By Omoh Gabriel, Emeka Anaeto, Levinus Nwabughiogu, Emmanuel Elebeke & Susan Onuorji
ABUJA—Nigeria’s economy came under renewed tension, yesterday, as fresh reports on key fundamentals, including Gross Domestic Product, GDP; inflation, employment/ unemployment, capital importation, among others, were worse than expected.
National Bureau of Statistics, NBS, said, yesterday, that Nigeria’s GDP at constant basic prices, contracted in the second quarter 2016 (Q2’16) by 2.06 per cent after shrinking 0.36 in Q1’16.
A slump in crude prices, Nigeria’s mainstay, has depressed public finances and the value of the Naira, causing foreign exchange shortages. Crude sales account for about 70 per cent of government revenues.
But the Presidency has allayed the fears of Nigerians that the sharp drop in GDP, which had plunged the country into economic recession would not persist.
Compounding the impact of low oil prices, attacks by militants on oil and gas facilities in the southern Niger Delta hub, since the start of the year, has cut crude production by about 700,000 barrels per day (bpd) to 1.56 million bpd, against government’s 2016 budget assumption of 2.2 million bpd.
The statistics office said, yesterday, that annual inflation reached 17.1 per cent in July from 16.5 per cent in June, which is more than 10-year high, while food inflation rose to 15.8 per cent from 15.3.
Nigeria’s sovereign dollar bonds fell across the curve to their lowest value in more than two weeks after the NBS released its data.
The NBS figures showed Nigeria attracted just $647.1 million of capital in the second quarter, a 76 per cent fall year-on-year and 9 per cent down from the first quarter.
Nigeria’s economy was last in recession, for less than a year, in 1991, NBS data shows. It also experienced a prolonged recession from 1982 until 1984.
The naira remained at record low of N423 per dollar in the black market, as dollar shortages curb activity on the official inter-bank market where the currency was offered at rates as weak as 365.25 this month before gaining ground after Central Bank’s interventions.
The oil sector, the NBS said, contracted by -17.5 per cent year-on-year, compared with -1.9 per cent in the first quarter of 2016.
The non-oil sector contracted by -0.4 per cent year-on-year, compared with a contraction of -0.2 per cent recorded in the first quarter 2016.
For the non-oil economy, manufacturing contracted by -3.4 per cent, compared with -7.0 per cent in the first quarter of 2016.
The slower contraction is attributed to base effects as foreign exchange sourcing issues are biting hard on manufacturers and power shortage was at its peak in the second quarter.
Commenting on the NBS data, FBNCapital said: “There are no major surprises in this release as we expected a contraction in the second quarter of the year.
“Given the macro challenges, steep slide in oil prices, production shortages due to vandalism, foreign exchange sourcing issues in an import dependent country and hike in inflation, the negative reading was a foregone conclusion.
“Technically, given that Nigeria’s GDP has now showed a decline for two consecutive quarters, the economy is in recession.
“Although we expect to begin to see signs of recovery as we enter the fourth quarter, there is still a lot of work to do and delays in releasing capital vote could also delay the recovery.
“There is also a risk that revenue collection shortfalls may lead to capital expenditure cuts. Our 2016 GDP growth forecast is -1.2 per cent FBNCapital.”
Also reacting to the developments, Razia Khan, Chief Economist, Africa at Standard Chartered Bank, said: “The Nigerian economy contracted more deeply than we had expected in the second quarter.
“With a wider current account deficit, it remains important for Nigeria to maintain a credible policy response in order to attract the much-needed stabilising inflows.”
Officially in a recession – what next?
Analysts at CardinalStone Partners, a Lagos-based investment house, said: “With the improvement seen in the real output of a number of sub-sectors in the manufacturing sector (food, beverage & tobacco, textile, apparel and footwear production) and the slow-down in the rate of decline of financial services sector’s real output), we believe there’s some respite ahead as recent policy changes in Q2’16 (removal of subsidy and foreign exchange liberalization) may be working.
“However, in our view, these policies need to be complemented by an aggressive fiscal-side stimulation, including swift budget implementation and increase in foreign exchange supply.
“Also, the contraction in oil sector GDP which weighed very negatively on overall GDP must be addressed promptly so the benefit of a relatively higher oil price can reflect on our fiscal position.
“A decisive, immediate fiscal action on improving foreign exchange supply is important to complement monetary policy and ease interest rates, as current high interest rate on government treasuries is counterproductive for real sector growth.
“With just a month left in Q3’16, we are cautiously optimistic and, at best, expect real output to be flat. However, if significant progress is achieved in Q3’16, we may see positive real GDP growth in Q4’16”.
The economy as a whole expanded 0.8 per cent, compared with the previous quarter, according to NBS. That means Nigeria avoided a technical recession, Cobus de Hart, an analyst at NKC African Economics in Paarl, outside Cape Town, said.
But John Ashbourne, an economist at London-based Capital Economics Ltd., said: “Every engine has blown out.” The key point from today’s data is that there was a very poor performance across almost the entire economy.”.
While the government planned to stimulate the economy with a record N6.1 trillion budget this year, it delayed approving the spending plans as President Muhammadu Buhari haggled with lawmakers over allocations. The government collected N1.16 trillion in revenue, or about half of what it expected, in the second quarter compared with N1.27 trillion in the previous three months, the central bank said in a report.
Reacting on the basis of the constrained revenue and fiscal measures, Alan Cameron, an economist at Exotix Partners LLP, said: “There is a limit to what the federal government, with its limited tax collections and expenditures can really do at an economy-wide level. One obvious area of improvement would be the power sector.”
The slump in oil, the nation’s biggest revenue earner, as well as shortages of foreign currency and power, could cause the economy to shrink 1.8 per cent this year, according to the International Monetary Fund.
Ridle Markus, an Africa strategist at Barclays Plc’s unit in Johannesburg, said: “We are likely to see better growth numbers coming through in the third and fourth quarters, but it’s unlikely to make up for the really poor performance of the first half of the year.”
FG gives hope
The office of the vice president, which oversees economic policy, said in a statement that it expected a “better economic outlook” for the second half of 2016 “because many of the challenges faced in the first half either no longer exist or have eased.”
Adeyemi Dipeolu, a presidential economic advisor, in a statement, attributed the recession largely to a sharp contraction in the oil sector, caused by militant attacks.
The statement read: “The just released GDP figures for the 2016 second quarter by the National Bureau of Statistics, while confirming a temporary decline, has also indicated an hopeful expectation in the country’s economic trajectory.
“Besides the growth recorded in the agriculture and solid mineral sectors, the Nigerian economy in response to the policies of Buhari’s Presidency is also doing better than what the IMF had estimated, with clear indications that the second half of the year would even be much better.
“The just released data from the National Bureau of Statistics showed that Gross Domestic Product declined by -2.06% in the second quarter of 2016 on a year-on-year basis.
“A close look at the data shows that this outcome was mostly due to a sharp contraction in the oil sector due to huge losses of crude oil production as a result of vandalism and sabotage.
“However, the rest of the Q2 data is beginning to tell a different story. There was growth in the agricultural and solid minerals sectors, which are the areas in which the Federal Government has placed particular priority.
“Agriculture grew by 4.53% in the second quarter of 2016 as compared with 3.09% in the first quarter. The metal ores sector showed similar performance with coal mining, quarrying and other minerals also showing positive growth of over 2.5%. Notably also, the share of investments in GDP increased to its highest levels since 2010, growing to about 17% of Gross Domestic Product.
“The manufacturing sector, though not yet truly out of the woods, is beginning to show signs of recovery, while the service sector similarly bears watching.
“Nevertheless, the data already shows a reduction in imports and an increase in local produced goods and services and this process will be maintained although it will start off slowly in these initial stages before picking up later.
“The inflation rate remains high but the good news is that the month-on-month rate of increase has fallen continuously over the past three months.
“Unemployment remains stubbornly high which is usually the case during growth slowdowns and for reasons of a structural nature.
“The picture that emerges, barring unforeseen shocks, is that the areas given priority by the Federal Government are beginning to respond with understandable time lags to policy initiatives. Indeed, as the emphasis on capital expenditure begins to yield results and the investment/GDP numbers increase, the growth rate of the Nigerian economy is likely to improve further.
“As these trends continue, the outlook for the rest of the year is that the Nigerian economy will beat the IMF prediction of -1.8% for the full year 2016.
“The IMF had forecasted a growth of -1.8% for 2016, however, the economy is performing better than the IMF estimates so far. For the half year, it stands at -1.23% compared to an average of -1.80% expected on average by the IMF.
“What is more, it is likely the second half will be better than the first half of 2016. This is because many of the challenges faced in the first half either no longer exist or have eased.”
For the Minister of Finance, Mrs. Kemi Adeosun, this recession would be short-lived but stressed that the federal government was committed to stimulating the economy through its capital releases, social intervention programmes, import substitution strategies, tackling the oil production crisis in the Niger Delta and policies geared towards attracting foreign portfolio and direct investments.
Inflation at 11-yr high
NBS’ latest Consumer Price Index, CPI, which measures inflation rate, shows that inflation for the month of July at 17.1 per cent, climbed to its highest point since 2005, while representing 0.6 percentage point above the 16.5 per cent recorded in June.
It stated that the increases were recorded in all Classification of Individual Consumption by Purpose (COICOP) divisions, which contribute to the headline index reflecting higher prices across the economy.
The Bureau noted that the pace of the increase in the headline index was, however, weighed upon by a slower increase in three divisions; health, transport, and recreation and culture divisions.
The report indicated that the onset of the harvest season was yet to have a significant impact on food prices as the Food Sub-index increased by 15.8 per cent (year-on-year) in July, 0.5 per cent points lower from rates recorded in June.
However, it noted that prices increased at a slower pace across a few groups within the food sub-index namely Milk, Cheese and Eggs; Oils and fats; and fruits.
In addition, the NBS report stated that imported foods as reflected by the imported food sub-index increased by 0.4 per cent points from June to 20.5 per cent in July.
The report reads, “Energy and energy related prices continue to be the largest increases reflected in the Core sub-index. In July, the Core sub-index increased by 16.9 per cent during the month, up by 0.7 per cent points from rates recorded in June (16.2%).”
During the month, NBS noted that the highest increases were seen in the electricity, liquid fuel (kerosene), solid fuels, and “fuels and lubricants for personal transport equipment.
Lowest capital inflow ever
NBS also said that total value of capital imported into Nigeria in Q2’16 was estimated to be $647.1 million, which represents a fall of 8.98 per cent relative to Q1’16, and a fall of 75.73 per cent relative to Q2’15
This provisional figure, NBS said, would be the lowest level of capital imported into the economy on record, and would also represent the largest year-on-year decrease. It would also be the second consecutive quarter massive decline record.
According to the report, the continuing decline in the value of capital imported into the economy was symptomatic of the difficult period that the Nigerian economy is going through.
“The second quarter saw the economy enter into the first recession during the rebased period, according to the technical definition of two consecutive periods of decline, suggesting less profitable opportunities for investment,” said the report.
NBS noted that in Q2’16 there was considerable uncertainty surrounding future exchange rate policy, which may have deterred foreign investors.
The Bureau further recalled that the Naira was allowed to depreciate towards the end of the quarter, a factor said to have likely contributed to the record decline in capital importation.
NBS also reported that in Q2’16, the number of unemployed in the labour force increased by 1,158,700 persons, resulting in an increase in the national unemployment rate to 13.3% from 12.1% in Q1 2016, 10.4% in Q4 2015 from 9.9% in Q3 2015 and from 8.2% in Q2 2015.
In view of this, there were a total of 26.06 million persons in the Nigerian labour force in Q2 2016, that were either unemployed or underemployed, compared to 24.5 million in Q1 2016 and 22.6 million in Q4 2015.
Similarly, the number of underemployed in the labour force (those working but doing menial jobs not commensurate with their qualifications or those not engaged in full time work and merely working for few hours) increased by 392,390 or 2.61%, resulting in an increase in the underemployment rate to 19.3 % (15.4million persons) in Q2 2016 from 19.1% (15,02 million persons) in Q1 2016, 18.7% (14.42 million persons) in Q4 2015, from 17.4% (13.2 million persons) in Q3 2015 and 18.3% (13.5 million persons) in Q2 2015.
In Q2 2016, the labour force population (those within the working age population willing, able and actively looking for work) increased to 79.9 million from 78.5 million in Q1 2016, representing an increase of 1.78% in the labour force during the quarter. This means 1.39 million persons from the economically active population entered the labour force, that is individuals that were able, willing and actively looking for work. This magnitude of this increase between Q1 and Q2 2016 is smaller when compared to Q4 2015 and Q12016, which was an increase of 1.59m in the Labour force population.
Naira crumbles to 423/$1
Meanwhile, the naira fell to 423 against the dollar at the parallel market , yesterday, after the National Bureau of Statistics announced an official recession in the economy.
The naira opened at 418/$1 on the day, but slipped to 423 after the NBS announced the worst economic recession in 29 years.
The Euro and British pound traded at N461 and N535 at the parallel market, while the official market remained relatively unchanged.
Lukman Otunuga, FXTM research analyst, said the recession had brought about an undeniable feeling of disappointment in the economy, affecting the naira.
“An undeniable feeling of disappointment engulfed the Nigerian economy on Wednesday (yesterday) following the 2.06% contraction in the second quarter GDP which confirmed that the nation had descended into a technical recession,” he said.
“The signs of an imminent slowdown were already visible with the Central Bank of Nigeria’s reserves falling to 19 billion as the nation struggled to support its local currency.
“While Naira’s vulnerability was highly expected following the official floatation, external risks such as a resurgent Dollar has accelerated the devaluation of the local currency consequently pressuring the nation further.
“With inflation and unemployment hovering around worrying levels, the CBN has been placed under immense pressure to act which may weigh on investor sentiment,” he said.