Culled—Proshare
October 10, 2016/RTC Advisory Services
Nigeria’s Recession…
According to NBS data, the Nigerian economy has recorded two consecutive quarters of economic contraction…
In Q1 2016, GDP growth was negative (-0.36%) and recently released Q2 2016 data reflects a larger contraction (-2.06%)
The economic contraction is fairly broad…and includes both oil and non-oil sectors.
The oil sector contracted by 17.48% and non-oil sectors by 0.38%.
Virtually all major economic sectors are in recession…manufacturing, construction, trade, transport, hotels and restaurants, finance and insurance, real estate and government!!!
The only exceptions are agriculture and telecommunications!
Why Are We In Recession?
Lets first clarify the diversification issue
Nigeria’s GDP is quite diversified…so the problem is not structure of domestic production…
The issue is undiversified structure of government revenue and exports (FX) revenue…
Legacy Factors
- Policy Factors
- Political/Security Factors
Legacy Factors
Oil Dependency
For Government Revenue (79.8%, 75.4% & 72.3%) and Export (FX) Income (96.89%, 95.2% & 95.4%) in 2012, 2013 and 2014 respectively
Oil Price Collapse
From over $100 pb to $50
Low Sovereign Savings
Foreign Reserves down to $30bn @ 2015 from over $65bn in 2007
Political Risk in 2015 due to general elections
Effect on Foreign Direct Investment (FDI) and GDP Growth
Fiscal Leakages and Corruption
Reduced value-for-money from government spending
Policy factors
Governance Vacuum
No Cabinet for 7 months in 2015
Policy Vacuum
Lack of clarity over economic policy (which subsists till today)
Wrong Policy Choices
Especially FX policy (till June 2016) and downstream deregulation
No Strategy for Private Capital
Financial Sector Weakness
Weak Economic Cabinet
The consequence of policy factors above has resulted in low investor and market confidence from both domestic and foreign investors and impacted FX inflows, FDI, new domestic investment, capital markets, employment and economic growth.
Policy Options for Recovery
Leveraging Private Capital
Urgently enact PIB(s) and fast-track Incorporated JV strategy for upstream oil JV operations (and reduce government share)
Privatisation or concessioning of major/regional airports and refineries
High-level concerted PPP strategy for infrastructure and raising profile of ICRC and BPE
Deregulate downstream oil sector (as opposed to government raising petrol prices).
Consider government investment in public transport to assuage citizens’ pains.
Implementation of National Integrated Infrastructure Masterplan (NIIMP)
Channeling pension fund investment towards infrastructure and mortgages
Policy Refinements
CBN should immediately restore 95HS Code items (out of 680 HS Codes under the 41 banned items list) identified by MAN as critical raw materials for industry to “valid for FX” status
Taxation
VAT Increase: Necessary, but is this expedient due to economic recession? Can VAT increase be balanced with social intervention or deferred for 18 months?
Reduction of Corporate Tax rate may also be deferred for 18 months
For now policy should continue to focus on widening the tax net and effective tax enforcement
Procurement Reforms: Constitution of National Procurement Commission
Promote Exports
Refined Petroleum Products
Core policy required are full downstream petroleum sector deregulation and incentives for building private refineries
Agro-Manufacturing and Processing
Key issues are power, export incentives (especially resumption of the Export Expansion Grant (EEG), doing business reforms and access to finance
Mining
Solid Minerals reforms and global investor outreach signaling policy certainty and investor-friendly policy
ICT
Informal Sectors: Sports, Music, Film and Entertainment
“Privatise” sports administration
Legislative Action: Priority Legislation
· Federal Competition and Consumer Protection Bill
· Petroleum Industry Bills (PIB(s))
· Review of Companies and Allied matters Act (CAMA) and Investment and Securities Act (ISA)
· Nigerian Railway Authority Bill
· National Transport Commission Bill
· Nigerian Ports and Harbours Authority Bill
· Federal Roads Authority Bill
· National Roads Funds Bill
· Secured Transactions in Movable Assets Bill
· Nigerian Independent Warehouse Regulatory Agency Bill
· National Development Bank of Nigeria Bill
· Land Use Act*
Outlook for 2017
Politics: Towards 2019
Three (3) Political Economy Scenarios
Conclusions
Our projections do not suggest a radical improvement in economic performance in the short term; though the economy may come out of recession, the period of low growth may persist.
There remains some scope for enhanced economic growth dependent on a more pro-reform, pro-private capital policy posture. The main catalyst for such policy moderation may be external pressure.
Political risk may begin to rise again in the course of 2017/2018 as the 2019 elections draw nearer and political calculations increase in fluidity.
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