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A few good wins and a final lap in 2018

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Although at a slow pace, inflation experienced a downward trend this year. The positive base effects against the monthly baskets in 2016 played a major role in the steady slowdown; improved fx liquidity also contributed and this was particularly visible in the trend of imported food prices. However, general food price inflation remained stubbornly high throughout the year, notably due to poor infrastructure, insecurity in the northeast and a pick-up in food exports.

A success story for which the CBN has been applauded is the boost in liquidity in the fx market. The CBN adopted a multiple currency practice (MCP) approach in Q1 2017. There are separate sales at different rates to banks (for invisibles for retail), to banks (for importers on a wholesale basis), to banks for portfolio investors and exporters (NAFEX), to SMEs and to bureaux de change (BdC). This approach is having far greater success than the market had anticipated.

Reserves have picked up significantly on the back of improved fx liquidity; the CBN’s MCP approach has brought with it an increase in reserves of US$4.65bn. However, the inflows are not all autonomous portfolio monies. Reserves at end-November covered 13.4 months’ merchandise imports.

On a sectorial basis, the Buhari-led government has recorded good successes in agriculture, power generation, mining, security and its social investment packages. The narrative on agriculture is gradually changing, and the sector can now plausibly be seen as the economy’s new backbone. Over the past eight quarters, agriculture has posted uninterrupted growth. In Q3 2017, it grew by 3.1% y/y. The FGN’s import substitution strategy and related incentives have produced some positive results, and the evidence can be seen in new investments in rice, sugar, fertiliser and cassava farming. However, the sector is not yet performing at its full potential.

Rice consumption has risen to 7.9 million metric tons per year (mmt/y) while production has risen to 5.8mmt from 5.5mmt. The increase in rice production is partly linked to the anchor borrowers programme (ABP) which is expected to empower over 10 million farmers. Under the programme, states such as Kaduna, Kebbi, Jigawa, Ebonyi and Cross River have been able to boost cultivation. Some new developments in the rice segment include the new WACOT rice mill located in Kebbi State with a milling capacity of 120,000mt. It is expected to engage at least 50,000 farmers over the next few years. Also worth mentioning is the inauguration of the Amarawa rice mill in Kano State with a capacity of 288mt per day.

There has also been a pickup in aquaculture activities. Data from the federal ministry of agriculture and rural development reveal that annual supply has increased to 1.2mmt from 800,000mt. The pick-up is largely attributed to increased government intervention. However, there remains a supply gap of 64%, which points towards investment opportunities.

As for the energy sector, power still remains one of the country’s major structural issues. However, some incremental increases in energy distribution were recorded during the year. The Transmission Company of Nigeria has now secured US$1.5bn from donor agencies to finance power transmission projects and so boost capacity. Based on the most recent data from the federal ministry of power, works and housing, peak generation was 4,979MW on 06 December. Its lowest generation on the day was 3,780MW. Additionally, there have been efforts at ramping up alternative sources of energy. Power generation from the three hydropower generation companies (Kainji, Jebba and Shiroro) now account for 26% of Nigeria’s daily power generation. Given the frequency of attacks on gas pipelines and assets last year, the FGN’s steps towards diversifying the country’s energy sources are laudable.

Some strides have also been made in the mining sector. The sector’s potential is significant when considering the impact it could have on broader economic development as well as export earnings. However, technical skills required to tap into the industry are scarce. To address this, the Bank of Industry (BoI) has partnered with the United Nations to deliver training on gemstone production under its commodity-based industrialisation strategy. Additionally, the Federal Executive Council (FEC) approved a N30bn mining intervention fund to support local mining operators. The ministry of mines and steel development has partnered with the BoI to offer loans from this intervention fund.

The next presidential election has been scheduled for February 2019. Therefore, next year is practically the final year in terms of execution from the current administration, given that electioneering will take over in the months leading to the election. The current administration will be judged on its fiscal performance because it has pushed an expansionary agenda with ambitious capital spending plans (when governments in Ghana, Angola and elsewhere in similar circumstances have opted for austerity). The expansionary budgets are the FGN’s contribution to lifting Nigeria out of its recession.

Hopefully, economic diversification remains on the front-burner and would drive the Buhari-led administration to make a few more quick and valuable wins that could boost non-oil economy activities and, by extension, the broader economy within its limited timeframe.
Chinwe Egwim
Macroeconomist, Fixed Income Analyst at FBNQuest Merchant Bank

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