The Nigerian economy recorded 3 consecutive quarters of economic contraction in 2016. The GDP in the third quarter of 2016 continued the downward trend and contracted by 2.24 percent relative to Q3 2015.
Nigeria’s economic performance worsened in 2016. The economy was severely affected by the plunge in crude oil prices, decline in oil production, and the reduction in non-oil exports, all of which contributed to the acute scarcity of foreign exchange. The economy was also adversely affected by the knock-on effects of foreign exchange controls introduced by the CBN in 2015, especially the foreign exchange restriction of 41 items, some of which are direct inputs required by the manufacturing and agro-allied industries.
This article analyses some key economic indicators in 2016, and provides a quick review of the 2016 Budget.
Gross Domestic Product (GDP)
The Nigerian economy recorded 3 consecutive quarters of economic contraction in 2016. The GDP in the third quarter of 2016 continued the downward trend and contracted by 2.24 percent relative to Q3 2015. While the oil sector continued its decline, the non-oil sector moved in the opposite direction and grew slightly by 0.03 percent. Virtually all major sectors of the economy were in recession with the exception of Agriculture and Information & Communications.
There is an urgent need for the FG to take steps to spur growth in the following six sectors of the economy, which accounted for approximately 80% of GDP as at Q3 2016: Agriculture, Trade, Information & Communications, Manufacturing, Real Estate, and Mining and Quarrying.
Consumer Price Index (CPI) / Inflation Rate
In 2016, the CPI recorded significant increase in the price level of goods and services nationwide, rising to a 20-year high of 18.555 (year-on-year) in December 2016! The increase was largely due to the devaluation of the Naira, the hike in electricity tariffs and the “modulation” of the prices of petroleum products.
The most affected areas of increase relate to essentials such as housing, water, electricity and gas. The uptick in inflation, combined with rising unemployment and underemployment rates, has increased Nigeria’s Misery Index to one of the worst in the world.
Exchange Rate (₦/US$)/ Interest Rate / Foreign Investment
Nigeria depends significantly on oil exports for its foreign exchange earnings. The sharp decline in global oil prices in 2015 and 2016, therefore, hampered foreign exchange supply in the country, whilst demand remained strong. This put significant pressure on the nation’s exchange rate.
The CBN maintained a fixed exchange rate of ₦197:US$1 for the first half of 2016, defending the Naira with a significant portion of the country’s foreign reserves. However, in June 2016, the fixed exchange rate policy was officially replaced with a flexible one to be regulated by the Revised Guidelines for the Operation of the Nigerian Inter-Bank Foreign Exchange Market (“Revised Forex Guidelines”).
The introduction of the Revised Forex Guidelines was seen by many stakeholders as a welcome development. The general expectation was that exchange rates would be determined by market forces with no spread restrictions, and international monetary transfers would be purchased by Authorised Dealers at the Interbank Foreign Exchange Market (IFEM). The liberalisation of the IFEM was intended to boost investors’ confidence, and thus increase foreign exchange supply by attracting foreign direct investment (FDI) and foreign portfolio investment (FPI).
Unfortunately, the CBN’s implementation of the Revised Forex Guidelines has been suspect. This has resulted in significant fragmentation of the foreign exchange market, and a wide (and widening) gap between official and parallel market rates.
The CBN’s Monetary Policy Rate (MPR) was the principal instrument used in controlling the direction of interest and inflation rates in the economy in 2016. In January 2016, the Monetary Policy Committee (MPC) of the CBN reduced the rate from its 2015 level of 13 percent to 11 percent. However, it was increased to 12 percent in March 2016, and 14 percent in June 2016. Throughout the second half of 2016, the MPC maintained the MPR at 14 percent in order to control inflationary pressure amid foreign exchange scarcity.
The increase in MPR in 2016, amongst other factors, resulted in an uptick in the interest rates charged by deposit money banks during the year, with the prime lending rate and maximum lending rate averaging 16.87% and 27.29%, respectively6. The high interest rates in the country have continued to stifle business and economic growth, especially in the real sector of the economy.
In respect of external sector statistics, FDI and FPI continued to dwindle in 2016, relative to prior years. This is largely attributable to the depressed state of the economy and Nigeria’s foreign exchange challenges.
The 2016 Budget of Change had a total expenditure outlay of ₦6.06 trillion, and was anchored on an average crude oil price of $38 per barrel, oil production of 2.2 mbpd and an exchange rate of ₦197:US$1. The projected deficit was ₦2.2 trillion or negative 2.14 percent of GDP. The implementation of the budget was expected to ensure real GDP growth of 4.3 percent, whilst keeping inflation rate at 9.81 percent.
Sadly, this was not to be, as the above economic indices clearly show.
As at 30 September 2016, the FG had achieved only 75 percent of its target revenue and 79 percent of its target expenditure, compared to the 2015 revenue and expenditure implementation rates of 80% and 94%, respectively.
The under-achievement of the 2016 Budget was generally due to late passage of the Appropriation Bill, revenue-generation challenges, and government bureaucracy and inefficiencies. These issues need to be addressed swiftly and decisively by the FG if the 2017 Budget of Economic Recovery and Growth will be more than a buzzword.
This article is an excerpt from our Thought Leadership document "National Budget 2017" . Click here to download the publication.
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