The problem of over-dependancy

FIVE AND A half decades since independence not much structural change in the Nigerian economy has taken place. Crop production still dominates economic activity, followed by trading and services. Oil, though, with a much bigger share of total output today than it had at independence in 1960, remains about the fourth largest sector. Meanwhile, manufacturing, construction and solid minerals contribute less to the economy today than before.

Crops, which dominated exports in the first decade after independence, have been replaced by oil as the dominant export earner in the past five decades. Yet crops supply the bulk of domestic production, employment, trading and and spending today, while oil continues to post weak links with domestic production and employment, but generates a huge chunk of government revenue and foreign exchange for financing imports.

In the absence of structural change, the country’s economic performance depends on the strength of the global economy, essentially transmitted through merchandise trade and commodity prices. In Nigeria’s case, it is principally through oil. 

Commodities, mainly crops, and, since the 1970s, mainly oil, accounted for more than 90 per cent of the nation’s productive activity since 1960.

With only commodities to export, it is not surprising that global economic shocks over the decaded have dovetailed into domestic stagnation and macroeconomic instability for the country. A weak global economy also means weak oil and non-oil commodity prices in Nigeria, inhibiting incentives for their production. Crop and oil production have constricted, government revenue and external reserves both dropped to insignificant levels, putting pressures on government debt, and on an unholy trinity comprising inflation, exchange rate, and interest rates.

Dunnlorenmerrifield (DLM) Research maintains in a recent Economic Update made available to NewsAfrica: “We note that the prospect of significantly increasing foreign exchange inflow

in the short term to restore market equilibrium is largely bleak as it is predicated on a major rebound in global oil prices, increased foreign direct investment and/or an increased export base particularly from non-oil items. The current structure of the nation’s export remains largely dominated by crude oil exports with a contribution of 69.1 per cent recorded in 3Q15 and we note that the ramping up of non-oil exports is a medium term objective. In addition, the uncertainty

surrounding the ‘future of the naira’ further dampens investor enthusiasm towards FDIs. Given the decline in global oil prices, we are not oblivious of the fact that accretion to reserves at this time will be a challenge in view of the country’s reliance on oil export for foreign exchange needs.” DLM continued: “While we note that growth in oil sector retreated further into the negative territory, we also observed the decline in contribution to the nation’s GDP. The contribution of the oil sector to GDP declined to 8.06 per cent in 4Q15 from 10.27 per cent in the preceding quarter, though slightly lower from 8.97 per cent in the corresponding period of 2014.

“In terms of real growth, the oil sector recorded a deceleration to -8.28 per cent during the quarter compared to 1.06 per cent in 3Q15. Overall, we observed that the sector growth and contribution recorded during the quarter is the lowest in eight quarters.

“The weak performance of the oil sector was driven by the decline in the nation’s oil production to an average of 2.16 million barrels per day (mbpd), down from 2.17mbpd and 2.18mbpd in 3Q15 and 4Q14 respectively.”

In 2016, the government intends to lay the foundation for sustainable growth. In his presentation of the budget, President Buhari said: “The 2016 budget is designed to ensure that we revive our economy, deliver inclusive growth to Nigerians and create a significant number of jobs. We aim to ensure macroeconomic stability by achieving a real GDP growth rate of 4.37 per cent and managing inflation. To achieve this, we will ensure the aligning of fiscal, monetary, trade and industrial policies.”

(NANTA), Segun Adewale, has called on the government to do all that is possible to address the economic hardships facing the country and review its forex policy, which is affecting the aviation industry.

Latest purchasing managers’ index (PMI) data compiled for Stanbic IBTC Bank by Markit Economics Limited shows that Nigeria’s private sector economy slipped into reverse gear during February. “After having pointed to a notable growth slow­down in January, the latest seasonally adjust­ed PMI signalled an outright deterioration in business conditions,” said Markit Group.

“This was a survey first, driven by unprecedented falls in output and new orders. Official figures updated to the fourth quarter of 2015 released last week were equally worrying. Annual growth of GDP at market prices in the fourth quarter eased to a new low of 1.8 per cent, a far cry from the marked expansion seen in the same period during 2014 (6.4 per cent).

“The recent downturn in the PMI and continually low oil prices suggests that growth could slow further or even turn negative in the first quarter of 2016. Delving deeper into the PMI dataset, multiple head­winds were flagged in February. Companies indicated that client demand was particularly subdued, leading to a solid reduction in new orders.

“Output dropped as a result for the first time since the series began at the start of 2014. Sharply rising input costs were a key obstacle facing companies in Nigeria. This reportedly stemmed from currency weak­ness relative to the US dollar, which was linked in turn to the ongoing oil price slump. With cost pressures picking up, charges rose at the fastest pace since data collection began. The weak oil price also appears to be hurting exports, which fell at a survey-record pace in February.

The scale of the challenges facing Nigeria was underlined by its status as Africa’s worst- performing major economy in February, according to PMI data. Kenya’s private sector has surged ahead in recent months, but the latest downturn in Nigeria was greater even than that seen in South Africa — a country which has been in contraction since last June.”

NewsAfrica gathered that the next release of Nigerian PMI data from Stanbic IBTC Bank, scheduled for April 5, would provide further clarity on the overall performance of the private sector economy in Q1 2016. It will be interesting to know how the country would fare by then.

While the president argues that the economy is growing, the IMF is unhappy that Nigeria’s external challenges are dete­riorating. The Fund is increasingly worried that Nigeria’s reliance on oil revenues doubled the general government deficit to 3.3  per cent of the GDP in 2015, with exports plunging 40 per cent, and the current account deficit climbing to 2.4 per cent of GDP. Worse still, foreign portfolio flows shrank and caused reserves to fall to $28bn at the end of the year.

With eyes focused on flexible exchange rate policy, the IMF managing director Christine Lagarde visited Nigeria in January to discuss the fall in oil prices, the need for fiscal discipline, and to offer advice on improving tax and debt management. Lagarde also recommended the broadening of the country’s revenue based by increasing VAT.

However, experts say raising VAT alone will not be sufficient to resolve the country’s challenges, with the argument that VAT is like a sales tax in that ultimately only the end-consumer is taxed. They are quick to highlight that it backfired in Japan, an advanced economy. Prime Minister Shinzo Abe hoped it would strengthen the economy while supporting the growth, but realised it weakened the debt-ridden country. They further argue that VAT is regressive that leaves the poor paying more than the wealthy as a percentage of their income.

Figures show that agriculture employs more than 70 per cent of the labour force in Nigeria. Officially, unemployment rate is 10 percent, but analysts believe that the underemployment rate exceeds 17 per cent. More than 60 per cent of Nigerians live below the poverty line of $2 per day. Given this scenario, VAT would only increase chal­lenges. Moreover, the tax is difficult and cosdy to administer, so revenues are often lower than expected.

It is not all doom and gloom, though. The good news is that sectors with limited foreign exchange availability, increased gov­ernment expenditure on infrastructure and capital expenditure, local content and labour intensive activities, less dependency on bank debt, are export competitive and reliant on large consumer base and urbanisation, are expected to drive growth in 2016. These include civil works, construction and real estate, pipeline and storage, domestic avia­tion, agriculture and power sectors, according to Bismarck Rewane, head of Financial Derivatives Limited.

From whichever perspective it is viewed, the importance of oil to Nigeria cannot be overemphasised. It is the country’s main source of foreign exchange earnings and government financing. It generates 94 per cent of Nigerian export revenues, 70 per cent of Nigeria’s government income and 11 per cent of its GDP. Prices recently tumbled to as low as $30 per barrel before rallying to $40.

It is not surprising, therefore, that growth expectations for the economy have deteri­orated as a result of the oil slump. For instance, the ministry of finance projected growth last year of 5.5 per cent, down from 6.4  per cent at the start of 2014. Sadly, the country’s GDP fell to a mere 2.5 per cent by year-end, a performance described by analysts as the lowest since 1999 when Nigeria made detour to democracy.

In its report on economic scenarios for 2015 and 2016 — ‘What next for Nigeria’s economy? Navigating the rocky road ahead,’ - accountants PWC stated: “We expect that even under a benign economic scenario, the Nigerian economy will struggle to realise growth much higher than 4.0 per cent. Nigeria’s economy has tended to suffer following an oil price crash, although its resilience has improved in more recent times.

 

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