market. These are clear signs of a troubled economy.

Again, the growing level of public debts is continually worrisome. The huge debt profile at about N22.3 trillion is currently assuming more disproportionate weight against the country's growth and development. Recently, President Muhammadu Buhari sought the approval of the Senate for a fresh $2.868 billion foreign loan - to partly fund the 2018 budget and to refinance maturing Eurobonds. Many Nigerians are becoming uncomfortable with the penchant by the current administration to resort to external borrowing at the slightest prompting. Currently, the growth in Nigeria's public debt is greater than the growth in government revenues. Since 2013, there has been a steady increase in the debt profile with less than proportionate rise in government revenue. With this scenario, one really worries whether this easy resort to foreign borrowing by the Buhari administration is the way to go, particularly when there appears to be little to show for the growing public indebtedness, in terms of critical infrastructure. Government revenue as a proportion of GDP is still very low, at about six per cent, which is far less than the ratio for other developing countries such as Kenya where it is 19 per cent and India where it is 21 per cent. For China and South Africa, it is 28 per cent. Hence the need for government to intensify its revenue diversification programme has become very urgent. Unless this is done, with the current unbridled rate of external borrowing, debt service may become a major issue in the not too distant future. Particularly, there is a persistent and significant increase in interest payments on domestic debts relative to the government revenue from the federal accounts allocation committee in the past three years. This current high interest payment relative to government revenue actually increases the country's credit risk. The current increasing rate of return on government treasury bills indicates high and emerging credit risk the country is currently facing. The perceived elevated risk of government borrowing has led to the increase in interests on government loans. No doubt, this has implications for private sector operators and the entire macro-economy.

What is more, the elevation of political activities in the election cycle currently being experienced is having its own toll on the economy. The preponderance of election-related spending has had its negative effects on the inflation rate. The IMF has projected that inflation in Nigeria would increase to about 13.5 per cent by next year. This is after a continual decline in inflation for the past straight 18 months. However, the recent National Bureau of Statistics (NBS) data shows that inflation is currently trending upwards. The data showed that inflation showed signs of increase when it moved from 11.14 per cent in July to 11.23 per cent in August this year.

Therefore, government, through the monetary and fiscal authorities need to make effort to manage this dicey situation. Managing economic uncertainty can be a huge challenge but the Buhari administration has to steer the ship of state properly to avert a situation where the economy will go into another round of recession. If allowed to happen, this would further exacerbate the already depressing poverty situation in Nigeria, which has already been labelled the extreme poverty capital of the world. This reproach should be removed forthwith by freezing politics in the management of the economy.

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