Nigerian economy in 6 months of sluggish recovery 

The Nigerian economy witnessed slight improvement in recovery with real Gross Domestic Product (GDP) growth settling at 0.51 per cent in first quarter of 2021. CHIMA NWOKOJI dissects the performance of various sectors and outlook for second half of the year.

The performance of Nigerian economy in the last six months reflects a slow but gradual recovery from the 2020 recession.

The economy witnessed slight improvement in recovery with real Gross Domestic Product (GDP) growth settling at 0.51 per cent in the first quarter (Q1) of 2021, compared to 0.11 per cent in the preceding quarter.

Six months after, growth remains weak and fragile in relation to population growth of 2.7 per cent, indicating that the economy is not growing fast enough to create new opportunities for the populace.

Sectoral performance remains underwhelming. Of the 19 major sectors, eight (8) sectors reported expansion while 11 sectors contracted.

Though experts say the economy has posted modest GDP expansion for two quarters, the country is still struggling to see growth rates reversing the steady decline in incomes and the rise in poverty. COVID-19 and its global impact have exposed the weaknesses of the macro story, namely the continuing dependence on oil, the huge untaxed informal economy and the stuttering efforts at reform.

Policy makers in Nigeria have been navigating a treacherous path. This is as they align strategic reforms beneficial to the economy with reducing the short term pain of citizens.

One indicator that affects everybody but impacts more on the elites than the bottom of the pyramid is the value of the naira. Corporates in particular are saddled with the burden of exchange rate misalignment and its attendant volatility.

The naira remains flat at N503/$ at the parallel market and N411/$ at the I & E window but is likely to appreciate marginally in the near term. This depends on an increase in forex supply by the CBN. Average forex intervention in the market rose by 2.39 per cent to $143.34 million in June from $139.99 million in May.

 

Overview of the GDP

An overview of growth in the economy will be through the lens of the first quarter (Q1) 2021 domestic output data released by the National Bureau of Statistics (NBS) in May 2021 as the second quarter report is being awaited.

Nigeria’s Gross Domestic Product (GDP) grew by 0.51 per cent (year-on-year) in real terms in the first quarter of 2021, marking two consecutive quarters of growth following the negative growth rates recorded in the second and third quarters of 2020.

The Q1 2021 growth rate was slower than the 1.87 per cent growth rate recorded in Q1 2020 but higher than 0.11 per cent recorded in Q4 2020, indicative of a slow but continuous recovery.

Nevertheless, quarter on quarter, real GDP grew at -13.93 per cent in Q1 2021 compared to Q4 2020, reflecting a generally slower pace of economic activities at the start of the year.

For better clarity, the Nigerian economy has been classified broadly into the oil and non-oil sectors.

The Nigerian non-oil sector followed the global pattern of recovery. Arts, Entertainment & Recreation posted zero per cent growth in the quarter; Accommodation and Food Services declined (-0.05 per cent); Transportation and Storage declined (-0.39); Education (-0.13 per cent) as well as Trade (-0.39 per cent). It is instructive to note, however, that those sectors in which the CBN had intervened the most since the COVID-19 pandemic struck – Agriculture, Manufacturing as well as Human Health and Social services grew by 0.5, 0.33 and 0.03 per cent respectively, and were largely responsible for the 0.51 per cent overall growth in Q1 2021.

A member of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) Adenikinju, Adeola Festus gave a summary of the economic condition when he said “the economic recovery rate is still very weak and fragile. Poverty and unemployment rates are still quite high. The security situation in the country is hurting economic recovery, while at the same time, poverty and unemployment also contributes to the worsening security challenge we have.

“As we enter another planting season, the effect of climate change may have negative impacts on food prices in later part of the year. The current efforts of the CBN to promote dry season agriculture would be quite helpful.”

 

The oil sector

Since January 2021, oil prices have trended upwards although with some volatility. The price of Bonny Light at $66.0 per barrel as at March 18, 2021 and $65.51 as at May 22, 2021(compared to $51.27 in December, 2020), was far above the budget benchmark of $40.0 per barrel. Indications from the oil futures market, however, suggest a gradual downtrend towards December 2022 to about the high fifties from the current level of mid-sixties. For Nigeria, the current crude oil price regime is good news in terms of its positive impact on exchange rate stability, domestic revenue and foreign exchange earnings although this is dampened by OPEC+ production quota limitation of about 1.4 million barrels per day.

In the first quarter of 2021, average daily oil production stood at 1.72 million barrels per day (mbpd), or 0.35mbpd lower than the average daily production of 2.07mbpd recorded in the same quarter of 2020 but higher than the production volume of 1.56mbpd recorded in the fourth quarter of 2020.

The oil sector recorded real GDP growth rate of –2.21 per cent (year-on-year) in Q1 2021 indicating a decrease of –7.27 per cent points relative to the growth rate recorded in the corresponding quarter of 2020 (5.06 per cent).

In terms of contribution to aggregate GDP, the Oil sector accounted for 9.25 per cent of aggregate real GDP in Q1 2021, slightly lower than 9.5 per cent recorded in the corresponding period of 2020 but higher than in the preceding quarter, where it contributed 5.87 per cent.

 

Non-Oil Sector

The non-oil sector grew by 0.79 per cent in real terms in Q1 2021, which was –0.75 per cent points lower compared to the rate recorded in the same quarter of 2020 and -0.89 per cent points lower than rates recorded in the fourth quarter of 2020.

Growth in the non-oil sector was driven mainly by the Information and Communication (Telecommunication) sector while other drivers include Agriculture (Crop Production); Manufacturing (Food, Beverage & Tobacco); Real Estate; Construction and Human Health & Social Services. In real terms, the Non-oil sector accounted for 90.75 per cent of aggregate GDP in the first quarter of 2021, higher than its share in the first quarter of 2020 which was 90.50 per cent but lower than 94.13per cent recorded in the fourth quarter of 2020.

 

Inflation

Nigeria’s headline inflation went up by 1.46 per cent since January, but

April 2021 inflation data appears to have calmed growing concerns as headline inflation registered moderation for the first time in nineteen months from 18.17 percent in March 2021 to 18.12 per cent in April 2021. The marginal decline in headline inflation was attributed to the deceleration in food prices (especially bread, cereals and tubers) as government support helped in addressing some supply disruptions.

So, Inflation decelerated marginally from 18.17 per cent in March 2021 to 18.12 per cent in April 2021. Both headline and food inflation show trend reversal from the March level.

May’s inflation eased to 17.93 per cent, but despite the easing, inflationary pressures persist.  Major causes of the pressures are: Insecurity, exchange rate passthrough effect, rising cost of petroleum products and electricity, planting season and supply chain/logistics disruptions. Inflation trajectory was a tale of two parts in the first half of 2021. Consumer prices trended northwards between January and March 2021 and decelerated in April and May. Uptick in the sub-indices of the food and core component affirms the persistence of inflationary pressure in 2021 while the recent deceleration is largely attributed to base effects associated with last year’s price level Inflationary environment elevates production costs with adverse impact on corporate profitability, thereby making it increasingly difficult for businesses and corporates to meet their debt obligations to lending institutions.

Analysts from Financial Derivatives Company Limited (FDC) expect inflation to come down a little after rising in the third quarter. The firm projects that inflation for June will rise to 18.1 per cent.

 

Exchange rate

The foreign exchange market faced liquidity constraints in the first half of 2021. The supply of foreign exchange was inadequate to meet rising demand. The rate premium between the Nigerian Autonomous Foreign Exchange Rate (NAFEX) and the parallel market rate averaged around 20 per cent.

Several businesses and corporates encountered difficulties in sourcing foreign exchange at the formal segment of the market and were forced to source the greenback at the parallel market. Towards the end of the first half, the CBN replaced the fixed exchange rate of N379/$ with the NAFEX rate of N410-N411/$, which implied the unification of both rates into a more market reflective rate.

According to the former Director-General, Lagos Chamber of Commerce and Industry (LCCI) Dr Muda Yusuf, lack of foreign exchange (illiquidity) makes banks more cautious in lending, especially to sectors with huge exposure to foreign exchange.

He said Foreign exchange illiquidity has aggravated investment risk which has negatively impacted asset quality in the banking system. Foreign currency-denominated loans account for between 30 per cent and 35 per cent of banks’ loan books.

Movement on FX policy at the edges

The CBN has moved close to unification of rates and may well complete the exercise in the months ahead.

Many are less convinced by its pledge to adopt “market-determined” forex rates because of its preference for managing and administering the market.

The government’s rate is now the NAFEX rate, which it does not set but which it can guide, being a core supplier of dollars (particularly when the foreign portfolio investors ((FPIs)) are not tempted by the returns).

Analysts therefore see a slow downward trend for the naira under the guidance of the CBN. This time around, we doubt that the FPIs will shore up reserves.

 

Monetary Policy

Monetary policymakers retained policy parameters in the first half of 2021 as the committee tried to maintain a balance between boosting growth recovery and curbing the monetary component of inflationary pressure.

The CBN sustained its developmental finance intervention in the first half as part of efforts in stimulating local production. Similarly, the bank employed administrative measures including Open Market Operation (OMO) auctions, Loan to Deposit Ratio/ Cash Reserve Ratio (LDR/CRR) debit and special bill auctions to control excess liquidity in the banking system as a way of tackling the monetary inflationary drivers.

The banking industry demonstrated resilience amid disruptions associated with the pandemic, attributable to the policy intervention of the CBN.

Going by key ratios, the banking industry is financially stable and sound with industry capital adequacy and liquidity ratios above regulatory threshold while non-performing loan ratios is slightly above the five percent prudential guideline.

Cash reserve requirement remained elevated at 27.5 per cent. A high CRR constrains banks from deploying funds into several profitable and productive ventures, thereby impacting their liquidity position. In reality, the actual cash reserve ratio is around 40 per cent to 50 per cent for some banks. The current CRR environment negates policy that mandates banks to lend at least 65 per cent of customer deposits to the real sector. Banks are more concerned about the risk of extending credit to priority sectors such as agriculture, manufacturing, general commerce and SMEs amid weak macroeconomic conditions, which explained why large corporates or prime borrowers with high creditworthiness are the biggest beneficiaries of the LDR policy.

Also, for intervention funds, banks are concerned about the risk of lending to targeted sectors as the high level of risk is not commensurate with interest rates for intervention facility. This reinforces the need for policymakers to intensify efforts in de-risking the real sector to bolster banks’ confidence.

 

Fiscal Conditions

The fiscal conditions of the economy in the first half were not impressive from debt, revenue, and budget performance standpoints. Public debt stock grew marginally to N33.1 trillion as at end-May 2021, equivalent to around 22 per cent of nominal GDP. While debt-to-GDP ratio is below the 55 per cent threshold recommended by the World Bank and International Monetary Fund for emerging markets, the country’s high debt cost to revenue portends significant risks to fiscal sustainability. Debt costs accounted for over 90 percent of Federal Government’s retained revenue between January and May 2021 and policymakers have continued to depend on debt and unconventional measures [CBN ways and means facility] to fund the national budget.

For Nigeria, fiscal deficits widened further in March 2021 and in the absence of clear fiscal consolidation plans or an expenditure austerity strategy, hopes of an imminent debt decline may be out of the way. Important macroeconomic gains would be surely realised by achieving a stable public debt level and will definitely enhance the effectiveness of monetary policy.

 

Social Media/ Twitter ban problem

Nigeria is estimated to have 33 million active social media users and over 104 million internet users. 61.4 per cent of total internet users are on twitter. It is already a month since the Nigerian authorities banned twitter (June 4, 2021). FDC estimates that active users of twitter in Nigeria are between 40 million to 60 million people. Several estimates of what the country is losing have been thrown up. Latest estimate according to FDC is 105 million every hour, N2.5billion daily and N75 billion monthly yet, the federal government remained undisturbed. Many have expressed concern that another danger to the continued ban is sharp increase in youth unemployment as market access gap for small businesses that rely on twitter widen. Investors are also getting more worried about the effect of this on technology and e-commerce space.

 

Insecurity

The economic environment was beset with a rising spate of insecurity in the first half. Banditry attacks, farmer-herder conflict, abduction, secessionist agitations and arson were recurring incidences in the first six months. Several farmlands were destroyed. Assets worth billions of naira were destroyed even as several people in the Northern region lost their means of livelihood.

The high level of insecurity further undermines investors’ confidence in the economy despite strong oil prices and improved external conditions. Confidence may not be restored in the near term if the worsening security situation is not urgently addressed. For financial sector, rising insecurity discourages banks from providing credit facilities to businesses in vulnerable sectors and geographical locations as repayment capacity will be impaired.

 

The financial and insurance services

The banking industry, according to members of the Monetary Policy Committee (MPC) remains resilient with relatively good fundamentals. In April 2021, industry non-performing loans (NPLs) ratio moderated to 5.9 per cent and capital adequacy ratio (CAR) rose to 15.8 per cent. Likewise, industry earnings have remained strong despite the macroeconomic shock arising from COVID-19. In effect, the capacity of the banking system to create credit is high. From a regulatory angle, what is needed is a mechanism that ensures that growth/employment-elastic activities receive adequate funding from the banking system.

This is essentially what most of the extant policies including the global standing instruction (GSI) are designed to achieve. These policies they believe should be allowed to run their full course.

Other analysts said financial market conditions during the review period were subpar, with a bearish stock market, tepid liquidity in the money market, and lingering exchange market pressure. Weighted average inter-bank call and open buy-back rates rose from 1.8 and 1.5 per cent, respectively, in March 2021 to 15.3 and 14.6 per cent in April.

The Financial and Insurance Services sector consists of the two subsectors, Financial Institutions and Insurance, which accounted for 87.55 per cent and 12.45 per cent of the sector respectively in real terms in Q1 2021.

The sector grew at 2.15 per cent in nominal terms (year on year), with the growth rate of Financial Institutions as 2.78 per cent and –2.08 per cent growth rate recorded for Insurance.

The overall rate was lower than that in Q1 2020 by–21.81 per cent points, but 3.25 per cent points higher than the preceding quarter.

In real terms, the Financial and Insurance Services sector grew by –0.46 per cent, or –21.26 per cent points lower from the rate recorded in the first quarter of 2020, but 3.16 per cent points higher than the rate recorded in the preceding quarter.

 

Real Estate

In nominal terms, Real Estate Services in the first quarter of 2021 grew by 8.04 per cent, or 6.92 per cent points higher than the growth rate reported for the same period in 2020 but lower by -1.11per cent points compared to the preceding quarter. Quarter-on-quarter growth rate for the sector was -27.76 per cent.

The contribution to nominal GDP in Q1 2021 stood at 5.03 per cent as against 5.23 per cent recorded in the first quarter of 2020 and the 6.40 per cent recorded for the fourth quarter of 2020.

Real GDP growth recorded in the sector for the first quarter of 2021 stood at 1.77 per cent, higher than the growth recorded in first quarter of 2020 by 6.52 per cent points, but lower by -1.04 per cent points relative to Q4 2020.

 

Arts, Entertainment and Recreation

In nominal terms, the Arts, Entertainment and Recreation sector grew by –0.47 per cent in the first quarter of 2021 (year-on-year), representing an increase of 0.40per cent points relative to the preceding quarter growth rate of -0.87per cent, and a decrease of -2.68per cent points compared with the preceding year’s rate of 2.20 per cent.  Overall, Art, Entertainment and Recreation contributed 0.30 per cent to real GDP in Q1 2021, slightly lower than the 0.31per cent recorded the previous year but higher than 0.20 per cent recorded in the fourth quarter of 2020.

 

Electricity and Gas Conditions

The Nigerian Electricity Regulatory Commission (NERC) says it is concluding the Extraordinary Tariff Review process for the 11 Electricity Distribution Companies (DisCos).

The commission said the review was pursuant to the provisions of the Electric Power Sector Reform Act (EPSRA).

The commission said it would also commence the processes for the July 2021 Minor Review of the Multi-Year Tariff Order (MYTO-2020), which is done every six months

Meanwhile, the Electricity, Gas, Steam and Air conditioning Supply sector recorded a year on year growth of 30.70 per cent in the first quarter of 2021.

In real terms, the sector grew by 8.66 per cent pet cent in Q1 2021, an improvement from the growth rate of –2.31 per cent recorded in the same quarter of 2020. When compared to the immediate past quarter, there was an increase of 11.17 per cent points from –2.51per cent recorded.

 

Manufacturing Sector

The marginal growth in real GDP mirrors the growth in Manufacturing and Non-Manufacturing Purchasing Managers Indices (PMIs) which inched closer to the 50-point 27 benchmark at 49.0 and 48.3 points, respectively, following the slight increase in business and production activities.

Nominal GDP growth of the Manufacturing sector in the first quarter of 2021 was recorded at 32.10per cent (year-on-year), 3.62per cent points higher than recorded in the corresponding period of 2020 (28.47%) and 7.50per cent points higher than the preceding quarter figure of 24.60 per cent.

The Manufacturing sector is comprised of thirteen activities: Oil Refining; Cement; Food, Beverages and Tobacco; Textile, Apparel, and Footwear; Wood and Wood products; Pulp Paper and Paper products;

Chemical and Pharmaceutical products; Non-metallic Products, Plastic and Rubber products; Electrical and Electronic, Basic Metal and Iron and Steel; Motor Vehicles and Assembly; and Other Manufacturing.

The contribution of Manufacturing to Nominal GDP in the first quarter of 2021 was 15.27per cent, which was also higher than the corresponding period of 2020 at 12.98 per cent and the fourth quarter of 2020 at 12.87 per cent.

 

Agriculture

The agricultural sector grew by 15.14per cent year-on-year in nominal terms in the first quarter (Q1) 2021, showing a decline of -7.33per cent points from the corresponding quarter of 2020 but an increase of 1.11 points when compared with the preceding quarter’s growth rate of 14.03per cent.

Four sub-activities make up the Agricultural sector: Crop Production, Livestock, Forestry and Fishing. Crop Production remained the major driver of the sector, as it accounts for 71.69per cent of overall nominal growth of the sector in first quarter 2021.

Agriculture contributed 21.42 per cent to nominal GDP in the first quarter of 2021, higher than the rates recorded for the first quarter of 2020 but lower than the fourth quarter of 2020 which recorded 20.88 per cent and 24.23per cent respectively.

In real terms, the agricultural sector in the first quarter of 2021 grew by 2.28per cent  (year-on-year), an increase of 0.07 per cent points from the corresponding period of 2020, but a decrease of -1.14per cent points from the preceding quarter which recorded a growth rate of 3.42 per cent.

 

  Outlook for the next six months

The economy started the second half on a good note with the recent passage of the Petroleum Industry Bill by the Ninth National Assembly after years of neglect. Although the bill is coming at a time the global energy landscape is placing greater attention on renewable energy, nonetheless, the bill [when signed into law] will reposition the oil and gas sector for healthy competition, efficiency, and governance transparency. Also, the National Assembly has passed the 2021 supplementary budget. The budget makes provision for vaccine procurement and security-related expenditures. Lawmakers have endorsed the move to raise $6.1 billion via the issuance of Eurobonds.

Improvement in current vaccination rate is expected to improve economic and business activities in the country, which is positive for the sustenance of growth recovery. Inflation is expected to decelerate in the second half of the year on account of base effects and expectations of modest harvest, barring further exchange rate adjustment. With the deceleration in inflation rate, monetary policymakers would be further encouraged to keep policy parameters at current levels. Relative stability is anticipated in the foreign exchange market as CBN sustains its intervention efforts.

Issuance of Eurobonds is expected to improve Nigeria’s reserves position, thereby enhancing the liquidity injection capacity of the CBN in the currency market.

Non-oil revenue should improve as economic activities gain more traction while oil revenue will be constrained by Nigeria’s commitment to OPEC+ supply policy amid a high oil price environment. Stock market performance will likely be weak as interest rates on government securities inch higher. External conditions should improve in the second half on the back of stronger oil prices, higher FX inflows [as government intensif commitment to key reforms], and accretion to external reserves [on the back of Eurobond issuance].

As a country, Nigeria›s excessive dependence on oil for revenue and foreign exchange sustenance is no longer tenable in the medium and long term.

«We need to diversify the economic and revenue base of the economy to reduce our exposure to external shocks as well as prepare the economy for the global shift from fossil fuel to green economy. It should not be business as usual for our economic managers. The economy also needs a strong buffer to mitigate external volatility,» says Adenikinju  at the last MPC meeting.

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