Nigeria: Another Recession Looms

By Akanimo Sampson

There is a high risk that Nigeria will cycle back into a recession in the new year if oil prices fall below $60 per barrel for any sustained period of time.

Those who have the technical know-how say the country’s economy has remained sluggish despite recovering from a recession in 2017. Growth remains below 2.0%, with per capita growth consistently falling since the inception of the incumbent administration in 2015.

What this tends to show is that there is lack of key reforms by the President Muhammadu Buhari/All Progressives Congress (APC) administration. By implication, this means growth has largely depended on the oil sector’s performance.

However, a recession is when the economy declines significantly for at least six months. That means there is a drop in the following five economic indicators: real Gross Domestic Product (GDP), income, employment, manufacturing, and retail sales. 

People often say a recession is when the GDP growth rate is negative for two consecutive quarters or more. But a recession, according to those who know better,  can quietly begin before the quarterly GDP reports are out. That is why some researchers always measure the other four factors. That data comes out monthly. When these economic indicators decline, so will GDP.

Usually, recession is underway when there are several quarters of slowing but still positive growth. Often a quarter of negative growth will occur, followed by positive growth for several quarters, and then another quarter of negative growth.

With negative growth recorded for the fifth consecutive quarter, some sources have said Nigeria’s economy is mired in recession. However slightly, the Buharinomics appears to be inching towards growth as even though the economy shrank by 0.52% in the first quarter of 2017, it represents an improvement compared to previous quarters.

Analysts suggest the slight improvement in GDP growth could mean the worst could be over for Nigeria’s economy. “The positive which can be taken from the figure is that the hemorrhaging has stopped, thus clearing the path to growth,” analysts at SBM Intelligence, a Lagos-based firm, commented in a note.

The negative growth rate since the start of last year has been mainly attributed to a drop in the country’s foreign revenues, following the fall in price of oil—Nigeria’s main export. But just as critical, a brief resumption in militancy in the Niger Delta, the country’s main oil and gas region, last year saw oil production levels tank to 20-year lows, making a bad situation much worse.

With a peace pact agreed with Niger Delta agitators, National Bureau of Statistics data shows an uptick in average oil production levels which have now reached 1.8 million barrels per day (mbpd)—the highest point since the first quarter of 2016—but still some way off desired levels of around 2.2 mbpd.

With the seeming uncertain 2019 contest for political power, the Federal Government has little headroom to manoeuvre if oil prices fall and compress revenues, of which 69% is now consumed by interest payments on debt.

The Buhari cum the APC administration has been struggling to boost revenues but has nonetheless expanded expenditure by increasing its borrowing. At the moment, interest repayments are beginning to put pressure on revenues and any fall in oil prices will trigger a fiscal crisis next year.

On a brighter side, the fear of a fiscal crisis might force the government to take their privatisation plans more seriously in the new year. A likely cash squeeze will forced the re-election seeking Buhari  to sell down some of the national assets to help fund fiscal expenditure in 2019.

Assets that are likely to be put on sale could be some of the joint venture stakes with the transnational oil corporations. These plans have been on the drawing board since 2015 without any progression but a fiscal crisis might just force the government to make a move on it. The Buhari administration will also consider selling some stakes and assets in the power sector and even in abandoned buildings that are littered across the country.

As some of those who have eyes are saying, there is equally a high risk of the local currency depreciating in 2019 with some estimates forecasting the naira trading at around ₦400 to the US dollar by the end of the first quarter of 2019. A continuous decline in external reserves — albeit remaining relatively strong — and falling capital inflows as well as oil price volatility will put pressure on the weak local currency and lead to its depreciation in 2019.

Regardless what religious leaders and institutions are forecasting at the moment, 2019 is likely to be a turbulent year for the country’s economy. The depth of the turmoil will largely depend on oil prices. 2019 is a year the Buhari administration has to undertake some painful reforms or risks continuous stagnancy and the consequent rising levels of mass poverty.

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