Published On: Mon, Sep 3rd, 2018

Declining economy signposts hard times ahead

By Uche Chris

A worrisome and unexpected report about the economy came from the National Bureau of Statistics, which most informed observers are still trying to digest. The Gross Domestic Product (GDP), the aggregate growth rate of the economy dropped in the first half of the year from 1.9 percent at the beginning of the year to 1.5 percent, a decline of 0.4 percent.

Although the non oil sectors such as transportation, telecommunications and real estate etc recorded some improvement, the core sectors such as oil, manufacturing, agriculture and financial institutions dipped. Agriculture dropped by -1.19%; manufacturing -0.65%; oil by 3.9%; financial/insurance -1.28%. Non oil grew by 1.5%.

The report was a major signal that the economy is in real trouble in spite of the cosmetic growth in non oil sectors as the core sectors which constitute the bed rock of the economy all dropped. “The non oil sector performance was however constrained by agriculture that grew by 1.3 per cent compared to three per cent in Q1 2018 and 3.01 per cent in Q2 2017,” the report said.

Coming just a year after the country exited recession and on the heel of the hardship being experienced by Nigerians as a result of high cost of living and the increasing impoverishment of the people, the alarm bell is understandably ringing. Anxiety is rising about the future of the economy going into the general election in February 2019.

The government had projected a GDP growth of 3.5 percent in the 2018 budget to consolidate on the exit from recession but instead of the anticipated rise the economy dipped. Obviously, the dream of growing the economy this year seems to have disappeared and the people should brace up for hard times ahead.

Although government projected growth rate of 3.5 percent in the 2018 budget, experts had been warning about the issues surrounding its passage and implementation and its impact on the economy. Without the budget, the economy has been bleeding and the result was expected to manifest in time. And it appears the time has finally come.

With the executive and NASS still squabbling over the budget, it is obvious that any hope of an improvement on the performance of 2017 is farfetched. Both the CBN and the business community had continued to warn about the confusion over the economy and negative impact it is likely to create going forward. Just a month to the last quarter of the year, the final shape of the budget is yet to be determined.

At every of its Monetary Policy Committee meeting since this year, the CBN has consistently maintained that the economy is still fragile and unstable and its recovery from recession was tentative. It has therefore kept all economic bench marks unchanged to ensure that it does not instigate any artificial turmoil. And the report has largely proved the apex bank prophetic.

In the past three years government has been dodgy and pretentious about the capital budget which has adversely affected the economy.  First the budgets have been steeped in one controversy or the other. It had been either delay in passage, late presentation, padded items or poor implementation. For instance, the 2017 budget manifested all these controversies and ended with only19 percent implementation level.

Second, the capital votes of this government have been ostensibly increased to about 38 percent of the budget from about 18 percent before it. Sadly, it had been just expression of intent without serious political will to drive it.

In fact N700 billion, about half of the capital vote of N1.9 trillion was released on December 17, 2017, clearly defeating its intended impact on the economy; the balance of N900 billion was carried over to 2018. It was not surprising that the economy though out of recession on account of upsurge in oil price could only record a 1.8 percent growth last year.

For an economy that is bludgeoned on every economic index, a 1.5 percent growth is almost a recess, because the oil sector alone contributes about three percent while population growth is at three percent also. So, experts predict that a growth rate of less than 10 percent cannot salvage the economy and will lead to deeper poverty and unemployment.

The economy has been losing investments since the year in anticipation of the coming elections. Effective implementation of the budget was expected to compensate for the anticipated run on the economy which is common during election seasons in the country. In most cases, elections pose high political risk for investors who take a flight to safety because of its violent and turbulent nature, thus compounding the already fragile and negative growth prospect of the economy.

However, this expectation, with hindsight, seems to have been overly optimistic as the budget may have failed to provide such cushion. Already the market has been on a free fall since the third quarter and this will continued till the election in 2019. And this is contrary to the general trend in the economy during oil price boom.

The contrast is that for the first time, the economy is contracting at a time of high oil price. For over a year now oil price has been on the upsurge reaching a peak of about $80, which has only reflected in foreign reserves accretion while the economy remains in the woods.

The pressing question is; if the economy does not improve during high oil price, when will it do so, given that the fortunes of the economy are more often than not tied to the apron-string of oil price? With the approaching elections when economic policies are expected to take the back seat, there is little hope of any    improvement in the economy.

A major challenge in boosting the economy since the advent of this government has been the untidy and unscrupulous manner the administration has approached the issue of capital expenditure. Although the government had ostensibly increased capital budgets significantly, the funding and implementation has conversely equally worsened, thus vitiating any expected gains from it.

For the first time in our budgeting process, the entirety of capital expenditure is to be funded through borrowing – both internal and external. The challenge and dilemma has been that such borrowings hardly completely materialised and consequently putting the budgets in peril.

With just a month to the last quarter of the year, inflation is still at double digit at 11.2 percent, interest rate is at 14 percent with businesses struggling to survive, the market is in free fall, public infrastructure is non-existent, cost of living is skyrocketing with attendant increase in poverty rate, and capital projects remain unfunded. Consequently, there is visible sign that the economy will perform worse than last year. Recession may not be imminent but economic hardship is likely to aggravate going forward.

Exiting recession last year was at the back of oil price push rather than the efficacy of the government Economic Recovery and Growth Plan, which was launched with so much fanfare. Actually, the greatest failing of this government has been its inept economic policy. It is also the decline in the oil price and output that is responsible for the drop in GDP.

Although the government maintain a robust price differential between the budget benchmark of $52 per barrel and market price of over $70, output on the other hand has been the sore point; while the budget estimated output of 2.3 mbpd, current quota and actual output has been at 1.8 mbpd, leaving a shortfall of 500000 bpd completely vitiating any gains from the high price.

Another alarming aspect of this ominous report is that the decline occurred in the most critical sectors of the economy, namely, oil, manufacturing, financial institutions and agriculture. An important implication is that with these drivers of the economy declining, unemployment, poverty, and inflation will worsen.

Manufacturing and agriculture are the main sources of employment and food supply, while oil sector is the main source of revenue for government, especially foreign exchange. Also the decline in agriculture underlies the huge government interventions especially through the CBN Anchor programme; and points to the devastating effect of the herdsmen attacks on farmers. The implication, experts warn, is that there is a possibility of food crisis ahead.

With unemployment level at 18 percent and youth unemployment at 46 percent, it suggests that the potential lull in the job sectors will exacerbate the crisis.

But the real danger is in the oil sector. With oil price at over $70, fall in foreign reserves from $47.6 billion to $46.3 billion between July and August 2018, as pressure mounts on the naira; and output of 1.8 mbpd against 2.3 mbpd, there is major cause for concern, because the economy depends on oil and any changes or disruptions have drastic and immediate repercussions.

Moreover, a decline in the financial services sector clearly points to lingering problems which continue to dog the sector; these are high impairment of credit facilities, high interest rate and strangulating regulations. The sector is usually unaffected by changes in the economy; but the decline currently signals danger.

Dr. Boniface Chizea, Managing Consultant, BIC Consultancy Services Ltd, says the situation is not surprising, given the preponderant attention accorded to politics over the economy.

“The economic decline was expected as nothing is currently happening in the economy. We are currently consumed by politics of 2019 with nobody sparing a thought regarding governance. Budget 2018 is in limbo; because of heightened risk factor portfolio investors have voted with their feet and all the indices at the Stock Exchange are in the southward direction.

“Inflation though has maintained its continued declining trend is still high and unserious, particularly for SMEs, cost of credit remains unbearable and banks have lost credit appetite particularly to the private sector against the background of burgeoning NPLs. So where will economic growth come from?

Let us salute the Bureau of Statistics for observing commendable commensurate level of professionalism not allowing itself to be swayed by political sentiments to begin to make its results politically correct.”

Mr. Ayodele Akinwunmi, Head, Research, FSHD Merchant Bank Ltd, believes the situation if it unchanged will deepen poverty.

“The development shows clearly that there is the need for specific growth enhancing policies in the economy. GDP growth rate of 1.5% when the population is growing at 3% is sub-optimal. If this low growth continues, poverty will increase.”



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