March could mark end to Nigeria’s economic slump

The curtain appears to be drawing on the most painful economic crisis in Africa’s most populous nation, as green shoots of recovery sprout across several pockets of an economy the International Monetary Fund (IMF) has tipped to grow one percent in 2017.

Declining inflation, rising external reserves on the back of higher oil volumes and better price, a surprise 20% appreciation of the naira, expanding agricultural output and an improving Purchasing Manager’s Index (PMI) are part factors raising hopes that the current month may signal an end to the country’s economic recession.

In particular, analysts pointing to core inflation rate slowing for the third consecutive month, are now comfortable in seeking a cut in the monetary policy rate when the MPC meets next week.

“There are signs we have reached the bottom and economic growth now beckons,” says Kyari Bukar, chairman of private sector think-tank, the Nigeria Economic Summit Group (NESG) which draws membership from virtually every sector of Africa’s largest economy.

“There has also been a lot of activity in the agricultural sector, and with the harvest period a month or two away, we will should see that rub off significantly on economic growth,” Bukar added by phone.

Agriculture has been the high-flier in an all-round bleak economy and rice farming is particularly enjoying a boom— a rare bright spot in a country enduring its worst economic crisis in a quarter of a century, thanks to funding interventions by the Central Bank, under the Anchor Borrowers Programme.

The sector grew o.56 percent points to 4.03 percent (year-on-year), in the fourth quarter of 2016 from 3.48 percent in the corresponding period of 2015. In contrast to the economy which contracted 1.5 percent in 2016, agriculture grew 4.1 percent.

In addition, headline inflation reversed a 15-month upward trend in the month of February, notching 17.8 percent, from 18.7 percent in January, the National Bureau of Statistics (NBS) said Tuesday.

“This encouraging sign of returning price stability could boost investor sentiment as the nation tackles a fierce currency crisis and dollar shortages,” said Lukman Otunuga, an analyst at forex brokerage firm, FXTM.

“It must be kept in mind that Nigeria remains on a quest to achieving economic sustainability and such may become a reality if the current upside momentum holds,” Otunuga added.

Analysts at investment bank, FBN Quest forecast a much steeper inflation decline in March (16.6 percent), compared to February on base effects.

“The disappointment was the pick-up in food price inflation, to 18.5 percent y/y from 17.8 percent,” FBN Quest analysts said in a March 15 note to clients.
Crude oil prices have also found their base level at higher than $50 dollars, thanks to OPEC’s output cut which took effect in January.
However, Charles Robertson, chief economist at investment bank, Renaissance Capital is cautious.
“With oil dropping like we saw in the last one week; we should have some doubts about how long CBN governor, Godwin Emefiele will inject funds into the parallel market,” Robertson said through his twitter handle on March 15.
The Federal Government’s peace talks in the Niger-Delta have also helped ease tensions in the oil-rich region, where oil production was sabotaged by militant attacks, while a 225 percent increase in the presidential amnesty programme to N65 billion in 2017 from N20 billion in 2016 is sure to appease the disgruntled militants.
Oil production has recovered to around 2 million barrels per day, according to state-owned oil company, Nigerian National Petroleum Corporation (NNPC), while government targets 2.5 million barrels daily by 2020, as stated in the Economic Recovery and Growth Plan.
If the oil market dynamics on the domestic and international front remain favourable, analysts at the Bismarck Rewane-led Financial Derivatives Company (FDC) say they expect the country’s external reserves to maintain its upward trend.
Gross external reserves rose to its highest level in a year to $30.04 billion, a reserve reserve accretion of US$6bn since end-October 2016.
“Higher external reserves will reduce speculative attacks on the currency and enable the CBN to efficiently meet forex demand through forward auctions,” FDC analysts said in a March 14 note to clients.
“This will also strengthen the currency at the parallel market,” they added.
Meanwhile, the manufacturing sector, which has been in recession since 2015, is also tipped to expand, according to Femi Jacobs, the chairman of the Manufacturers Association of Nigeria (MAN).
“The recession is bottoming out, as evidenced in the slowing contraction in the fourth quarter of 2016 and an improvement in February’s PMI reading,” Jacobs said.
“The new FX policy implemented by the CBN could boost productivity and drive an expansion in the manufacturing sector, though much would rely on sustainability,” Jacobs said by phone.
Despite posting negative growth of 2.54 percent in the fourth quarter of 2016, manufacturing output saw an improvement relative to the decline of 4.38 percent recorded in the third quarter and this time, four of the 13 activities under manufacturing recorded growth in Q4 2016 compared to three in Q3 2016.
Seven of the activities nevertheless, performed better than in Q3 2016.
The Purchasing Managers Index (PMI) for the month of February jumped to 50 index points from 48.6 in January, a development that Gregory Kronsten and Chinwe Egwim, both of FBN Quest, say points to a slow pickup in economic activity.
Another source of positive sentiments is derived from the commencement of the Lagos-Ibadan Rail Project awarded to China Civil Engineering Construction Corporation (CCECC) at the cost of $1.5 billion (about N458 billion), which had stalled under the previous administration.
The completion target is December next year, according to Vice President Yemi Osinbajo, and when on stream, the speed rail would carry about one million passengers per annum, while freight traffic along the route is also expected to hit two million metric tonnes cargoes per annum.