Nigeria’s Key Economic Indices in Bad Shape before COVID-19
The Nigeria’s key economic indices have been in bad shape before the outbreak of coronavirus pandemic that eventually handed a veritable alibi for government for non-performance.
Riding on global price level of crude oil, the petrol-dollar powered economy was fiscally strained as government revenue under-performed expectation.
This happened following fluctuations in oil price, production volume and ambitious non-oil revenue target in the prior years.
Failure to diversify government earnings source continue to add pressure as foreign investors stay aloof due to inability to place price on uncertainties in Nigerian economy.
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Key indices like inflation, unemployment and foreign exchange rate remain abysmally unfavourable to productive base of the economy.
Pundits noted that poor economic policies had been key to worsening indices.
The outbreak of coronavirus pandemic handed a veritable alibi to the government, and there seems to be long road to economic freedom for many Nigerians.
After the two consecutive record of negative growth rate, officially, Nigeria’s economy slipped into recession in the third quarter of 2020.
Meanwhile, the problem is not the recession given that it was externally driven but quality of Nigeria’s policy supported this, as analysts explained.
To some analysts, it appears that the Central Bank of Nigeria has abandon its primary objective of price stability for pro-growth stance.
This is not really unfortunately expect for lack of balance.
Also note is the lack of coordination between fiscal and monetary policies authority have affected Nigerians significantly in the recent time.
Pressured mid-class economy has shrank as misery index widen further after inflation rate hits 14.23% in October, 2020.
Investment banking firms’ research notes indicate uptrend bias for average price level in 2020, and of course in the first quarter of 2021.
It has been noted that government land border closure has done nobody good but few oligarchy capitalists businesses.
Based on earnings results submitted to the Nigerian Stock Exchange, almost all the companies in the fast moving consumers sector (FMCG) have raised prices of their products.
Unfortunately, government’s protectionism stance gives consumers no choice but to buy despite price hike – against the rule of free market economy.
As a result of limited choice, these companies raised price and many still maintain volume growth, explaining lack of substitute.
In 2020, the worse has happened in the food market. There have been stable increase in prices of food item.
This also include agricultural produce that Nigerian government has spent humongous amount but yield no reasonable result for the masses.
The CBN’s agricultural financing has been nothing but effort to income redistribution.
The imbalance in the plan has seen prices of food items skyrocketing and unaffordable to the 99 percentile in the economy.
One would be tempted to ask: what is CBN seeks to achieve with all the spending? Obviously to stimulate growth, raise output level and encourage productivity.
However, testing this hypotheses, it is clear that CBN pro-growth has not been working for Nigerians.
Isn’t time to take a step back and look at things holistically?
Unemployment has increased aftermath of the outbreak of coronavirus pandemic that had necessitated lockdown.
With inflation rate rising, and unemployment at peak, life has become less bearable for many Nigerians.
It has been noted that the outbreak of COVID-19 gave Nigerian government veritable alibi to excuse non-performance.
In five years, the economy has hit iceberg twice and household finances and well-being have tumble severally as a result.
Following the previous pattern, some analysts think the economy will rebound in the second quarter of 2021.
Analysts explained that Nigeria joined a list of over 30 countries (including the US, Israel, Japan, Germany) to have experienced a recession in 2020, as COVID-19 outbreak weighed heavily on global economic activity.
“In line with CardinalStone Partners Limited forecast of -3.76%, the third quarter economic contraction of 3.62% reflected shrinkages in both oil and non-oil GDP segments.
Oil segment plunged 13.9% while non-oil dropped 2.5% year on year.
“While the non-oil sector contraction mirrored trade frictions, weaker consumption, and a fall in investments, oil weakness reflected impacts of OPEC+ cut agreements and a COVID-19 induced slowdown in global travel”, CardinalStone stated.
For context, oil production collapsed by 18.13% to 1.67 million barrel per day (mbpd), representing its lowest level since the vandalism-driven pressures of the third quarter of 2016.
Cumulatively the economy has contracted by 2.48% in 2020, the worst contraction in 30 years.
In its estimate, CardinalStone concluded that trade weakness was responsible for almost a third of the GDP contraction.
The trade sector, which mostly reflects reselling activities, has remained weak since the commodity shock of 2014-2016 that decimated consumer purchasing power.
Naira Plunged 94%, Inflation Rises 89.8% since 2016
Explaining the Nigeria’s economic dynamics, CardinalStone stated that a combination of about 94.1% naira depreciation (since the start of 2016), 89.8% rise in general price levels and stagnant wage growth were the main drivers of weaker consumer purchasing power and trade declines before 2019.
COVID-19 induced lockdowns, supply chain disruptions, FX accessibility issues and sustained border closures have only exacerbated the decline in the last two quarters.
In the Q3-2020, it plunged 12.1% year on year and 16.66% decline was reported in Q2-2020, consequently setting trade activities back to 2012 levels.
Notably, the recent contractions have shrunk the sector’s contribution to GDP to 13.9% from 16.9% in 2015, and 16% in 2019.
But for the contraction in the sector, GDP would have declined by only 1.8% in the third quarter.
Declines in other manufacturing and some services sub-sectors compounded the adverse impacts of trade weakness on the economy, even though telecoms and construction sectors provided some support to aggregate output.
Telecoms sustained its impressive growth momentum, expanded 17.4% as movement restrictions accelerated the adoption of virtual communication.
Construction activities which appeared to have benefited from limited rainfall and greater government focus on the sector rose 2.84%.
The agricultural and financial sectors also recorded growths in the quarter, albeit considerably slower than those of previous quarters.
Growth in agriculture at +1.4% has materially slowed (average of 2.2% in the last eight quarters as against prior 5-year mean of 3.5%) despite prolonged monetary and fiscal support.
“We link the growth moderation to insecurity concerns, structural impediments to productivity”, analysts at Cardinalstone explained.
The drags on the sector may have been heightened by the adverse impacts of flooding in several foods producing regions in Q3’20.
Similarly, a slowdown in loan creation amid asset quality concerns and weak macro conditions appeared to have forced normalisation of growth in the financial sector (+3.2% ), which had hitherto enjoyed double-digit growth on the back of CBN’s LDR policy.
Gentle recovery beginning to take root In line with earlier expectations, Nigeria experienced a milder contraction in Q3’20 than in the previous quarter as economic activity gradually reverted to pre-COVID levels.
Indeed, COVID-19 appears to have worsened structural concerns across a few sectors, but the sustained pickup in economic activities in other sectors suggests that some non-oil contraction may be mostly transient.
Notably, the contraction in manufacturing eased from 8.8% in the second quarter to 1.5% year on year in the third quarter, with CBN data showing improvements in new orders as well as production and inventory levels in the review period.
The manufacturing PMI data also revealed that the sector recovered in November since its contraction in May 2020, leaving legroom for continued recovery compared to the average levels of the last two quarters.
The considerable improvements observed in real estate, education, entertainment, and trade sub-sectors also support a possible non-oil sector led recovery in coming quarters.
Elsewhere, the oil sector is unlikely to record a considerable rebound until Q2’21 on likely extension of OPEC+ cuts and expected lag in mass COVID vaccinations. All in, we expect a further 2.7% contraction in GDP in Q4’20.
Nigeria’s National Bureau of Statistics Q2-2020 data on foreign capital inflows showed a drop to US$1.3bn, compared to US$5.9bn in Q1-2020 and US$6.1bn in Q2-2019.
Tellimer, in a note, said that this was the lowest inflow recorded since the 2016/17 recession.
The firm stated that this was not entirely a surprise, given the Covid-19 induced shock to financial markets in Q2-2020 and investors’ risk-off sentiment towards emerging market assets, Nigeria included.
There were also country-specific risks, as the period was associated with lockdown measures in key cities (Lagos – the commercial hub, Ogun – the industrial hub, and Abuja – administrative capital) and marked the beginning of a severe FX liquidity crunch.
An analysis of the major components of capital inflows – Foreign Direct Investment, Foreign Portfolio Investment and Other Investments – also tells an interesting story.
FDI inflows contracted 33% year on year (-31% quarter on quarter) and remain small relative to total inflows (averaging 6% of the total over the past year).
Tellimer said this points to the inability of the country to attract the much-needed investment amid long-term uncertainties and a lack of any meaningful structural reform plans by the political leadership.
Other Investments declined 49% year on year (plunged 43% between Q2 and Q3), with inflows mainly relating to loans.
The performance of Foreign Portfolio Investments was the most negative, declining 91% year on year.
It would be recalled that the segment previously accounted for the large majority of foreign capital inflows, given the attractiveness of the CBN’s OMO bills in the past.
“For the rest of 2020, we believe two disturbing issues are likely to discourage large-sized FPI and FDI inflows.
“The uncertainty around the FX level and FX illiquidity; and a significant decline in the attractiveness of the CBN’s OMO bills, with average yield now around about 3.1%, which is sharply negative in real terms”, Tellimer said.
Analysts said with most foreign investors basically “trapped” in the country’s financial system, options have been relatively few – roll over maturing investments in OMO bills, make a play in the equities market, wait in line for the CBN to meet demand, or repatriate capital at the significantly devalued parallel rate.
It seems investors have gone mostly with the first option, causing the average yield on OMO bills to slump to 3.1% in August, compared to 11.4% at the end of February.
At these yields, there is no rationale for external funds to chase a carry trade on Nigeria’s debt instruments.
Bearing the above in mind, Tellimer believes that foreign capital imported in Q1-2020 (US$5.9bn) might prove to be the largest this year, with Q2 figures already depressed, and Q3 and Q4 data also likely to be weak.
Tellimer said: “Only major policymaker changes (such as the CBN allowing the exchange rate to adjust to a market-clearing level or providing a significant injection of FX liquidity) would lead us to change this view”.
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