Stabilising fragile economy through desperate fiscal adjustments

Innoson vehicle assembly plant

Since February this year, the country’s economy, although still held hostage by low economic activities- recession, has been clawing back some gains owing to aggressive policy reversals. First is the easing inflation, which persistently lost strength up to April, while the May data is around the corner.

The easing inflation rode on the back of foreign exchange reforms, according to some analysts, which has continued to evolve since February, starting from huge market interventions, retail segment’s “devaluation”, to opening of new windows targeted at the critical segments that have impact on the general price mechanism.

Of course, since then, exchange rate has risen in favour of the naira from an all-time low of N520/$1 to near rate convergence at N364/$ recently. In fact, there is a semblance of economic tranquility, the type that has not been experienced in more than eight months.

Just three months back, as the naira weakened below N520/US$ in the parallel market, business confidence waned due to foreign currency shortages, macroeconomic risk became the most fundamental short term basis for forecasting Nigerian equities, despite cheap valuation of assets. Here and now, all seem to be in the very distant past with reinvigorated investment confidence, thanks to policy response.
But a currency and research analyst at Cyprus-based FXTM, Lukman Otunuga, explained that the possibility of lower global oil prices and reduced production levels have long been highlighted among the investing community as points of concerns, since they could hinder export earnings, which account for a major share of total foreign exchange revenues.
According to him, oil prices were sold off aggressively recently, after an unexpected increase in US crude oil inventories fuelled oversupply concerns.With the oversupply woes still a dominant theme in the oil markets and OPEC’s valiant efforts to stabilise the markets disrupted by US Shale production, a breakdown below $45 per barrel would also open risks commodity dependent countries like Nigeria would pay for it.
“Despite efforts to reduce its economy’s reliance on oil, Nigeria continues to be exposed to external risks due to oil market volatility. The outlook for oil still remains bearish despite the probable nine-month extension to the supply cut deal. If oil prices find comfort below $40 this year and Nigeria is forced to cut production at any point, this will impact government revenues and slightly obstruct the road to recovery,” he said.
“The year 2017 will be a critical test for Nigeria with foreign investors heavily scrutinising economic data and Central Bank of Nigeria (CBN) policies to gauge the health of the economy. It is common knowledge that the largest economy in Africa needs to achieve a stable macroeconomic climate, heavily reinvest in agriculture when diversifying, and boost infrastructure to generate sustainable economic growth.
“I feel that the recent sharp decline in oil prices should be another wake-up call for Nigeria to break away from the chains of oil reliance and diversify into a self-sustaining economy that is shielded from external shocks,” he said.
The World Bank, recently, reviewed upwards, the wobbling global economic growth to 2.7 per cent, with Nigeria moving to 1.2 per cent, against its earlier projection at one per cent.Nigeria will also accelerate to 2.4 per cent in 2018, with a marginal increase to 2.5 per cent in 2019, helped by a rebound in oil production, as security in the Niger Delta improves, and by an increase in fiscal spending.
But the multilateral institution reiterated its warnings to Nigeria and other resource-endowed countries in the sub-region, to implement significant fiscal adjustment policies to enthrone macroeconomic stability and nurture economic recovery.World Bank Group President, Jim Yong Kim, who lamented that for too long, low growth has held back progress in the fight against poverty said: “With a fragile but real recovery now underway, countries should seize this moment to undertake institutional and market reforms that can attract private investments to help sustain growth in the long-term.
“Countries must also continue to invest in people and build resilience against overlapping challenges, including climate change, conflict, forced displacement, famine, and disease.”
Although Nigeria has a positive forecast, the growth in Africa’s non-resource countries, which stems from consistency and commitment to thrive without endowments, far eclipses the projections for the country from this year to 2019.Ethiopia is forecast to expand by 8.3 per cent in 2017, Tanzania by 7.2 per cent, Côte d’Ivoire by 6.8 percent, and Senegal by 6.7 per cent, all helped by public investments. However, some countries need to contain debt accumulation and rebuild policy buffers.
But frontline economist, Bismarck Rewane, noted that it is easier to record huge growth number with smaller population than otherwise, adding that what is important is the actual wellbeing of the populace.

“You cannot compare the size of Nigeria with these countries, so at first look, you cannot criticise the country. Per capita income is impacted by numbers, but that does not mean we should relax. In fact, we can grow more than these countries without oil.“I think the economic blueprint has some projections about non-oil resource, which these countries are growing with. What we need now is putting the plans into action. The figures present a challenge for the country, but let us see how far we can go,” he said.
For the Chief Executive Officer, Cowry Asset Management Limited, Johnson Chukwu, the rising growth trend of non-resource countries in Africa has been ongoing and persistent, while the so-called big economies are faltering.Apart from their small sizes, these countries have configured their macro-economy with consistency, such that they do not think about natural resources and that is the edge over Nigeria and others.

These countries have also taken full advantage of the resource crisis- crashed oil prices, which reduced their cost of oil to build up their reserves and economy.“Nigeria, apart from adopting agriculture, should pursue development of raw materials from the sector, as well as other value chains. It should not be a case of crude oil production and petrol importation,” he said.
Since the turn of the second quarter however, macroeconomic fundamentals have shown remarkable improvements. There is rebound in oil production volumes and stable oil prices – which have stabilised fiscal balance and buoyed foreign exchange earnings.
The manufacturing index report of the CBN showed that the manufacturing sector, for the second consecutive month, expanded to 52.5 index points in May 2017.This has been attributed to significant improvement in the foreign exchange transactions, as the apex bank embarked on massive interventions that have seen the naira strengthen. Indeed, recent policy moves by the CBN to converge FX rates at all segments of the market have been helpful.
The latest of these moves is the opening of the Investors’ and Exporters’ Window (I&E window) in April, which allowed market determined pricing of FX on a “willing buyer willing seller” basis for trades related to invisibles. So far, transactions have topped $1.7 billion in the window since turnover data became available three weeks ago.
The I&E window has opened up the equities market once again to foreign investments, with average value of daily trade on the NSE more than doubling to N4.5bn since April 24th from N1.6bn in the previous month, while the benchmark All Share Index has gained 26.4 per cent in five weeks.
Morgan Stanley Capital International (MSCI), a global stock index, two weeks ago also increased Nigeria’s weighting in its frontier markets index from 6.5 per cent to 7.9 per cent, while the CBN added to the flurry of good news with a circular released on April 5, 2017 to improve efficiency of the I&E window and aid faster convergence of all rates.
Hence, as the stars continue to align for Nigeria from different directions, the narratives have conveniently changed from an underperforming economy in crisis, to a growth economy leaving behind her cyclical and structural economic problems. These changing narratives have so far justified the recent bullish run on equities.
Nigeria’s Economic Recovery and Growth Plan (NERG), still in the works, has attracted improved sentiment to the economy, as well as patronage, with assumption that when followed, the risks factors would have been elicited. This is currently working for the country, particularly in areas of debt issuance.
The Director of Fiscal Affairs at International Monetary Fund (IMF), Vitor Gaspar, attested to that when he lauded the document and said: “I had the privilege of visiting Nigeria some months ago and was very happy to understand that for Nigeria, fiscal policies in general and tax policy in particular are part of the strategies for development.”
The ERGP aims to increase export earnings and government income by N800 billion more yearly for a period of three years. The same plan has a revenue earning plan from sale of national assets, including oil joint ventures and reducing stakes in oil and non-oil assets. There is also plan to review and if possible, remove currency control on 41 goods and services that have been on since 2015.
It would also improve tax collection to raise N350b yearly, partly by implementing and increasing tax on luxury goods to 15 per cent from its current five per cent, starting from 2018.Agriculture would get an upscale to realise self-sufficiency in rice by 2018; wheat by 2019; and Nigeria becoming a net exporter of rice, cashew, groundnuts, cassava and vegetable oil by 2020.
Corroborating the stance, the Assistant Director of Fiscal Affairs Department, International Monetary Fund (IMF), Catherine Patillo, added: “This is necessary for diversification and in building revenues. So, we very much welcome the ERGP. The need to address the fiscal situation is urgent. Our recommendation is for the continued fiscal consolidation. One striking statistics, I think, is the fact that over the past years, the ratio of interest payment to tax revenue has doubled to 66 per cent in Nigeria. This, the ERGP is targeting.

“So, two-thirds of all tax revenue is going into interest payment, illustrating the need to raise tax revenue. That would allow the government to implement the social and growth-friendly policies that are part of the objectives of the ERGP.”While the economy continues to enjoy a favourable outcome induced by the stabilising foreign exchange market, sentiments, real and/or imagined persist that CBN’s next approach towards the management of the market remains a downside risk, as it cannot be predicted.
Nigeria also recorded growth in the latest trade report by the National Bureau of Statistics, which showed that merchandise for the first quarter (Q1) of 2017 rose by 0.11 per cent to close at N5.29 trillion.

Indeed, while the exports section revealed that Nigeria mainly sold mineral products, which accounted for N2.86 trillion or 95.2 per cent of the total export value, “Prepared foodstuffs; beverages spirits and vinegar; tobacco,” stood at N46.5 billion or 1.5 per cent.
Consequently, export grew by 0.9 per cent, while that of import closed lower 0.9% from the Q4 2016 figure, emphasising the dominance of crude oil exports in Nigeria’s trade structure, contributing N2.37 trillion or 79.1 per cent, to the value of total domestic export trade in 2017.This, however, showed that diversification project and development of the value chains, which is aimed at products’ value addition are yet to deepen or yield fruits, as greater number of the exports were still raw. Besides, oil took almost all the value of the exports as usual.
Similarly, Nigeria’s debt stock, which rose to N19.15 trillion ($62.91 billion at official exchange rate of N304.4) as at March 31, 2017, against N17.36 trillion at the end of December 31, 2016, has remained topical issue in the survival discourse.The latest report showed an increase of N1.79 trillion ($5.88 billion at N304.4 per dollar) in three months, arising from new deals in efforts to overcome 2016 budget deficit at N2.2 trillion. Parts of these deals include $1 billion in February and $500 million in March from Eurobond sales.
While public officials have consistently played down the consequences, the obvious is that there has been revenue crisis since 2014, and the debt service bill has risen to 66 per cent of earnings. Worrisome too is that there are plans to borrow more, but the most important thing is these monies must be made to count.
The country’s revenue-to-debt ratio and revenue-to-interest payment have long elicited local and international discourse, even as multilateral institutions like the World Bank and IMF have declared it unsustainable, and called for deepening of tax collection as immediate support.

Specifically, of the domestic debt, made up of states and the Federal Government, put at N14.9 trillion, no less than N474.1 billion has been paid out as interest in the first three months of the year- N180.1 billion in January; N106.4 billion in February; and N186.9 billion in March.

Similarly, the external debt component at $13.8 billion as at March 31, was in contrast to $11.40 billion by December 31, 2016, and has consumed about $127 million (about N387 billion) within the period under review.

Managing Director of Afrinvest Securities Limited, Ayodeji Eboh, is of the belief that as streams of good decisions are capable of bringing positive gains to the economy, the reverse would definitely be the case with one bad decision, which is also capable of spoiling many of good ones.The firm in its report last week noted: “CBN’s ability to maintain its stance of non-interference in the I&E window regardless of the direction in which the naira trends, is highly essential, as a breach on its part will almost certainly retard participation by investors in the equities market.
“Again, the ability of the CBN to sustain its timely interventions, which have significantly boosted liquidity in the economy remains susceptible to shocks in the global oil market. The possibility of lower global oil prices and reduced production levels – that could come about through quota limit extension to Nigeria or acts of sabotage – remain key points of concern as they could hinder oil export earnings, which accounts for a major share of total foreign exchange earnings and consequently pressure the external reserves.”

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