Economic policy: GTI displays Nigeria’s mixed performance
Given Nigeria’s current economic policy, experts think clear strategies are not alive and posit that there is a need to give birth to some amidst weak per capita income data, a reflection of the crystal clear perspective observed in the second half of the year.
Federal Government must be willing to come up with a fresh economic blueprint given the failure of the economic recovery and growth plan to push the nation into an uptrend state, analysts added.
In a recent report, GTI Research said two years down the line, the government Economic Recovery and Growth Plan (ERGP) initiative has recorded mixed performance across its three broad strategic objective areas.
These areas include restoring growth; investing in people, and building a globally competitive economy.
In terms of the former, the country recorded a fragile growth of 0.82 per cent and 1.93 per cent in the 2017 and 2018 periods, as against the targets of 2.19 per cent and 4.80 per cent for the periods respectively.
GTI stated that this was driven by underperformance of both the oil and non-oil sectors, and we do not envisage any sharp improvement in the 2019/2020 periods.
Similarly, at the analysts’ forum, the MarketForces Africa team comes to the conclusion that the government has not been able to achieve this, as available data shows. Pundits said the economy is recovering but on a slow path, thus dragging per capita income lower.
In the report, GTI reckoned that much has also not been achieved in terms of investment in human capital, as budget allocation to critical sectors in this area remains largely unimpressive.
The firm reviewed that out of the 2018 fiscal budget of NGN9.1 trillion, the federal government allocated N605.79 billion and N340.46 billion to the education and health sectors respectively, representing 7 per cent (education) and 4 per cent (health) of the total budget size.
Interestingly, the bulk of these allocations were earmarked for salaries and ‘other’ recurrent spendings, while a meagre NGN61.73 billion (education) and NGN71.11 billion (health) went into capital expenditure in these sectors.
These further underscores the reason for the high number of Nigeria’s out of school children (10 million, UNICEF 2018), as well as infant mortality and maternal death rate of 53 per cent (WHO, 2017).
Although, the federal government boasts of impressive figures in its different social intervention programmes such as the N-Power scheme, National Home-Grown School Feeding Programme (NHGSFP) for primary school pupils. Trader-Moni and conditional cash transfers to the most vulnerable.
Economic policy: GTI displays Nigeria’s mixed performance
“We are of the view that more of these efforts may not be impactful in the long run if capital expenditures on education and health remain paltry”, GTI Research said. On the other hand, the World bank 2018 Global Competitiveness Report shows that Nigeria moved up 10 positions from where it was in 2017 to 115/140 in 2018.
This was based on perceived improvement in six of the twelve pillar areas of Institutions, Infrastructure, ICT adoption, Health, Business dynamism, and Market size.
Nonetheless, we believe concerted efforts will be required to improve on the other six pillars of the competitive index if Nigeria is to reach its goal of being among the 100 most competitive countries by 2020, GTI noted.
Fiscal policy: Low optimism on budget assumptions
GTI assessment of the fiscal policy observed low optimism on budget assumptions. Having come to terms with the difficulty experienced in mobilizing revenue for the 2018 budget implementation, FG proposed a less expansionary budget of NGN8.68 trillion for the fiscal year 2019.
This was later reviewed up to N8.92 trillion by the 8th National Assembly before its passage in May. Nonetheless, there are two factors that we believe will determine the successful implementation or otherwise of the proposed budget.
First is the underlying assumptions of the revenue estimate. According to the proposed budget document submitted to the legislators, the FG revenues estimate for the 2019 budget was put at N6.97 trillion.
This comprises oil revenue of N3.73 trillion, non-oil revenue of NGN1.39 trillion and other revenues of NGN1.85 trillion.
The oil revenue was predicated on a benchmark price of $60/bl and an average daily output of 2.3 million barrel; while the non-oil and other revenues was predicated on a GDP growth rate of 3.0 per cent.
Drawing from reliable estimates, GTI Research opined that the total projected revenue (NGN6.97 trillion) is highly optimistic in the face of the realistic revenue capacity of the government.
For instance, the OPEC monthly oil market report shows that Nigeria’s average daily crude oil production stood at 1.73 million barrels in the first quarter of 2019, while the price averaged $63 per barrel.
GTI Research stated that hence, for Nigeria to achieve its oil revenue target at the current output level, the oil price will have to increase above $80/bl; a development that is less likely in the near term given the weak global crude oil demand outlook for the remaining part of 2019.
The firm also expects the delay in the passage of the budget to constrain its implementation process before attention shifts to the 2020 budget.
However, it believes a more cordial relationship between the leadership of the new 9th national assembly and executive can help achieve a decent implementation rate if personal interests are not elevated above that of the country.
Furthermore, we expect the non-oil revenue to be hampered by heightening cases of insecurity across the country and weak corporate earnings. Hence, we project a maximum implementation rate of 60 per cent – 65 per cent for the 2019 budget.
Read Also: Oil prices climb on improve demand in United States
Monetary policy: Cost of borrowing still elevated
Following reduced, domestic and external pressure brought about by a mild reduction in domestic inflation rate and accommodating monetary policy in the U.S. since the turn of 2019.
The CBN in the first quarter of the year adopted a less aggressive liquidity management approach, causing interest rates in both capital and money market to compress. Consequently, the Monetary Policy Committee (MPC) of the CBN during its last meeting in the first quarter of 2019 resolved to cut down its benchmark interest rate by 0.5 per cent (from 14 per cent to 13.5 per cent); the first-rate cut since June 2016.
The committee noted that given the relative stability in the key macroeconomic variables, there is the need to signal a new direction that is pro-growth and capable of increasing credit flows to the productive sector of the economy.
However, we are of the view that the interest rate cut may not achieve much in terms of fast-tracking credit flows to the productive sector (as envisaged), due to its marginal size.
Furthermore, we expect upward inflationary pressure to strengthen in the second half of 2019 as the implementation of the newly approved minimum wage gains traction across states. Hence, we believe this will constrain the MPC from considering a further cut in MPR in the near term.
Analysts at GTI say they do not rule out the possibility of a hike in electricity tariff, removal of fuel subsidy and renewed external pressure on capital inflows into the economy. These together with expected demand-side pressure, resulting from the minimum wage increase, analysts believe, may deter the MPC from further reducing the benchmark interest rate to a level that will be more attractive to the real sector players to access.
Overall, analysts at GTI Research expect benchmark cost of debt (MPR) to remain above 13 per cent in the second half, with no significant increase in credit flow to the real sector operators.
Foreign Reserves: Strong enough to curtail exchange rate pressure?
After touching a five-month low of $42.29 billion in the week leading to the presidential election on March 9, 2019, Nigeria’s foreign reserves balance recovered by more than $2 billion in the last two weeks of March to close for the first quarter at $44.60 billion.
The rally was mainly driven by foreign investors’ renewed interest in Nigeria’s financial assets as election jitters faded away.
Given the current level of Nigeria’s foreign reserves balance and the mild volatile outlook for the crude oil price, we expect the Naira/USD exchange rate to remain relatively stable in the second half of 2019 amidst continued support by the CBN through weekly intervention in various FX market segment.
Inflation rate: Is upward pressure back again
Record of the movement in changes in average general prices of goods and services shows that rates have not settled, there have been swings highs and lows in the last few months.
Over the last 12-months period, Nigeria’s headline inflation, a measure of the average change in the general price level of goods and services, fluctuated within the bound of 11.20 per cent – 11.50 per cent since touching a two-year low of 11.14 per cent in July 2018.
This was mainly driven by reduced price pressure on both farm (food inflation) and non-farm (core inflation) products in the larger part of this period.
The reduced price pressure on farm produce was supported by favourable climatic conditions and increased government intervention in the Agricultural sector on one hand, and base effect on the other.
On the flip side, the reduced price pressure on non-farm produce (core inflation) was mainly aided by the relative stability in the foreign exchange market due to the CBN regular intervention.
With the recent uptick in the food price sub-component (since April 2019), we anticipate a further upswing in the inflation rate in the second half of 2019. This, especially when the new minimum wage becomes fully implemented across states of the federation.
Overall, we expect the average Headline inflation rate for 2019 to settle at 11.50 per cent.
Unemployment: The ticking time bomb
The most recent labour force data published by the National Bureau of Statistics (NBS) shows that the unemployment rate in Nigeria stood at 23.1 per cent (20.93 million of the 90.47 million active labour force population) as of the third quarter of 2018.
This represents an increase of 14.6 million between the second quarter of 2015 and the third quarter of 2018 and could be largely attributed to the economic recession of 2016/17. Plus low absorbing capacity in the formal sector is due to the high cost operating environment and the poor state of critical infrastructure.
Comparatively, the rate is also more than double what is obtainable in countries with similar demographics such as India, China, Indonesia, Egypt and Brazil with unemployment rates of 3.52 per cent, 3.82 per cent, 5.34 per cent, 10.0 per cent and 11.7 per cent respectively.
Going forward, analysts at GTI Research said they anticipate further upward pressure on the unemployment rate in the second half of 2019, as against moving close to the ERGP target of 12.90 per cent for 2019.
Our position is based on comparative lower expansion in the formal and semi-formal sectors’ absorbing capacity as against the labour force growth rate, the firm stated.
Economic policy: GTI displays Nigeria’s mixed performance
