Macroeconomic Analysis: How Nigerian Economy Stands (1)
President Muhammadu Buhari

Macroeconomic Analysis: How Nigerian Economy Stands (1)

The Nigerian economic growth has remained largely unimpressive as population rises farther ahead in the past years amidst weak macroeconomic condition.

Following the weak macroeconomic condition, data shows that revenues accrued to the Nigerian government have been on decline, and this remain key pressure point for capital and recurrent spending.

Howbeit, recurrent spending appears more as an obligation, especially debt aspects, but capital spending has been low and most times, underperforming the budget.

With growth coming at low single digit, poverty reduction could remain a mirage – perhaps for longer than envisage despite rising inflation rate, weak purchasing power.

However, contrary to general perception across the streets that Nigeria is heavily indebted, some school of thoughts actually hope to see the country leveraging further.

But sustainability remains a key issue with ticking public debt having increased by N20 trillion in five years under President Muhammadu Buhari.

Unfortunately, government has not been able to successfully raise the nation’s revenue capability, noted to be the actual problem despite untapped resources endowments.

The country would get better in terms of growth at the point when revenue collections is sufficient enough to cater for government budget in a fiscal year.

Running budget deficit in a given year has always translates to borrowings, and provision for debt service cost in the nation’s budget would continue to rise.

Macroeconomic indicators shows that Nigerian tends to do better when global prices of oil rise along with increased production volume.

That often translates to strong revenue performance for Nigeria, but it hardly comes as behaviour of the two determinant variables remains unpredictable.

Data from Budget Office shows that Nigerian government revenues printed at ₦3.240 trillion 2015, but fell to ₦2.947 trillion in 2016, ₦2.657 trillion in 2017 before it rose strongly to ₦3.937 trillion in 2018 and then ₦4.120 trillion in 2019.

In 2020, WSTC Financial service estimates total revenue to settle at ₦3.937 trillion and for 2021.

Under the present administration, revenue has been underperforming year on year, thus resulting to more borrowings.

In 2015, government achieved 94% of revenue expectation for the year, but this dropped to 76% in 2016, 52% in 2017 and 54% in 2018. By 2019, it rose to 59%.

Key macroeconomic indices have remained scary. Inflation has continued to maintain uptrend for 16 months, printed at 15.75% in December, 2020.

Debt profile has skyrocketed to more than ₦32 trillion, driven in part by translation risk brought about by devaluation of the local currency from ₦197 to ₦305, then ₦306 and now ₦360.

Ticking unemployment rate at the time when prices of food items are skyrocketing.

On revenue side, it appears the economic structure is working against overall welfare of the nation.

In 2020, World Bank group report on Nigeria stated that given its resource endowments and market opportunities, Nigeria is uniquely placed for strong economic growth.

The report stated that Nigeria is rich in agricultural and mineral resources.

“Its population of about 200 million people presents a huge market—the largest in Africa—for domestic production.

“In addition, a large segment of Nigeria’s labor force is young and entrepreneurial—5.3 million people entered the labor force in 2018 alone”, World Bank noted.

The report added that moreover, market access to other member countries of the Economic Community of West African States (ECOWAS) and the wider African region offers opportunities to Nigeria’s private enterprises.

However, it added that Nigeria’s resource endowments and opportunities have not translated into sustained economic growth and shared prosperity for its citizens.

Explaining the conundrum, World Bank noted that gross domestic product (GDP) growth, which averaged 8.4 percent per year in the first decade of the 2000s, has slowed considerably, to around 2 percent in 2018, well below the average for many of Nigeria’s peers.

It categorically stated that poverty has increased, with nearly half of the population living in extreme poverty (that is, below US$1.90 per day).

“Nigeria now hosts the largest number of poor people in the world—surpassing India in 2018. The rate of unemployment has also risen, reaching 23 percent in 2018.

“Likewise, underemployment of labor—at around 20 percent—is rising”, it added.

Indeed, Nigeria’s economic performance and development outcomes are diverging from regional averages and on its current trajectory the country is expected to further lag, the World Bank group stated.

It was noted that strong regional disparity in development outcomes compounds Nigeria’s challenges.

These include poverty rates, and human capital indicators—such as adult literacy, primary school enrollment, and health outcomes—in the northern zones of the country are significantly worse than those in the southern zones.

World Bank report hinted that the prediction for development outcomes is worrisome and creates a case for urgent action for faster economic growth and job creation.

Prior to the COVID-19 pandemic, the number of people living in extreme poverty was projected to reach 120 million (or 45 percent of the population) by 2030.

But the World Bank noted that the pandemic and impending recession could further increase the poverty rate and reduce Nigeria’s economic and development outcomes.

Estimates suggest that Nigeria needs investments worth 6–8 percent of GDP and 40 to 50 million higher-income and higher-productivity jobs by 2030 to reduce poverty and to help create a more prosperous Nigeria.

“High dependency on crude oil exports has contributed to increasing poverty and inequality”.

World Bank maintained that Nigeria’s oil and gas sectors generate on average more than half of fiscal revenues and nearly 90 percent of the nation’s exports.

The report noted that series of reforms in the early 2000s helped to raise productivity and growth (especially in the services sector) and increased non-oil contribution to GDP to 90 percent (compared with 68 percent in the late 1990s), the oil and gas sectors continue to dominate Nigeria’s economy.

It however maintained that high dependency on oil exposes the country’s growth performance to the boom and bust cycle of oil prices, which creates economic uncertainty and dissuades investment.

The shock of the unprecedented collapse in oil prices during the COVID-19 pandemic comes on the heels of a weak recovery from the 2014–16 oil price crash.

This has led to dramatic revenue shortfalls and debt buildup and precipitated the recession of 2016.

Also, experts stated that oil dependency will deepen the imminent recession from the fallout of COVID-19.

Moreover, the challenging governance framework of Nigeria’s oil industry, together with increased competition in the global oil industry, and traction with curbing the use of fossil fuels because of climate change effects, will diminish the oil sector’s long-term contribution to the economy.

The noble petroleum industry bill has remained under carpet, like many other value adding plans that could helped the economy to grow.

In the absence of adequate fiscal buffers and low non-oil revenues, the World Bank thinks public finance will become increasingly vulnerable to oil price shocks, hampering the government’s ability to invest in needed infrastructure and to provide vital services.

The oil price crash during the first quarter of 2020—precipitated by the failure of two major producers (Saudi Arabia and Russia) to reach an agreement on production cuts and the subsequent oil price war.

This was worse by the outbreak of the COVID-19 pandemic, which devastated global oil demand—thus, reinforces the argument that an over-dependency on oil exports creates substantial risk to Nigeria’s public finances.

Equally, World Bank also added that Nigeria’s weak economic policy framework has impeded growth and development.

“Government policies and programs in the real sector (for example, the 2011–15 Agriculture Transformation Agenda and the 2007 National Integrated Industrial Development Strategy) that were developed to promote growth, drive non-oil exports, and create jobs have been poorly designed, inconsistent or short-lived, and weakly implemented”.

It also added that important reforms under the 2017–20 Economic Recovery and Growth Plan (ERGP) have been delayed.

As a result, targets for output diversification, growth, and job creation have not been met, the World Bank stated in the report.

For example, manufacturing value-added (MVA) has fallen dramatically during the past 20 years and is well below the MVA of regional peers such as Côte d’Ivoire and Ghana.

Meanwhile GDP growth—projected under the ERGP to average about 4.6 percent a year (2017–20) and to peak at 7 percent by 2020—is well below this target.

In addition, the 3.75 million new jobs expected to be created annually under the ERGP have not materialized.

“These policy challenges, which also reflect weak institutions, are eroding the social contract between the government and the private sector and are creating a difficult business environment in Nigeria.

“Nigeria lacks strong institutions that can deliver public services and economic opportunities efficiently and effectively and this has led to a high cost of doing business—to the detriment of the private sector”, the World Bank said.

Consequently, World Bank group reckoned that the trust between the government and the private sector has eroded over the years.

While improving, it added that Nigeria’s business environment ranks 131 out of 190 countries on the 2020 World Bank Doing Business Index, well below its aspirational peers.

Also, foreign direct investment (FDI) to Nigeria has progressively declined since 2011, reaching about US$2 billion in 2018—the lowest level since the early 2000s.

Due to improved macroeconomic situation, and right policy strategy, World Bank noted that Ghana has now overtaken Nigeria as the largest recipient of Foreign Direct Investment in West Africa.

Leveraging the World Bank’s Systematic Country Diagnostic (2019) for Nigeria, the report argues that Nigeria must focus on a wider private sector–led growth strategy based on its considerable factor endowment and market opportunities.

“Addressing the deficiencies in Nigeria’s policy framework and its infrastructure sector that are stifling growth would enable the private sector to create millions of quality jobs for its rising population, mitigate economic vulnerability by diversifying exports, and reduce inequality and instability by driving economic activity in underdeveloped regions”.

It mentioned that there are three key features of Nigeria’s economy that uniquely position the country for a strong non-oil sector growth that leverages the private sector.

“First, the country’s rich agricultural and mineral resource base provides the opportunity to significantly expand food manufacturing and resource-based manufacturing, especially in the lagging North.

“Second, Nigeria’s relatively large, fast-growing, and urban domestic population, and regional integration with ECOWAS, provide a ready market base for Nigerian food products, consumer goods, building materials, and services (such as financial, transportation, and digital).

“Third, with a large, young entrepreneurial population, Nigeria is well-positioned to increase productivity and innovation through digital entrepreneurship”, the World Bank added.

To improve macroeconomic indices, right policies and strategy that support the private sector would be needed in Nigeria.

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Macroeconomic Analysis: How Nigerian Economy Stands (1)