Nigerians brace for continued slump

Nigerians are not optimistic about their economy. Even Kemi Adeosun, Nigeria’s finance minister, admitted the danger posed by the continued slide in crude oil prices to the economy.

She hinted that the economy is faced with some fairly significant micro-economic challenges that require some fiscal housekeeping.

“It is going to be a tough year and we are going to make extremely tough decisions. We have to control the significant challenge around recurrent expenditure in the budget,” she told bank chiefs at the Bankers’ Committee retreat held last December in Lagos.

“If you look at recurrent expenditure at a percentage of our total budget with the just approved supplementary budget, it is about 90%. If we continue in that trajectory, every penny we borrow will go into recurrent expenditure.”

The minister took office at a time the economy badly needed lifting. The price of Nigeria’s crude oil – bonny light – has plummeted since September 2008 after attaining a record high of $147 in July that year. It was trading below $30 per barrel as we went to press, while the foreign reserves level has declined to $29.3bn from the September 2008 peak of $63bn. As well as the drop in crude oil prices, cocoa prices dropped by 10% from $3,252 per tonne at the end of September 2014, to about $2,900 per tonne on 7^th January. Iron ore, which traded at around $130 per dry metric tonne two years ago, is trading at around $76 per dry metric tonne, a loss of more than 40% within the same period.

The implication for Nigeria, which has over 80% of its revenues from crude oil, but failed to diversify its economy away from oil and harness other opportunities in agriculture, solid minerals and manufacturing, is that President Mohammadu Buhari may find it difficult to keep his campaign promises as oil export earnings continue to fall.

The president’s priorities – diversifying the economy away from oil, developing agriculture, exploiting solid minerals and creating millions of jobs for the youth – are difficult to achieve with the existing cash crunch.

The IMF recommends…

Christine Lagarde, the IMF head, shared her thoughts on possible ways to deal with the dwindling government revenue, foreign exchange pressure and huge infrastructure deficit confronting the economy.

She told President Buhari during a four-day visit to Nigeria in January that managers of the economy should “act with resolve, build resilience and exercise restraint”.

She advocated more flexibility in the management of the naira as the capacity of the Central Bank of Nigeria (CBN) to defend the naira wanes, depleting external reserves. Lagarde wants government to widen the tax base as a way of improving the government revenue in the face of lower oil prices, while augmenting compliance and collection efficiency. She noted that Nigeria has the lowest value added tax (VAT) rate among ECOWAS countries at 5% and called for an increase in VAT as a measure to boost tax revenue.

Economist Bismarck Rewane has said government will face a challenge bridging the N6 trillion ($30bn) projected budget revenue shortfall in 2016 – either by raising financing from domestic or international debt markets or any other means.

He said the CBN has maintained its positions on defending the naira from any further devaluation despite less favourable terms of trade and a drop in foreign investment inflows.

Inflation rose from 9.4% in November to 9.5% in December because of exchange rate pressure, intermittent fuel scarcity, policy uncertainty and trade restrictions. In December, the naira depreciated significantly in the parallel market to an all-time low of N280 to the dollar, further compounding shortages of imported products.

As a mono-product economy, excessively reliant on crude oil, any significant price or trade shocks negatively impact the country’s forex earnings, external reserves and balance of payments position.

“We can expect these oil price shocks to last for the foreseeable future given OPEC’s reluctance to cut production. By not properly managing the oil windfall before the crash, Nigeria has found itself in a position where it does not have the funds to invest in capital projects and defend the naira,” Rewane said.

Reflationary budget?

Richard Obire, former executive director, Keystone Bank, said government is working on achieving a reflationary budget, one that puts more money into infrastructure development. For him, it will be challenging for a government that wants to spend in
the context of revenue that has dropped.

Obire said the government can drive revenue streams through an effective tax regime and increased earnings from the Customs Service, but it has to be prudent in spending, ensuring that every naira spent comes with maximum value. He wants the government to also focus on promoting small and medium enterprises (SMEs) and to strengthen domestic production.

Adeosun believes that naira devaluation, as advocated in many quarters, won’t on its own solve the nation’s economic problems. Forex restrictions by the CBN had prompted JPMorgan’s delisting of Nigeria from the Global Bond Index.

Dr Abraham Nwankwo, director-general, Debt Management Office, has allayed fears that Nigeria’s delisting from the Global Bond Index will hurt the economy, saying the economy is still attractive to investors.

But Razia Khan, chief economist for Africa at Standard Chartered, commented: “For many investors in Nigeria, the key consideration is what is done in terms of forex policy. The endorsement of current forex policy choices will disappoint investors who had been hoping for more rapid liberalisation of Nigeria’s forex market.”

Ike Chioke, managing director, Afrinvest West Africa, says the incorporation of a long-term diversified strategy in fiscal policy is required to deliver the cushioning support for crude oil shocks in various segments of the economy.

He is advocating a counter-cyclical fiscal policy that will minimise the impact of the crude oil price decline, as the CBN cannot continue to defend the naira with foreign reserves: “To reduce this pressure, an inward-looking policy like tax incentives, infrastructure development and production subsidy should be emphasised to reduce the dependence on imported goods.”

He says the government’s anti-corruption stance, though income saving, may not be sufficient to lift the economy from the doldrums. The government has to seriously look for avenues to diversify the country’s revenue base from oil.

Chioke said an upward adjustment of VAT, as suggested by the IMF’s Lagarde, is needed but should be done only after exhausting the option to enhance the compliance and collection mechanism to broaden the current tax base.

He said the government’s plan to increase foreign borrowing to N900bn, or $5bn, may be met with challenges requiring a significant risk premium if the government does not take urgent steps to improve the perception of the domestic economy and its macro outlook.

Michael Nwadike