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Why the Euphoria?

The positive press that greeted Nigeria’s 2017 GDP numbers from the Nigerian Bureau of Statistics (NBS) – reflecting the country’s exit from a recession – seems to have been inspired by John Bunyan’s poem: “He that is down needs fear no fall”. According to the NBS, Nigeria’s economy grew by a meagre 0.83% in 2017 on the heels of a 1.58% contraction in the prior year. Despite the weak growth in 2017, Nigeria recorded its strongest recovery in the fourth quarter of the year. In the last three months of 2017 (Q4 2017), Nigeria recorded a 1.92% growth (-1.58%, Q4 2016), the third consecutive quarter of positive growth in the year (See Figure 1).

Nigeria’s new GDP numbers largely indicate a fragile recovery that should elicit cautious optimism, however the humbling effects of the recession has led to an expected euphoria. The 2017 GDP growth – especially Q4 numbers – becomes even more resounding when weighed on the back of the debilitating and crippling fuel queues in December. These fuel queues created by the fixed price regime in the downstream petroleum industry – like the demand management foreign exchange policies – is just another in the series of own goals currently afflicting the current policy environment.

Another indication of the fragility in the growth numbers is the population growth rate vis-�-vis the GDP numbers. With an annual population growth rate of about 2.6% and a GDP growth rate of only 0.8%, Nigeria will experience a slowdown in its GDP per capita, a measure of the country’s wealth per citizen (GDP divided by the population). When the effects of the currency depreciation are factored in, Nigeria’s GDP per capita further weakens. Thus Nigeria’s GDP per capita is expected to drop for a fourth successive year to about $2,411 in 2017 from $2,456 in 2016. This implies that Nigeria will remain within the lower income bracket fold and even below sub-Saharan Africa’s other major petro-dollar economy – Angola ($3,110).

In 2018, Agusto & Co, has a three case scenario driven by various macro-economic assumptions and socio-political prognosis. Our best case scenario is hinged on macroeconomic reforms. However, we consider this as an unlikely scenario due to the current Reform-lite approach in the policy environment. Our base case scenario (most-likely scenario) is drawn on a prognosis that the current statist policy environment will subsist in our forecast period. Thus we project a GDP growth rate of about 2% in 2018. While our third case scenario is hinged on a significant drop in oil prices leading to the restoration of exchange rate controls and a possible recession.

The Sore Spots in the 2017 GDP numbers

Figure 1: Nigeria – Quarter-on-Quarter GDP Performance

Source: Sources: World Bank, NBS, Agusto & Co.

Nigeria’s aggregate 2017 GDP was largely weighed down by the underperformance of some big names in the sectoral classification. The most prominent of these big names will be Trade which contracted by 1.05%, closely followed by Information and Communication (-1.04%) and then Manufacturing, which contracted by 0.21%. Cumulatively, these three sectors contribute about 37% to the aggregate GDP and also provide a large chunk of the country’s labour force and the government’s tax revenues. For instance, Trade is the third largest contributor to Nigeria’s VAT receipts. However, VAT receipts from Trade fell by about 1.4% to ₦49.5 billion in 2017 from ₦50.2 billion in the prior year, due to the contraction in the sector. This clearly demonstrates the effects of a weak economy on the government’s fiscal positions.

Overall, in our view, the GDP sore spots reflect the consequences of the reluctance to reform. For instance, in manufacturing the biggest sub-sectorial drawback comes from the Oil Refining Industry which contracted by 27.7% in 2017 largely due to the effects of state ownership of the country’s major refineries and the associated inefficiencies. The cement industry also contracted by 2.2% due to the slow recovery in allied industries that should drive demand for the commodity. The construction industry which is a major driver of cement demand is only on fragile recovery with a growth of only 1% in 2017 while government spending on capital expenditure is capped by the widening fiscal deficit. The slow recovery in construction driven by weak fiscal spending on CAPEX also led to the contraction in Quarrying and other Minerals (-1.12%).

Other growth constraints affecting cement manufacturing include the contraction in the real estate industry (-4.27%). Structural reforms particularly the amendment of the Land Use Act will be required to help Nigeria meet its housing needs and unlock the potentials of the sector.

The slowdown in Information and Communication was largely driven by the contraction in telecommunications and information services (-2.04%). The telecommunications industry in Nigeria obviously needs new thinking to unlock a new wave of growth and investments.

The Bright Spots

Figure 2: GDP Per Capita

Source: Source: World Bank, NBS, Agusto & Co.

Despite its marginal contribution to aggregate GDP, the Metal Ores sub-sector gets our vote as the brightest spot in 2017 GDP numbers. We are of the opinion that the growing political rhetoric in the solid minerals industry has been evenly matched with the requisite reforms to help unlock value. These reforms which have spurred investments in the solid minerals industry have led to the 21.4% year-on-year growth in the Metal Ores sub sector. However, there is still a need to follow through on reforms that will help address other structural issues constricting growth in the sector such as property rights and conflict resolution.

On the face of it, Agriculture which posted a 3.45% growth in 2017 will pass off as a bright spot. However, when adjudged with 2016 growth numbers, (4.11%), the slowdown in the Agriculture sector could lead to new worries for policy makers. Security concerns in the food producing middle belt states further exacerbate these risks in 2018.

Another bright spot was the construction sector which recorded growth, albeit a 1% marginal rise. Construction is quite a germane sector for two major reasons. Firstly, it’s a labour intensive sector and could help Nigeria meet its job creation ambitions. Secondly, construction, could help Nigeria correct its debilitating structural bottlenecks especially in infrastructure. To help Nigeria achieve these benign objectives in construction, two things will have to happen. Firstly, the government will have to spend more on infrastructure (a best case scenario being 2.5% of GDP). But sadly, the current fiscal realities imply that it will be a big hurdle to meet this target. Thus, the government will have to look at the second alternative, which is to concession major infrastructural projects to attract funding to the sector.

Overall, Nigeria requires a Chinese styled double digit growth model which incorporates job creation with economic growth to drive inclusive growth. Secondly, as a base, Nigeria’s GDP growth rate must surpass its population growth rate. This will require bold reforms that challenge the current statist economic model. For now, Nigeria’s economic resurgence will have to be hinged on a wing and a prayer for higher oil prices.

Notes:

Nigerian Bureau of Statistics: Draft Q4 GDP – 2017
Nigerian Bureau of Statistics: Sectoral VAT: Q1-Q4 FROM 2013 – 2017
Agusto & Co: Economic Newsletter – Nigeria’s GDP Rebasing… Bigger but not better