Cover Story
Key economic drivers in 2018
By UCHE CHRIS
The year 2018 represents a milestone in the life of this country and the regime of President Muhammadu Buhari. This year is the first post-recession year in which the nation is expected to start and end in positive growth rate. The nation started 3016 in positive growth rate but ended it in recession; while it started 2017 in recession and ended in it positive growth of 1.55 percent. In 2018, it has been generally predicted that the economy will grow at the rate of 2.7 or 2.8 percent but the government in the 2018 budget projected a 3.5 percent growth.
Oil Price
As usual the economy will be determined largely by developments in the international oil market; but this time for good. Nigeria is an oil dependent economy and the movement of oil price has direct impact of the economy. Since the coming of this government, oil price has affected its performance and delivering its election promises.
The government came on board in the midst of slump in oil price to as low as $22 per barrel which had all sorts of implications for the economy including devaluation of the local currency, mass retrenchment and contraction of the industrial section, and galloping inflation, leading eventual to a one and half year recession.
This situation compelled some policy changes such as the renewed interest in diversification and strategies to boost internally generated revenue through improved tax cover and transparency in government revenue generation.
However, the worse seems to be over with the steady rise in oil price since the middle of 2017.
At the present level of close to $70 per barrel, Nigeria has witnessed an increased in foreign reserve, which grew from its lowest in years of $26 billion to the present $40 billion, empowering the CBN to defend the naira. Also more revenues are going to the states through the federation account, thus reducing their financial burden which had reached a breaking point in 2016 necessitating bailouts from the federal government.
The bold assumptions in the 2018 budget reflect this confidence in government revenue and its ability to fund its activities. But experts are concerned that the nation is treading an old path and all the gains made during the bad days may soon be jettisoned for the good times.
Just out of recession, the economy is still largely fragile and any negative development in the oil sector can upturn the applecart. However, high oil price may also be the undoing of the economy this year as there will be pressure to deregulate or increase the pump price of fuel. In fact the current fuel scarcity that has persisted since December is a direct fall-out of the rise in international price of oil.
Already, the landing cost of products is put at N171 per litre. Such eventuality will have very disruptive effect on the economy as inflation will rise with hike in cost of production and transport.
Budget
To be expected, the first issue that will dominate the economy this year will be the budget. Presented in November 2017, the earliest in the life of this administration, the budget perhaps may be the most contentious and loathed by the National Assembly and is likely to have a chequered and stormy passage process. This is for three reasons:
The first reason is the “very abysmal performance and implementation level of the 2017 budget”, which the senate put at a mere 19 percent, thus eliciting some very critical reactions from them. Indeed, only N450 billion was released for capital projects out of a vote of N2.3 trillion; however another N700 billion was released in December raising concern, whether it is part of the 2017 budget or the 2018 budget which is the extended version of the 2017 budget.
Generally, the senators described the budget as unrealistic, deceptive, overoptimistic, and wishing thinking”. Also all the critical bench marks are being challenged and questioned by the NASS.
For instance, oil production output of 2.3mbpd is already out of mark with OPEC limiting the nation’s output to its present level of 1.8 mbpd in its November meeting; exchange rate at N305/$1 and oil price of $45 per barrel are dependent on the continuing high price of oil in the international market which the nation does not control, and could be upset by the slightest drop in oil price during the year.
Again, a recurrent expenditure of N6.1 trillion from a budget of N8.6 trillion, with a debt service component of N2 trillion, leaving only N2.4 trillion for capital projects in an economy that has just exited recession and in desperate and urgent need of shock treatment to spike demand, production and employment is laughable, they fumed. “For a budget that was tagged Budget of Consolidation, this budget can only consolidated the failure of 2017”, the law makers remonstrated.
From very indication, it is expected that this year’s budget passage will follow the tradition of the past three previous ones characterized by controversy, power play and back and forth accusations, which will not do the economy any good like those before it
Lastly, 2018 is an election year and the budget will be a subject of political intrigues and controversy. Already allegations of padding and fictitious items have emerged and all these would further complicate the passage of the budget as political suspicions are likely to trail it.
As it stands now, the budget may experience another late passage, which is characteristic of this government but in an election year catastrophic for the economy because of the conflicting policies that may likely confront fiscal and monetary authorities. This may lead to extra budgetary spending to enable government fund some capital projects for electioneering purposes.
Power and Infrastructure
Poor power supply remains a huge challenge in the country especially for manufacturers who are heavy users of electricity. Significant attention should, therefore, be given to improve the current state of electricity generation and distribution in the country. The proposed N9.8 billion Mambila hydro power project and the N12 billion transmission lines and substations are welcome developments, if implemented. This will support productivity in the industrial sector.
The state of the road network across the country also demands better attention. While there is need to continue to rehabilitate the existing ones, it is imperative to construct new ones. The N10 billion 2nd Niger Bridge; and N300 billion construction and rehabilitation of strategic roads as proposed in the 2018 budget are commendable.
The 2018 capital allocation to transportation is N263.10 billion. This proposed budget is encouraging especially if properly and religiously implemented. Evidence has shown that well developed rail systems aid the process of industrialisation. Therefore, priority attention should be given to the development of critical rail infrastructure in the coming year. However, the question is where the funding will come from. According to the minister of Transport, Mr. Rotimi Amaechi, the nation needs $40 billion to cope its transport challenges.
Agriculture
The 2018 budget for Agriculture and Rural Development is N118.98 billion. This allocation appears not significant enough, considering the importance of agriculture to food security and provision of raw materials for the industrial sector. In this era that national discourse centres on backward integration especially in agric sector, it is important to make higher budgetary allocation to the sector. It will be difficult to achieve the growth target of 3.5% and inflation rate of 12.4% in the coming year without encouraging more activities in the agricultural sector.
Monetary policy
The economy is usually a function of the fiscal and monetary policies. Under this regime, both have not been working in tandem and synch, which has largely hampered its performance. In fact, experts say that this is monetary policy driven economy as the fiscal authorities have largely been docile which is the tail wagging the dog, the CBN. Two major monetary policies that will challenge the acumen of government are inflation and interest rates.
Inflation rate will be an issue this year given the likely conflict between the fiscal and monetary authorities. Poverty has grown in the past year due to high inflation and people expect a reduction to improve their lives. Government through the NBS is anticipating an inflation rate of 12.4% while the CBN is anticipating single digit.
In the past three years, the monetary authorities have continued to focus on these two economic variables dividing policy makers and practitioners on the right mix and priority policy objective for the economy.
CBN is projecting a single digit inflation band of six – nine percent. At the present 15 percent, it is doubtful to expect a single digit rate given that the rate dropped by just four percent throughout 2017. Again this is an election year and political spending will be expected to impact inflation rate as broad money chase few goods and services. So the more realistic rate is the budget assumption of 12.4 percent and achieving this will have serious effect on the economy.
Now given the expected political spending toward elections, the CBN will have to keep Monetary Policy Rate, MPR, or interest rate high enough even above the present level of 14 percent to tame inflation. Also the apex bank will likely embark on more frequent open market operations – mop ups – to defuse the impact of the ‘hot money’. This will put liquidity pressures on the banks and crowd out the real sector from accessing needed funds. While the monetary authorities may achieve certain stability in the system, the economy may be the worse for it.
Foreign exchange management
Because Nigeria is an import dependent economy, managing the forex market has become one of the most critical success indicators of any CBN and government policy. It is so important that the life of the economy literally depends on it as economy stands and falls on the strength of forex stability.
Since this administration, the forex market has been chaotic due to the fallen price of oil and the low income thereto; as well as the crash in the value of the naira, consequently spiking inflation.
However, the CBN has proved dogged and adroit in coping with the daunting situation by creatively improvising measures that proved timely and practical. In April 2016, a list of 40 import items was prohibited from forex access. Although this had very adverse effect on the industrial sector, it really put a damper on the free falling naira for a season.
At present the country has about seven different forex rates which seem to have stabilized the market but creates confusion and introduce corruption in the market. Moreover, it is discomforting to investors and multilateral institutions because there is no single rate to determine policy.
Monetary Policy Committee
With so much in its plate to ensure a sound economy and maintain the smattering growth being projected, the CBN faces a major political hurdle that may put a spanner in its works. The Monetary Policy Committee, MPC, its main economic policy body is trapped in the power struggle between the executive and NASS.
With a statutory membership of 12, this has been depleted to about seven through retirements and non confirmation of appointees by the senate over the continued retention of Mr. Ibrahim Magu as boss of the EFCC after twice rejection by the upper legislative chamber.
At present the committee cannot form a quorum and their meeting will only be routine as any decision taken would not be binding legally. This is an important setback for the economy given the critical role the CBN should play this year.
Taxation
In the quest to bridge the revenue shortfall, one of the areas the government turned to is tax, which contributed only N4 trillion to government income in 2015, or 4.3 per cent of the country’s Gross Domestic Product (GDP) in that year, while it was contributing as much as 22 per cent to the economy of a country like Ghana.
In the bid to reverse this trend, the government came up with the Voluntary Asset and Income Declaration Scheme (VAIDS), which was aimed at bringing more people into the tax net. It gives tax defaulters nine-month window to regularize their tax liabilities without penalty, which will lapse in March 2018.
The Federal Ministry of Finance explained that VAIDS is meant to encourage Nigerians to voluntarily disclose their assets and income that were thitherto undisclosed and go ahead and clear their tax liabilities. The initiative will see them enjoy limited waiver for a particular period of time.
Already, the government has raked in N20 billion from defaulters and expected to double it at the end of the amnesty in March. Government tax $1 billion from tax.
Minimum wage
With improvement in government revenue and the coming election, there will likely be more agitations for wage review and government may be tempted to accede to them because of political considerations. This will be devastating for the economy given the threat of inflation and the high recurrent expenditure of the public sector which at present is inimical to development.
Dr Uju Ogubunka, former registrar, Chartered Institute of Bankers of Nigeria (CIBN) and lecturer, Banking and Finance at the University of Lagos advises cautioun: “The way to measure the performance of the economy is how do people feel? What is the wellbeing of the people now compared to before? If you ask anybody in Nigeria, he will tell you that either right or wrong, he fared better than now.
Most of the indices also showed this. Inflation rate and exchange rate have changed significantly. Unemployment rate has also up and a lot of issues that you can use to measure the economy. People have lost their jobs and new jobs are not being created as much as could accommodate young graduates. From all indications, the economy has not done well. That is why you and I are also complaining. The government is owing so much, the people they are owing are not paying their banks, private individuals and even their staff.
“We have to change gear, because you are not expected to be on the speed lane when you are on gear one.. If we believe the economy has not fair to all of us, it suggests to me that we are still at the take-off point. You can only move faster when you go beyond gear one. We expect the government to change gear to such level that the economy can move faster; otherwise, it would remain at the level we are now.
Things may get worse. We need to go beyond next gear. Then, the economy would grow faster. We all have to put our hands on it. It is
not only government.
Dr Adi Bongo, economist and member of Faculty, Lagos Business School said CBN’s introduction of the Investors’ & Exporters’ Window in April helped stabilize foreign exchange market and returned investors’ confidence and addressed the dollar scarcity which manufacturers were grappling with before then. He further explained that the monetary authority also made significant progress in slowing down inflation rate from 18.72 per cent in January 2017 to 15.9 per cent in November.
“This year will be the test on the administrative competence of the President Buhari administration. Now that oil money has started flowing again, we will see how well they would be able to implement the budget. In the past two years, they have not implemented 20 per cent of the budget.
