The Nigerian economy effectively entered into recession in the third quarter of 2015. Throughout 2016, Nigeria reeled in recession that threatened to slide into a depression. However, in the second quarter of 2017, Nigeria’s economy grew by 0.72 percent and that ended the recession. The economy has since continued on a growth trajectory.
During the recession, or stagflation as other experts saw it, unemployment rose, output fell and government borrowing surged. Inflation continued to rise and citizens’ purchasing power diminished. Indeed this affected production and the demand for goods and services.
Nigeria’s economy, according to submission from the Central Bank of Nigeria (CBN), was plunged into recession largely due to three external shocks, namely: Significant fall in oil prices from an average of about $110 per barrel to as low as $28 per barrel; normalization of monetary policy by the United States’ Federal Reserve Bank, which led to a stoppage of an injection of about $85 billion per month into the global economy; and geopolitical tensions amongst critical trading routes and partners around the world.
But there were also local shocks like the dwindling capacity of local manufacturers, poor savings for the rainy day when Nigeria had surplus earnings from crude oil sales and large scale pilfering of government funds by political actors both at the federal and state levels.
There was also the issue of delayed cabinet appointments by President Muhammadu Buhari in 2015, when he assumed office, an issue that caused a lull in seamless government operations, critical to oiling the wheel of economic progression. Reports from the CBN also indicated that these shocks had adverse effect on Nigeria’s economy including: remarkable slowdown in economic growth, culminating in five consecutive quarters of GDP contraction bottoming at -2.3 per cent in the third quarter of 2017, having grown by nearly 7 percent in previous years; rising inflation, peaking at over 18 percent in January 2017, from as low as 9 percent in January 2016; persistent increase in unemployment rate to 16.2 percent in the second quarter of 2017, from 8.2 percent at the same period of 2015; significant depreciation of the exchange rate, reaching N520/$1 in February 2017, from as low as N155/$1 in June 2014; depletion of FX reserves, bottoming at about $23.6 billion in October 2016 from as high as $40 billion in January 2014; substantial decline in average inflows of foreign exchange into the CBN by over S$2.3 billion every month over a three-year period; and strain on the financial markets with declines in key money market, capital market and foreign exchange market indicators.
The report also showed that though the banking industry remained largely robust, its resilience weakened somewhat as follows: NPLs deteriorated in line with the difficulties of the macroeconomy; and the banking system exposure to foreign loans threatened to undermine their health.
On the fiscal side, there was constrained fiscal space leading to larger fiscal deficits and rising debt profile, although the debt to GDP ratio remained significantly robust and below the 30 percent threshold. Also given the sharp drop in oil prices, Federation Account Allocations to States dropped by an average of about N2 billion monthly per State, which partly explains their inability to meet some basic recurrent expenditures including payment of workers’ salaries. The CBN governor, Mr. Godwin Emefiele, in a speech delivered at the 25th seminar for Finance Correspondents and Business Editors held in Uyo, Akwa Ibom State recently reiterated that “given a more than 60 percent decline in oil price and its attendant effects on foreign exchange and fiscal earnings it is not surprising that our economy suffered so gravely.” Oil accounts for over 90 percent of our exports and nearly 70 percent of fiscal revenue. Represented by the Deputy Governor, Corporate Services, Mr. Edward Adamu, Mr. Emefiele also observed “the structural imbalance of the Nigerian economy with over reliance on imported goods added to the problem,” noting that “while growth declined, the rise in inflation was inevitable as falling exchange rate and rising foreign prices passed through directly to domestic prices.”
In the light of these difficult economic environments, the CBN took a number of proactive measures many of which were, at the time, vigorously criticized but which helped Nigeria exit the recession. These policy measures, according to Mr. Emefiele included the following: a cycle of monetary policy tightening to curb inflation using increasing Monetary Policy Rate (MPR) and aggressive Open Market Operations. This saw the MPR retained at 14 percent all through the period of recession till date. This helped pushed inflation down to about 13.34 percent as at end of Q1, 2018.
On the management of external reserves, the CBN adopted demand management through the restriction of FX for import of 41 items, which it believed could be produced locally. This also paid off as local capacity of some of those restricted items rose. For instance, Nigeria added in excess 3 million more metric tonnes of rice to its local production and counting. With the intervention of the CBN, Nigeria may be a net exporter of rice by 2019 as it would have surpassed its annual consumption requirement of 6 million metric tonnes through local rice production.
On exchange rate management, CBN took a number of actions to stabilize the exchange rate by checkmating speculators, bettors, round-trippers and rent-seekers. It introduced the NAFEX and the Investors-Exporters FX Window to increase market transparency and FX inflows. The investors-exporters window now witnesses monthly inflows in excess of $2.2bn.
The CBN has also sustained the weekly interventions in FX market by making FX available for invisibles, SMEs, and Retail Secondary Market Intervention Sales (SMIS).
In Development Finance, the Bank continued its financing activities in key high-impact sectors like Power, Aviation, Education, MSME, Agriculture, including CACs, ACGS, NIRSAL, the Anchor Borrower Programme of which over N43.92 billion has been disbursed to active farmers, etc.
In light of these and other policy responses, the economy has turned positive. For example GDP recovered after five quarters of continuous contraction recording positive growths of 0.7 and 1.4 percent in quarters two and three of 2017, respectively, and signaling an exit from the recession; inflation declined from a peak of 18.7 percent in January 2017 to 14.3 in December 2017; exchange rate appreciated significantly from over N525/ $1 in February 2017 to about N360/ $1 today, tapering premium across various windows and segments of the market; FX Supply has improved since the establishment of the I&E Window, with autonomous inflows of over $20 billion through this window alone from April 2017 to date; and FX Reserves has recovered significantly from a low of just over US$23 billion in October 2016 to about $47.37 billion as of 5 April 2018.
Other gains according to CBN include; improvement in the World Bank’s “doing business indicators” for 2018 as Nigeria rose 24 places to rank 145 out of 190 countries.
This feat also largely reflected in the CBN’s work on establishing the National Collateral Registry and Credit Reference Bureaus, both of which increased access to finance; significant boost in local production, which is partly due to the CBN’s development finance efforts and the dogged implementation of its FX policies.
Today many local manufacturers are reporting major boosts to their revenue and profit.
The CBN, however, wants these achievements sustained. It recommended a number of steps. Mr. Emefiele recommends we must all remain vigilant on the economy. “Those of us who have been entrusted with leadership and policymaking responsibilities must neither become complacent nor over-confident. We must strive to improve and sustain the same policies that has gotten us this far.
“For one, our import bill may have fallen but our manufacturing and agriculture sectors still have a long way to go if we must attain self-sufficiency in those sectors. We must not be quick to discard the restrictive measures which aided our recovery simply because the metrics have improved,” he noted. Continuing, he said the CBN would continue to fine-tune its policies and strategies based on its understanding of evolving developments and supported by in-house technical analysis and simulations.
In the area of Development Finance, the CBN governor assured the bank “will continue to provide access to muchneeded credit to sectors with the potential to create jobs on a mass scale. In this regard, we will explore opportunities to expand the highly-successful Anchor Borrowers’ Programme to other crops and States. In order to continue our gains in local production and help boost non-oil exports, we are in the process of finalizing the creation of a N500 billion fund with the Nigeria Export-Import Bank (NEXIM) to assist local manufacturers interested in nonoil exports,” he disclosed.
In Monetary and Exchange Rate Policy, he said the Bank had signaled from the last Monetary Policy Committee (MPC) that it would sustain the tight policies that have helped rein-in inflationary pressures.
According to him, that was the reason the CBN kept the Monetary Policy Rate (MPR) at 14 percent. “We will also continue the transparency and evenhandedness that has attracted inflows of FX into the country while keeping FX supply to the market adequate” he noted.
On the basis of the aforementioned policies, and barring any unforeseen shocks, Emefiele said that the CBN expects inflationary pressure to continue to ease, stressing that this could return to very low double digit or high single digit levels during the year. He also expressed confidence that the FX Reserves will continue to grow, noting that following recent accretion, FX Reserves may be about $50 billion sometime later in 2018, just as he noted that economic recovery would consolidate.
As the sentiments improve in the macroeconomy and supported by proactive monetary, trade, industrial and fiscal policies, he said the Bank expects a continued uptick in GDP growth with a positive spillover to improved unemployment rate.
“As policies to strengthen the agricultural and industrial sectors become more emergent, growth in these sectors will rise, further bolstering overall economy” he said.
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