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| Image Credit: Prolecto Resource |
According to the International
Monetary Fund, Nigeria’s economy will expand 0.6 per cent in 2017. This is
after due consideration of the major economic bottlenecks in 2016 which include
disruptions to oil production, foreign currency shortages due to a decline in
crude revenues, and weak investor confidence. The strength of the projected
recovery will depend on the recovery of oil prices, improvements in liquidity
conditions particularly in the foreign exchange market and the implementation
of structural reforms.
Monetary Fund, Nigeria’s economy will expand 0.6 per cent in 2017. This is
after due consideration of the major economic bottlenecks in 2016 which include
disruptions to oil production, foreign currency shortages due to a decline in
crude revenues, and weak investor confidence. The strength of the projected
recovery will depend on the recovery of oil prices, improvements in liquidity
conditions particularly in the foreign exchange market and the implementation
of structural reforms.
Despite obvious challenges
experienced by the Nigerian Federal Government in 2016, there remains widespread
optimism that 2017 will be a better year for Nigerians. One way to look at it
is that with the country currently experiencing its first official recession
since the early 90s, what more can go wrong? As the Finance Minister put it,
“Nigeria’s economic situation is in its worst possible time”. In 2016, we have
seen the price of Brent crude fall to $27.67 a barrel at one point,
its lowest since 2003 before bouncing back to current levels at $54.39/bbl.
Consequently, the country’s foreign reserves fell to a 10-year low at
$25.78billion whilst inflation spiked to a high of 18.48%, highest since
February 2010. Also, during the year, the naira slid to its lowest at N497.00
to a dollar. In looking at these extreme levels of key economic indicators, an
optimist would be wont to think “what could be worse”. As Lou Holtz aptly put
it, “It’s not the load that breaks you down, it’s the way you carry it”.
experienced by the Nigerian Federal Government in 2016, there remains widespread
optimism that 2017 will be a better year for Nigerians. One way to look at it
is that with the country currently experiencing its first official recession
since the early 90s, what more can go wrong? As the Finance Minister put it,
“Nigeria’s economic situation is in its worst possible time”. In 2016, we have
seen the price of Brent crude fall to $27.67 a barrel at one point,
its lowest since 2003 before bouncing back to current levels at $54.39/bbl.
Consequently, the country’s foreign reserves fell to a 10-year low at
$25.78billion whilst inflation spiked to a high of 18.48%, highest since
February 2010. Also, during the year, the naira slid to its lowest at N497.00
to a dollar. In looking at these extreme levels of key economic indicators, an
optimist would be wont to think “what could be worse”. As Lou Holtz aptly put
it, “It’s not the load that breaks you down, it’s the way you carry it”.
Based on the foregoing, we attempt
to analyse Nigeria’s economic outlook for 2017 under the following headers in
no particular order:
to analyse Nigeria’s economic outlook for 2017 under the following headers in
no particular order:
Federal
Budget 2017:
Budget 2017:
One of the major challenges the
Nigerian economy faced in 2016 is the late presentation, approval and eventual
implementation of the budget. This obviously had a crippling effect on the
economy with contractors being owed and major developmental activities being
stalled. According to the President, about 59% of the budget had been
implemented as at September with N753.6bn (the highest capital disbursement in
the nation’s recent history) having been released as at October ending as
capital allocations. The N7.28trillion 2017 budget tagged “Budget of Recovery
and Growth” has already been presented to the joint session of the National
Assembly for approval. With a total of N2.24trillion being projected for
Capital Expenditure and another N2.9trillion for Non-debt Recurrent
Expenditure, one can rationalise that it is a budget that seeks to balance
growth with sustenance. However, with a
projected deficit of N2.27trillion, one can expect continued bullish activity
in the Fixed Income market as government continues to expand its balance sheet
albeit at astronomically high costs. On the other hand, if fully implemented
despite obvious challenges to revenue generation and foreign exchange earnings,
Nigerians can expect significant economic activities with regard to job
creation and investment.
Nigerian economy faced in 2016 is the late presentation, approval and eventual
implementation of the budget. This obviously had a crippling effect on the
economy with contractors being owed and major developmental activities being
stalled. According to the President, about 59% of the budget had been
implemented as at September with N753.6bn (the highest capital disbursement in
the nation’s recent history) having been released as at October ending as
capital allocations. The N7.28trillion 2017 budget tagged “Budget of Recovery
and Growth” has already been presented to the joint session of the National
Assembly for approval. With a total of N2.24trillion being projected for
Capital Expenditure and another N2.9trillion for Non-debt Recurrent
Expenditure, one can rationalise that it is a budget that seeks to balance
growth with sustenance. However, with a
projected deficit of N2.27trillion, one can expect continued bullish activity
in the Fixed Income market as government continues to expand its balance sheet
albeit at astronomically high costs. On the other hand, if fully implemented
despite obvious challenges to revenue generation and foreign exchange earnings,
Nigerians can expect significant economic activities with regard to job
creation and investment.
Agriculture
and local content production:
and local content production:
Sectors that will continue to
receive strong government attention in 2017 are the agricultural and local
manufacturing sectors particularly in the clothes and textiles and food
and beverage industries. Given the low level of foreign reserves, it is
expected that the government will strongly pursue policies that would reduce
dependence on foreign (imported) products despite obvious resistance from some
Nigerians who are still able to afford these products. Whilst on one hand,
these sectors can help reduce demand for foreign currency excess production can
also be exported thus helping the country to grow the non-oil portion of its
foreign reserves. Considering the huge Nigerian population in the cities
demanding basic staple foods and other agricultural produce farmers can rest
assured that there lies a ready demand for their products in the coming year
and beyond.
receive strong government attention in 2017 are the agricultural and local
manufacturing sectors particularly in the clothes and textiles and food
and beverage industries. Given the low level of foreign reserves, it is
expected that the government will strongly pursue policies that would reduce
dependence on foreign (imported) products despite obvious resistance from some
Nigerians who are still able to afford these products. Whilst on one hand,
these sectors can help reduce demand for foreign currency excess production can
also be exported thus helping the country to grow the non-oil portion of its
foreign reserves. Considering the huge Nigerian population in the cities
demanding basic staple foods and other agricultural produce farmers can rest
assured that there lies a ready demand for their products in the coming year
and beyond.
Policy
stability:
stability:
From the monetary policy stance, the
Central Bank of Nigeria (CBN) has been largely criticised for policy
inconsistencies which in some cases have inadvertently contributed to the rapid
and disjointed depreciation of the naira even in the wake of devaluation of the
local currency. Over 2016, the Foreign Exchange market has remained largely
illiquid, fragmented and volatile. Foreign investors have continued to shun the
Nigerian financial markets despite impressive yields due to fear of their
capital and profits being trapped in the illiquid FX market at the point of
exit. This has deprived the Nigerian economy of much needed foreign direct and
portfolio investments with their desirable impact on job creation and growth.
It is expected that in 2017, the CBN will show a clear and steady path in
steering the Nigerian economy out of troubled waters. Its activities will be
based on principles of transparency, professionalism and integrity as the
smooth functionality of financial markets is fundamental to reviving the
Nigerian economy. On the fiscal side,
government policies to spur growth in the manufacturing and agricultural
sectors are expected to contribute to improved economic performance in 2017.
Although the proposed ban on car importation through land borders has been met
by stiff resistance, it is expected that the government in its resilience will
follow through on this policy. It is expected also that with further investment
in information technology infrastructure, the efficiency of the sea ports at
Apapa, Tin can and Onne will improve thus forestalling the need to attempt to
smuggle cars through the land borders in a bid to resist government policy.
Central Bank of Nigeria (CBN) has been largely criticised for policy
inconsistencies which in some cases have inadvertently contributed to the rapid
and disjointed depreciation of the naira even in the wake of devaluation of the
local currency. Over 2016, the Foreign Exchange market has remained largely
illiquid, fragmented and volatile. Foreign investors have continued to shun the
Nigerian financial markets despite impressive yields due to fear of their
capital and profits being trapped in the illiquid FX market at the point of
exit. This has deprived the Nigerian economy of much needed foreign direct and
portfolio investments with their desirable impact on job creation and growth.
It is expected that in 2017, the CBN will show a clear and steady path in
steering the Nigerian economy out of troubled waters. Its activities will be
based on principles of transparency, professionalism and integrity as the
smooth functionality of financial markets is fundamental to reviving the
Nigerian economy. On the fiscal side,
government policies to spur growth in the manufacturing and agricultural
sectors are expected to contribute to improved economic performance in 2017.
Although the proposed ban on car importation through land borders has been met
by stiff resistance, it is expected that the government in its resilience will
follow through on this policy. It is expected also that with further investment
in information technology infrastructure, the efficiency of the sea ports at
Apapa, Tin can and Onne will improve thus forestalling the need to attempt to
smuggle cars through the land borders in a bid to resist government policy.
Brexit
Vote Outcome:
Vote Outcome:
In June 2016, Britons stunned the
world by voting to leave the European Union. Although the full consequence of
this dramatic decision is still subject to open debate, some negative implications
may await the African continent with regard to trade as certain international
trade agreements may need to be re-negotiated. Also the UK has been a
substantial contributor to the EU aid programme, providing some €2billion,
including 14.8% of the European Development Fund. If the UK goes ahead to
trigger Brexit negotiations, this may have adverse effects on the African
countries that have benefitted directly or indirectly from this Fund. Finally,
with the rapid collapsing of the pound following the vote outcome, remittances
to Africa have become more expensive.
world by voting to leave the European Union. Although the full consequence of
this dramatic decision is still subject to open debate, some negative implications
may await the African continent with regard to trade as certain international
trade agreements may need to be re-negotiated. Also the UK has been a
substantial contributor to the EU aid programme, providing some €2billion,
including 14.8% of the European Development Fund. If the UK goes ahead to
trigger Brexit negotiations, this may have adverse effects on the African
countries that have benefitted directly or indirectly from this Fund. Finally,
with the rapid collapsing of the pound following the vote outcome, remittances
to Africa have become more expensive.
US
Presidential Election Outcome
Presidential Election Outcome
The world received another stunner
in November when contrary to popular expectations, the Republican candidate
Businessman Donald Trump, defeated the Democratic Party candidate,
former Secretary of State Hillary Clinton in the US Presidential
Elections. Although the consequences of
a Trump presidency for Africa remain uncertain, it should be duly noted that
some of his broad policy ideologies that have emerged include trade
protectionism, fiscal austerity and anti-immigration, amongst others.
in November when contrary to popular expectations, the Republican candidate
Businessman Donald Trump, defeated the Democratic Party candidate,
former Secretary of State Hillary Clinton in the US Presidential
Elections. Although the consequences of
a Trump presidency for Africa remain uncertain, it should be duly noted that
some of his broad policy ideologies that have emerged include trade
protectionism, fiscal austerity and anti-immigration, amongst others.
US
Federal Reserve Rate Hike:
Federal Reserve Rate Hike:
At its December meeting the US
Federal Reserve hiked rates for a second time in the current tightening cycle,
raising the interest rate by 25bps to 0.75%. The 25bps increase have been
particularly influenced by strong labour market data, the ongoing buoyancy in
financial markets and the recent increase in market-based inflation
expectations partly fuelled by higher oil prices. From a financial markets
perspective, this could have adverse impact on Nigerian financial markets as
investors may choose to re-balance their portfolios to take advantage of the
high US yields given the relatively secure environment over the much higher
yields Nigerian and other African markets have to offer albeit without the
corresponding security. Furthermore, Emerging markets like Nigeria do not stand
to benefit from the current rate hike considering the potential impact on local
currencies. The rate hike means a stronger dollar against most of the world’s
currencies including the naira as investors sell their local currencies to buy the
dollars needed to invest in the American economy. Also, rising US benchmark
rates will have a direct impact on pricing of floating-rate-dollar-denominated
loans. This will in effect adversely increase Non-performing loan ratios for
Nigerian and other African banks.
Federal Reserve hiked rates for a second time in the current tightening cycle,
raising the interest rate by 25bps to 0.75%. The 25bps increase have been
particularly influenced by strong labour market data, the ongoing buoyancy in
financial markets and the recent increase in market-based inflation
expectations partly fuelled by higher oil prices. From a financial markets
perspective, this could have adverse impact on Nigerian financial markets as
investors may choose to re-balance their portfolios to take advantage of the
high US yields given the relatively secure environment over the much higher
yields Nigerian and other African markets have to offer albeit without the
corresponding security. Furthermore, Emerging markets like Nigeria do not stand
to benefit from the current rate hike considering the potential impact on local
currencies. The rate hike means a stronger dollar against most of the world’s
currencies including the naira as investors sell their local currencies to buy the
dollars needed to invest in the American economy. Also, rising US benchmark
rates will have a direct impact on pricing of floating-rate-dollar-denominated
loans. This will in effect adversely increase Non-performing loan ratios for
Nigerian and other African banks.
OPEC
and Crude Quotas:
and Crude Quotas:
Recent slump in commodity prices has
taken its toll on African economies over the last two years although
surprisingly Africa’s external financial flows have remained stable overall. In
Vienna on December 10, eleven non-OPEC producers agreed to join eleven OPEC
members to reduce production in 1H17.
Based on the foregoing, it is expected that the observation of the OPEC-11 and
Non-OPEC 11 production cuts is required to sustainably support spot oil prices
in 2017. In 2017, it is expected that commodity prices will bounce back. Copper
for Zambia has already seen significant surge since November whilst the recent
decision in Vienna is likely to provide sustained support for Crude oil in
Nigeria.
taken its toll on African economies over the last two years although
surprisingly Africa’s external financial flows have remained stable overall. In
Vienna on December 10, eleven non-OPEC producers agreed to join eleven OPEC
members to reduce production in 1H17.
Based on the foregoing, it is expected that the observation of the OPEC-11 and
Non-OPEC 11 production cuts is required to sustainably support spot oil prices
in 2017. In 2017, it is expected that commodity prices will bounce back. Copper
for Zambia has already seen significant surge since November whilst the recent
decision in Vienna is likely to provide sustained support for Crude oil in
Nigeria.
Security:
The impact of insecurity on growth
and development cannot be overemphasized. From discouragement of foreign
investment to loss of revenue attributable to the activities of militants in
the Niger-Delta region, the Federal government needs to ensure that the
country’s security challenges are effectively addressed in 2017. A secured
environment is the baseline support required for all efforts towards revamping
the economy to work. It is expected that having made some progress across these
frontiers in 2016, the Government will consolidate on its 2016 successes to
achieve a more secure Nigeria (from both foreign and domestic threats) in 2017.
This will in turn help stabilize crude oil earnings both in production quota
and price terms.
and development cannot be overemphasized. From discouragement of foreign
investment to loss of revenue attributable to the activities of militants in
the Niger-Delta region, the Federal government needs to ensure that the
country’s security challenges are effectively addressed in 2017. A secured
environment is the baseline support required for all efforts towards revamping
the economy to work. It is expected that having made some progress across these
frontiers in 2016, the Government will consolidate on its 2016 successes to
achieve a more secure Nigeria (from both foreign and domestic threats) in 2017.
This will in turn help stabilize crude oil earnings both in production quota
and price terms.
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| Image credit: TVC News |
Foreign
Exchange (Monitoring and Miscellaneous Provisions) Act (Amendment) Bill 2016:
Exchange (Monitoring and Miscellaneous Provisions) Act (Amendment) Bill 2016:
This proposed Bill has undergone
more criticism than acceptance given the fear of the adverse impact it might
have on freedom and time period for Nigerian citizens to hold foreign currency
amongst other things. Given that even the most optimistic forecast for crude
oil price does not come close to pre-crisis levels, it is expected that foreign
exchange scarcity shall persist through 2017 unless the government and the CBN
can structure a sizable amount of foreign currency denominated loans whilst the
focus on non-oil export revenue also gains momentum. Otherwise, whilst the
turmoil over how to stabilize the falling naira remains, it is not expected
that the House will hastily approve the Bill which seeks amongst other things
to:
more criticism than acceptance given the fear of the adverse impact it might
have on freedom and time period for Nigerian citizens to hold foreign currency
amongst other things. Given that even the most optimistic forecast for crude
oil price does not come close to pre-crisis levels, it is expected that foreign
exchange scarcity shall persist through 2017 unless the government and the CBN
can structure a sizable amount of foreign currency denominated loans whilst the
focus on non-oil export revenue also gains momentum. Otherwise, whilst the
turmoil over how to stabilize the falling naira remains, it is not expected
that the House will hastily approve the Bill which seeks amongst other things
to:
- Empower
the CBN with the ability to preclude the repatriation of foreign currency
purchased from the autonomous foreign exchange market; - Curtail
the Finance Minister’s general supervisory powers under the Act; - Curtail
the Finance’s Minister’s appellate powers under section 6 of the Act (on
the appointment of Authorised Dealers and Buyers) and replace the Finance
Minister with the Central Bank of Nigeria (CBN); - Criminalise
acts such as “hoarding” and “monopoly” on the part of Authorised Dealers
and Buyers.
Inflation:
Given the existing fundamentals, it
is expected that balance of risks for the naira will remain tilted to the
downside in 2017. Despite the strong drive for import replacement, Nigerians
that can afford to pay the highly inflated prices of imported goods and
services have continued to do so thus keeping the naira under pressure at the
foreign exchange market. Furthermore, the poor infrastructural state of the
country continues to pose a huge challenge for the manufacturing and
agricultural sectors in their bid to generate enough output for domestic
consumption. This will continue to put upward pressure on the Consumer Price
Index (CPI) and inflation in 2017.
is expected that balance of risks for the naira will remain tilted to the
downside in 2017. Despite the strong drive for import replacement, Nigerians
that can afford to pay the highly inflated prices of imported goods and
services have continued to do so thus keeping the naira under pressure at the
foreign exchange market. Furthermore, the poor infrastructural state of the
country continues to pose a huge challenge for the manufacturing and
agricultural sectors in their bid to generate enough output for domestic
consumption. This will continue to put upward pressure on the Consumer Price
Index (CPI) and inflation in 2017.
Internally
Generated Revenue (IGR)
Generated Revenue (IGR)
Given that Nigeria’s present state
of recession is largely structural albeit triggered by reduced foreign
earnings, the government has naturally realised that IGR in the form of taxes,
levies, fines and duties will be one of the major sources to fund its growth
and recovery budget in 2017. It is thus expected that we will see policies that
will seek to impose stiff levies particularly on the importation of luxury
items in the coming year.
of recession is largely structural albeit triggered by reduced foreign
earnings, the government has naturally realised that IGR in the form of taxes,
levies, fines and duties will be one of the major sources to fund its growth
and recovery budget in 2017. It is thus expected that we will see policies that
will seek to impose stiff levies particularly on the importation of luxury
items in the coming year.
Although the foregoing list is
inconclusive, it is believed that these areas covered are highly significant to
the activities that will shape the major events in the Nigerian economy in
2017.
inconclusive, it is believed that these areas covered are highly significant to
the activities that will shape the major events in the Nigerian economy in
2017.
By Olawale Hamed
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