The 2020 Economic Outlook released by the Nigerian Economy Summit Group (NESG) on Wednesday shows that Nigeria’s economy is going to go through some challenges, writes CHINYERE OKOROAFOR
THE United States and Chinese governments are reaching a truce on their trade conflict. The feuding parties have embarked on a series of tariff exclusions to settle on a trade deal.
The outcome of the settlement deal is one of the issues the Nigerian Economy Summit Group (NESG) believes will have an impact on Nigeria’s economy this year.
It also listed other issues that will shape the economy to include the African Continental Free Trade Agreement (AfCFTA), which is slated to be effective from July 2020, electricity tariff hike, the Central Bank of Nigeria’s readiness to increase available credit to the real sector and the tension between the U.S. and Iran.
While AfCFTA presents an opportunity for Nigeria to increase non-oil exports and dominate markets of other African countries, the Nigerian Electricity Regulatory Commission (NERC) has approved the increase in electricity tariff by distribution companies in Nigeria, thus increasing the cost of production in the economy with a welfare implication on the citizens.
But, with the CBN set to increase the loan ratio to 70 per cent within the first quarter of this year, more credit will be available to the real sector. However, the NESG warns, it could increase non-performing loans of banks.
NESG argued in its outlook that the tension between the U.S. and Iran over a nuclear deal means uncertainty and unrest in the Middle East, a major region for the supply of oil.
“This will have a significant impact on oil price movement and will positively affect Nigeria’s oil revenue,” NESG said.
NESG Chief Executive Officer ‘Laoye Jaiyeola said: “The Nigerian economy is still on the path of recovery; however, at a slow momentum and high level of fragility. Real GDP expanded by 2.28 per cent in the third quarter of last year, averaging 2.17 per cent in the first three quarters of the year.
“Inflation rate averaged 11.4 per cent but closed the year at 12 per cent following the effects of the land border closure. Exchange rate stability was sustained on the back of continued Central Bank of Nigeria’s interventions while the foreign exchange reserves depleted significantly due to dwindling inflows from foreign portfolio investors and moderating oil prices.
“On the social aspect, the poverty situation worsened as growth remained non-inclusive-over 100 million people live in abject poverty. The weak linkage between economic growth and socio-economic impact persists as poverty becomes endemic.
“In our Macro-economic Outlook for 2019, we concluded that growth in 2018 was anaemic and marred by rising economic and social exclusion. We, therefore, proposed an inclusive growth framework for Nigeria with emphasis on broad-based economic growth that delivers improved social welfare. The proposed strategies prioritised industry governance and social sector reforms.
“To step up the inclusive growth narrative, our Macro-economic Outlook for 2020 takes a deep-dive approach to fixing Nigeria’s poverty problem through accelerated economic growth and job creation as a precursor to inclusive economic growth. Part I of the report reviews the Nigerian economy in 2019 and provides an outlook for 2020, which will be influenced by several events and policies such as the increase in Value Added Tax (VAT), implementation of the Africa Continental Free Trade Area (AfCFTA) agreement, movement in global oil prices, US-China trade wars, loan-to-deposit ratio and insurance companies’ recapitalisation, among others. Part II of the report examines how Nigeria can create significant number of jobs in the medium to long- term to lift millions out of poverty.”
He continued: “ As we enter this new decade, the government, private sector and other stakeholders must rise up to the challenge, work together and hold one another accountable in delivering a sound future for our great country.”
What the NESG said on Economy in 2019
“It is the dawn of a new decade and many economies, including Nigeria, are working towards achieving sustainable goals amidst diverse complexities and uncertainties. Still on the path of recovery with economic growth at 2.3 per ent, the Nigerian economy remains highly fragile and vulnerable to oil price fluctuations, even as the structure of growth is still skewed towards a few sectors.
At the wake of 2019, the economy faced a high level of uncertainty ahead of the general elections which later held in March last year. While several bold statements and policy proposals were made to stimulate the economy and provide jobs for the teeming populace during the campaigns, many of these promises are yet to be actualised. In our 2019 Macro-economic Outlook report, we noted that growth in 2018 was anaemic and thus strategies for steering Nigeria through the inclusive growth path needed to be rolled out. However, economic growth remains lethargic and non-inclusive.
“During the year, fiscal authorities continued to grapple with the challenges of underperforming revenue. This was triggered by lower than expected oil revenues arising from oil production shortages, which was below the budgeted target of 2.3 million barrels per day (mbpd).
“Efforts to improve non-oil revenues yielded positive results during the year with an improved collection of Company Income Tax, Customs Revenues and FGN Independent Revenues. On the business environment, Nigeria was ranked among the top 10 improvers in the 2019 World Bank Ease of Doing Business Rankings. Reforms in areas such as starting a business, dealing with construction permits and enforcing contracts propelled Nigeria to record significant jump from 145th in the previous year to 131st in the global rankings.
“Unconventionally, monetary policy focused on maintaining exchange rate and price stability, and to a broad extent, supporting economic growth. In 2019, the Central Bank of Nigeria (CBN) continued to defend the currency through its intervention in the foreign exchange market. This is evident in the declining external buffers in the face of lower inflows of foreign investment albeit a stable oil price.
“In desperation to tame the dwindling reserves, the CBN prioritised hot money in the interim as it limited Open Market Operation participation to foreign investors and deposit money banks. Furthermore, in the first quarter of last year, the Monetary Policy Rate (MPR) was reviewed downwards by 50 basis points to 13.5 per cent aimed especially at driving real sector growth. In the spirit of growth, the CBN increased the loan-to-deposit ratio twice, first to 60 per cent and second to 65 per cent.
“These moves are reshaping the interest rate environment and pushing credit to the private sector. In a bid to strengthen self-sustainability and curtail smuggling of goods, the government closed the Seme Border. This was later extended to all land borders in the country. The closure truncated the single-digit inflation target of the CBN with inflation rate reaching 12 per cent in December last year.
“However, even with the price effects, both the fiscal and monetary authorities were in unison regarding the potential medium to long-term gains of this policy; this, in effect, propelled the surge in the domestic production of some food items such as rice and poultry products. The policy action of closing the borders, which came some months after signing the African Continental Free Trade Area (AfCFTA) agreement, raises doubts as to Nigeria’s commitment to the trade deal and the country’s ability to take advantage of the opportunities it presents.
“Nigeria needs to do more in attracting real investments into key sectors of the economy. Although investors’ sentiment improved as overall foreign investment inflows into the economy increased relative to the previous year, data from the National Bureau of Statistics show that 70 per cent of foreign inflows in 2019 were portfolio investment. The concerns about lower foreign direct investment inflows, nevertheless, continue to linger,” NESG said.
The report added: “The review of the macro-economic indicators and the various policies stance in 2019 suggests that the Nigerian economy remains vulnerable to external shocks with dwindling reserves, rising debt levels and tardiness in growth response to impetus.
“Towards the close of 2019, Fitch, a rating organisation, downgraded Nigeria from Stable to Negative in their recent outlook revision, emphasising the increased vulnerability of the economy to disruptive macro-economic policy risk, rising debt profile in light of constrained revenue, inflationary pressure and complexity in CBN’s unconventional regulatory measures.
“This, therefore, calls for comprehensive and coherent economic and social policies that address economy-wide challenges and build resilience over time, even as the government’s plan – the Economic Recovery and Growth Plan (ERGP) – elapses in 2020. Such policies must prioritise accelerated and inclusive growth founded on the deliberate effort at ensuring overall macro-economic stability that instills confidence in the economy creates jobs and reduces poverty in the decade ahead.”
2020: What to expect
The group said the signing of the 2020 Budget in December was a good omen. It said it was the first time in over 14 years the budget was signed before the budget year begins.
“The 2020 Budget is themed ‘Sustaining Growth and Job Creation’ and also represents the largest spending plan of the Federal Government in a single year. Early passage of the budget is expected to result in improved capital spending, which is much-needed to stimulate economic growth and facilitate the delivery of infrastructure across the country. With oil price expected to stay above the budget benchmark of $57 per barrel in 2020, Nigeria has an opportunity to grow the excess crude oil account, improve external reserves and meet its oil revenue target to fund the 2020 Budget,” it said.
It observed that the government would have more money with the passage of the Finance Bill which would result in an increase in VAT from 5 per cent to 7.5 per cent in the year. The government, it added, is also considering other avenues of raising non-oil revenues such as the proposed communication tax, online tax, excise duty on carbonated soft drinks and toll charges.
“It is expected that the introduction of these taxes and charges will improve non-oil revenue; however, the challenge for fiscal authorities is levying several taxes and charges on an economy that is recovering with economic growth still low at 2.3 per cent. This could, therefore, have unintended negative effects on growth either through reduced consumer spending or reduced margins for businesses. Revenue drive should, therefore, be implemented with caution going into 2020.
“Inflationary pressure will remain high in 2020 on the basis of the continued closure of land borders, the introduction of taxes and other charges directed at consumers and businesses as well as sustained pressure on businesses arising from an infrastructure deficit, poor power supply and high cost of credit, among others.
“Given these concerns, monetary policy is expected to remain tight in the year, although the CBN will continue in its effort to provide financial support and direct incentives to local businesses in order to stimulate local production and reduce the country’s ever-rising import bills.
“The heightened tension between the US and Iran as well as OPEC’s commitment to control supply in order to sustain higher prices will stiffen oil price in 2020. In order to take advantage of the increase, Nigeria will need to implement reforms in the oil and gas sector to attract large investments into the upstream sub-sector and ultimately shore up oil production. The leadership of the National Assembly has made commitments to focus on the Petroleum Industry Bill in 2020 and progress in the industry will largely depend on the speed of passage of the industry-wide legislation,” it said.
The coming on board of the Dangote Refinery, the report said, will influence activities in the economy in this decade.
“The 650,000 barrels per day refinery is expected to meet Nigeria’s fuel requirements and produce about 35,000 direct and indirect jobs. At the moment, mineral products including petrol account for 30 per cent of imports; this figure is expected to reduce in the coming years as the refinery becomes operational, conserving foreign exchange.
“As the refinery comes into the stream, the output of oil refining which is currently categorised under the manufacturing sector as well as exports of petroleum products will significantly increase; even as transport and logistics within Nigeria will be impacted. Efforts are therefore required to upgrade infrastructure leading to the refinery to allow for easy and efficient traffic management,” it said.
It identified rising population, rapid urbanisation, the advancement of technology as complex challenges which will influence the future of work and skills. Rising population and urbanisation, it said, will create significant pressure on food, jobs, infrastructure, social amenities and human capital.
“The onus, therefore, is on policy makers to be spontaneous and proactive in dealing with these challenges, adopting innovative and home-grown strategies to deliver accelerated growth and enable the creation of sustainable jobs and reduction in poverty across the country.
“Incentivising private sector investments into strategic sectors as well as repositioning government towards becoming efficient and effective are crucial interventions that need to be implemented in the new decade to ensure that Nigeria is not left behind in the league of fast-developing nations,” NESG said.
Certainly, 2020 is a year to watch closely!