Smarting from the bitter pills served in the outgoing year in different facets of life, many Nigerians desire a big break and look forward to a very prosperous year in 2020. But virtually all the indices from governance, fiscal, monetary policies, to mention just a few show things do not bode well for the economy. Ibrahim Apekhade Yusuf and Charles Okonji examine the issues
For Azubuike Okoro, a middle age man who lost his job at one of the new generation banks years ago and now works shifts at a printing press in uptown district in Somolu, Lagos, year 2019 was to say, the least, a mixed bag of sorrows and misfortunes. He began the year on a sore note, as he lost his lifesavings which he had been keeping to offset his kids’ fees to some phony business schemes. While he was still trying to wriggle out of that ugly situation, he lost his aged mother who was depending on him for sustenance just as his landlord gave him eviction notice as he owed arrears in rents. He searched everywhere for succour to no end.
However, gazing listlessly into space as he shared his tale of woes with our correspondent on a sunny Thursday afternoon, he was nonetheless optimistic that the year 2020 was going to be a bright year for him indeed.
Okoro’s case typifies the growing optimism being expressed by many Nigerians, who despite obvious challenges of the past 12 months are hopeful of better things to come.
While majority of Nigerians are overly optimistic about the prosperity of the coming year, a few discerning Nigerians and external bodies rather than shout Eureka, want the populace to manage their expectations very well as a lot of things may not necessarily add up. Talk of forlorn hope.
2020 outlook from Rating Agencies
Scores of ratings from different groups, chief among which is Fitch Ratings for 2020 has revised the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable, and affirmed the rating at ‘B+.’
Specifically, Fitch Ratings states that a combination of slowing economic growth, sustained low interest rates and unprecedented levels of indebtedness will broadly influence the global credit outlook in 2020.
Based on key ratings drivers, the Economic Outlook revision for 2020 reflects the increasing vulnerability from the current macro policy setting, raising risks of disruptive macroeconomic adjustment in the medium term amid continued real appreciation of the naira.
A sharp devaluation of the exchange rate under the current policy framework would stoke macroeconomic volatility and significantly weaken some of Nigeria’s key credit metrics, including its GDP per capita in US dollars and its share in world GDP.
The substantial real appreciation of the naira over the last year appears uncorrelated with macroeconomic fundamentals and is set to continue, driven by high inflation. Commodity terms of trade have deteriorated somewhat and will decline further, weighed down by lower oil prices. However, Nigeria’s real effective exchange rate has surged by around 20% since April 2018 and is now close to its high reached in mid-2016, prior to the exchange-rate devaluation in the wake of the oil-price shock.
Fitch expects the current account (CA) balance has shifted to deficit from a long-standing surplus, pointing to deteriorating macroeconomic imbalances and adding to external vulnerability.CA will record a deficit of 1.6% of GDP in 2019, its second-weakest level in 24 years, after a surplus of 2.6% in 2018; Fitch forecasts the CA deficit will moderate to an average of 0.7% of GDP in 2020-2021.
FX reserves will average 4.7 months of CA payments over 2019-2021, down from 6.1 months in 2018. This will still be much higher than the forecast ‘B’ median of 3.5 months, but reliance on short-term financial inflows – particularly into OMOs – for building reserves and a significant portion of reserves pledged in swaps mean that Nigeria’s liquid foreign assets offer only a modest liquidity buffer against external shocks.
Fitch projects an average GDP growth of 2.4% in 2019-2021, well below the ‘B’ median of 3.4% and the five-year average demographic growth rate of 2.7%. The prospects for supply-side, fiscal and exchange-regime reforms that could tackle the major constraints for Nigeria’s credit profile are weak, as reflected by the record in recent years. Emerging rivalries within the ruling APC party, possibly sparked by early dissensions over the 2023 succession to President Muhammadu Buhari, could hamper policy-making.
Like Fitch Ratings, Vetiva Research shows a delicate sprout. Citing outcome of 2019 sub optimal performance, Vetiva’s outlook report highlights how several challenges facing the real sector (ranging from inadequacies in power supply, budget implementation and transport infrastructure) have capped Nigeria’s economic growth.
The group however expressed hope that it is looking forward to a better capex performance in 2020, underpinned by the government’s drive to revert the budget plan to a normal (January-December) cycle, coupled with less political distractions. While we believe a normal budget cycle would facilitate a better capex spend in 2020, we posit that a suboptimal revenue performance could dilute this benefit.
Nigeria can expect modest growth in 2020 at 2.4% year-on-year just as envisaged by IMF at 2.5% year-on-year, driven by sturdier growth in agriculture.
“On the flipside, we believe oil sector growth would slow to 3.0% y/y in 2020 from 4.5% y/y in 2019, given our underwhelming outlook for oil investments. Overall, while we expect Nigeria’s economy to strengthen in 2020, we opine that this growth is rather a delicate sprout, as shocks, such as lower-than-expected crude prices and disruptive policies, could dwindle our growth projections,” Vetiva Research stated.
Veracity of Fitch Ratings
Nigeria does not publish consolidated fiscal data on a general government basis, which complicates the assessment of fiscal performance. But Fitch produces its own estimates for general government fiscal metrics based on disaggregated data on federal, state and local government revenue, spending and debt published by the Nigerian National Petroleum Corporation (NNPC), the CBN, the Debt Management Office (DMO), the Budget Office of the Federation (BOF), the National Bureau of Statistics (NBS) and the Office of the Auditor General for the Federation (OAGF).
LCCI 2020 outlook
While attempting a prognosis of the year 2020 outlook, Dr Muda Yusuf, Director General, Lagos Chamber of Commerce and Industry, in a statement obtained by our correspondent expressed blessed assurances of a brighter year but urged caution all the same.
In his assessment of the broader economy, Yusuf said, economic growth may remain subdued at around 2% by 2020 as consumer demand, as well as private sector investment, will most likely remain weak, a development, which resonates with the position of World Bank and the International Monetary Fund (IMF) that growth will prime at 2.1% and 2.5% respectively, which is below the population growth rate of some 3%, implying per capita income will contract further, making more Nigerians poorer.
“Amidst continued global slow growth and trade wars, we expect growth to be slow albeit stable in 2020 in the face of implementation of recent policy measures by the government. We note that the Nigerian economy remains susceptible to external shocks most especially oil price fluctuations. Thus, we reiterate that government as a matter of urgency must intensify efforts in diversifying the productive base to other high-impact and growth-driving non-oil sectors like agriculture, manufacturing and services.”
For Nigeria to achieve strong growth of about 6-8% that is needed to effectively tackle poverty and unemployment, the LCCI boss urged economic managers and policymakers to embrace structural reforms such as deregulating the oil & gas sector; harmonising the multiple exchange windows, privatising redundant state assets, fixing infrastructural problems of poor power supply and bad roads.
These reforms, he maintained, will in no doubt deepen investor confidence and make the country a better destination for private investment.
According to the economist, headline inflation is expected to trend higher in 2020 driven by myriads of factors such as implementation of new minimum wage which will stimulate aggregate demand; continued closure of the land border; higher VAT rate of 7.5%; early disbursement of funds for budget implementation following the return of the budget cycle between January – December cycle and negative real return in fixed income market which disincentivizes investment.
The CBN is expected to maintain status quo by continuing to inject liquidity in the currency market to protect the local currency at current levels against the US dollar. However, its ability to intervene in the foreign exchange market could be limited if external reserves sustains its downward trend which could be triggered by lower oil prices and weak investor confidence.
The country’s debt profile is expected to trend upwards by 2020 on approval of $3 billion credit facility from World Bank for power sector reforms and based on possible ratification of $29.96 billion loan request for infrastructural development fueled by wider fiscal deficit of N2.7trn to increased appetite for government securities by institutional investors following their exclusion from OMO.
However, the rising indebtedness of the economy calls for concern as increased debt stock failed to stimulate neither growth nor infrastructural development. Given Nigeria’s revenue challenges, the country will continue to spend a large chunk of its earnings to service debt.
According to analysts, from policy perspective, the prolonged closure of the land borders will further add impetus to agricultural output in 2020. They were however, quick to add that risk factors to their prognosis include security challenges in the North-east zone, a major food producing region in the country just as resurgence in herders-farmers clash in the North-central region. Overall, they expect the sector to sustain its upward growth trajectory in 2020.
In the area of manufacturing, the LCCI holds the views and very strongly too that the sector will continue to benefit big from CBN’s aggressive credit push to the real sector. “In furtherance, we see scope that competition between foreign and local producers will fade on prolonged closure of land borders. Also, early budget implementation for capital projects is positive for the sector. We are of the view that failure by government to fix structural constraints with regards to fixing power challenges and rehabilitating deplorable road networks, will perpetuate the poor productivity and performance of the sector.”
Besides, they note that performance of trade sector in 2020 will be shaped by the direction of government policies. In our opinion, continued protectionist measures of government will most likely limit growth in 2020.
“Elsewhere, the level of the country’s engagement in Africa Continental Free Trade Area (AfCFTA) scheduled to kick-off July 1, 2020, will also impact the performance of trade sector.”
Overall, the LCCI states that the potentials for growth of the Nigerian economy is immense but adds that in order to unlock these huge potentials, appropriate policies, regulations and institutions need to be put in place.
“Investment is critical to the growth of any economy. This is even more so in an economy that is struggling with revenue and other resources. Growth in private investment will boost employment, impact on revenue, promote social stability and enhance the welfare of citizens. Even more important is the promotion of economic inclusion through a right mix of fiscal, monetary and investment policies. Thus it is very fundamental that we create an enabling environment for investors [domestic and foreign] to create wealth and jobs for the country. There is also a need to deepen the consultative process between the policy makers and the private sector.”
Nothing to cheer in 2020
Like others who have offered salient views on the state of the economy in the coming year, Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company Limited, is also less enthusiastic about the polity.
Speaking at a public forum organised by the Capital Market Solicitors Association, where he ventilated his views on the Nigerian Economic Prospects in 2020, he cited low credit to the private sector, low investments as well as huge infrastructure deficit of over $300billion as factors that may further weaken the already troubled economy.
Pressed further, Rewane expressed fears that litigation is likely to increase because of the various policies, just as the government would continue to deal; with the issue of trust.
NACCIMA’s 2020 outlook
In the view of President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Saratu Iya Aliyu a lot would give in 2020, albeit positively judging by the swift passage of the 2020 Budget in line with the promises of the ninth Assembly to revert the budget cycle to a January to December period.
She was however quick to add that some of our concerns raised during the presentation of the budget proposal in October 2019, noted that the budget deficit continues to rise from N1.9 trillion in 2019 to N2.8 trillion proposed in 2020 just as foreign debt is estimated to increase by 64 per cent based on the 2019 budget, and 180 per cent based on the 2018 budget while capital expenditure is two per cent higher than the 2019 budget 34 per cent lower than the 2018 budget. Recurrent expenditure continues to rise, possibly due to the implementation of the proposed minimum wage.”
“NACCIMA notes that the government has adopted an oil price benchmark of $57 per barrel, a daily oil production estimate of 2.18 mbpd and an exchange rate of N305 per US Dollar for 2020. However, this statement appears at odds with Nigeria’s current crude oil output of 1.69 million barrels per day and according to the Minister of State for Petroleum which assures the Organisation of the Petroleum Exporting Countries (OPEC) of Nigeria’s commitment to compliance with OPEC’s new production quota of 1.774million barrels per day. This raises some concern on the revenue projections expected to fund the budget.”
Speaking in the same vein, Frank Onyebu, Chairman, Manufacturers Association of Nigeria, Apapa branch, in his projection, laments that he does not see any better horizon about 2020 economic outlook with the current situation in the country. “There is nothing that the government is doing that is giving me that silver lining. I have not seen it,” Onyebu argued matter-of-factly.
However, making a volte-face, he said the only good thing is that the budget has been passed on time. “I just hope that the government would realise the kind of problems the country would be plunged into if they don’t take positive actions to rescue manufacturing from total collapse. Now the country has signed AfCFTA and this means that we are going to be opening up our economy, knowing that power situation has not improved, and infrastructure has not been put in place.”
Manufacturers, he maintained, have been complaining about the issue of multiple taxation to no avail but regrets that the government does not seem to understand the need of harmonising tax, and instead VAT is increased. “All these things are the problems we are facing that if not tackled, 2020 would be a difficult one for the manufacturers.”
Emefiele’s priorities for 2020
Expectedly, while a lot of bookmakers are hard pressed to believe that a lot would happen for the better in the coming year, the Central Bank of Nigeria (CBN) governor, Godwin Emefiele, one man who controls the levers of the economy believes otherwise.
While listing the Bank’s priorities for 2020, he expressly stated that there would be support for greater economic growth, price stability and low inflation, even as he hinted on the continued tight monetary policy stance of the Bank and the establishment of a Bankers’ Charitable Endowment Fund.
Emefiele unveiled the bank’s plans for the next year while delivering the keynote address titled, “Strong Sustainable growth for the Nigerian Economy” at the 54th Annual Bankers’ Dinner organised by the Chartered Institute of Bankers of Nigeria (CIBN) in Lagos on Friday, November 29, 2019.
The governor announced the establishment of a Bankers’ Charitable Endowment Fund that will fund a major charitable initiative every year starting in 2020. According to him, the Bankers’ Charitable Endowment will directly fund strategic social programmes in states and local communities across Nigeria. He expressed the hope that the Fund would spur a trend across other industries and sectors to collaborate and work together to better the lives of all Nigerians.
Speaking on the developments in the country’s economic and financial sector, over the past year, and how they affect the macro-economic outlook for 2020, he said in spite of the positive growth the economy experienced, growth had remained slow due to “some structural constraints” in the economy.
According to him, the pace of growth, given Nigeria’s growing population, exposed the economy to shocks, such as changes in the oil price, and sentiments in the global financial markets.
Disclosing plans by the CBN to support the economic recovery and enable stronger growth for the country’s Gross Domestic Product (GDP), Mr. Emefiele said that the Bank would continue its current tight stance, particularly in view of rising inflation expectations.
“Though we will act to appropriately adjust the policy rate in line with unfolding conditions and outlooks, the CBN will continue to ensure that the policy interest rate is delicately set to balance the objectives of price stability with output stabilisation,” he explained.
Doing a recap of the highlights for 2019, Mr. Emefiele recalled that the country’s GDP had remained positive, adding that the positive growth in GDP had been driven by improvements in agriculture, oil and gas, manufacturing and ICT as well as the intervention programmes of the CBN, along with sustained supply of foreign exchange and stability of the naira.
He also attributed the decline in inflation to the Bank’s maintenance of a tighter monetary policy rate at 13.5 percent, and its efforts at improving local production of key staple items.
Speaking further, he said the Nigerian financial system was now stronger due to the fact that capital buffers and liquidity in the banking system have continued to improve.
According to him, industry-wide Capital Adequacy Ratio (CAR) had increased from 10.2 percent in December 2017 to 15.5 percent in September 2019. He added that the percentage of non-performing loans in the banking sector had reduced from a high of 14.7 percent in January 2017 to under 7 percent as at October 2019.
He equally disclosed that credit conditions in the banking system had improved supported by the CBN’s new policy measures announced in June 2019, which require banks to maintain a minimum 65 percent loan to deposit ratio. Furthermore, he said banks in the country are now able to recover delinquent loans from customers’ accounts in other banks, adding that the measures now placed Nigerian banks in a much better position towards supporting a stronger economic recovery. This, he added, had increased gross credit by N1.16 trillion between May and October 2019.
On the country’s External Reserves, the governor said the Bank’s effort at supporting domestic production in the agriculture and manufacturing sectors among other policies had continued to encourage foreign exchange inflows into the Nigerian market. According to him, over $60 billion worth of transaction had taken place since the inception of the Investors’ and Exporters’ window in April 2017, adding that Nigeria’s foreign exchange reserves were above $40bn as at October 2019, compared to $23bn in the same period in 2016.
The governor also highlighted the Bank’s effort in development financing, which he said the CBN had sustained in order to help support growth in critical sectors of the economy such as agriculture and the manufacturing sectors, through programmes such as the Anchor Borrowers’ Programme, the Commercial Agriculture Credit Scheme and the Bankers Committee Agri-Business/Small and Medium Enterprises Investment Scheme (AGSMEIS).
Alluding to the economic face-off between some countries, as well as the likely challenges the economy could face due to moderate oil prices, he stressed the need for Nigeria to build up the necessary buffers that would protect the economy from pressures in the global market. He then restated the need to boost local production and diversify the country’s export base.
“We should encourage Nigerians to consume goods that can be produced in Nigeria, knowing full well that a time will come when we may not have the foreign exchange to aid such activities, if we continue to rely on earnings from the export of crude oil,” he emphasised.
Recalling the country’s economic glorious past when the economy was heavily reliant on agriculture, with increased cultivation and exports of primary products such as cocoa, palm oil, cotton and groundnut, Emefiele posited that it possible to envision a productive Nigerian economy that is not reliant on exports of crude oil.
The governor urged all stakeholders to believe in Nigeria’s greatness, stressing that the country was blessed with abundant human and natural resources, which if truly harnessed would propel Nigeria into one of the world’s top 20 economies.
“We must redouble our efforts to continue to support actions by the monetary and fiscal authorities to diversify the base of the Nigerian economy through encouragement of made in Nigeria products.
“We must also consume what we produce and produce what we consume. We must discourage the propensity to import what can be produced in Nigeria. This is because if we do not reduce import, the same imports will kill us knowing full well that such activities do not aid our efforts to create jobs and support the growth of our local industries.
“If we choose to follow the trend of supporting imports of goods that can be produced in Nigeria, we will lose jobs, our industries will die and insecurity and other social vices in our land will continue to increase. We must choose this alternative path of improving domestic production, which will support growth of our local economy,” he charged.
As part of the Bank’s priorities for 2020, he said the CBN was determined to maintain its stable exchange policy stance in the near to medium term given the relatively high level of reserves. He said the Bank would also sustain these efforts in 2020 as part of our plan to reduce our financial exclusion rate to under 20 percent over the next year.
The governor said the Bank will also improve access to credit for farmers and SMES by deepening its intervention efforts through the Anchor Borrowers’ Programme, Commercial Agriculture Credit Scheme and the Real Sector Support Funds, amongst others. Similarly, he said the Bank, in pushing to improve access to finance and credit, would protect them from unfair banking and lending practices by maintaining oversight on the banks and other financial institutions.
In addition to making sure that financial institutions support the growth of the real sector, Mr. Emefiele said the CBN, working with the Nigerian Export Import Bank (NEXIM), improve access to the N500bn facility designed to support the growth of Nigeria’s non-oil exports.
While disclosing that the Bank, working with the fiscal authorities, will support the recovery of the economy, the CBN boss reiterated that Nigeria was open to business and urged investors to take advantage of the investment opportunities in Nigeria. He assured that investments in Nigeria would be duly protected by the authorities.
Like Vladimir and Estragon, the two characters in Samuel Beckett’s Waiting for Godot, would Nigerians get the expected reliefs promised by the government? Time will tell.
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