The economy may be on its way out of recession. Besides the International Monetary Fund (IMF) prediction of 0.8 per cent growth by the end of the year, the feedback from critical sectors of the economy shows that the boom time is near. Improved access to foreign exchange, rising crude oil production and upbeat in the manufacturing sector are signs that the recession may not last beyond the third quarter as predicted by the Central Bank of Nigeria (CBN), writes COLLINS NWEZE.
If the latest International Monetary Fund (IMF) Report on Nigeria is anything to go by, the country may be on the way out its first recession in three decades. The IMF report, which is positive, has given hope of economuic recovery.
The IMF is not the only institution that is upbeat about the Nigerian economy in the months ahead, the performance of key sectors within the economy and the improvement in foreign exchange (forex) access to both retail and wholesale users are also pointers that better days lay ahead.
In the Purchasing Manager’s Index (PMI) for July released last Wednesday by the Central Bank of Nigeria (CBN), the statistics showed an expansion in manufacturing activities for the fourth consecutive month. The non-manufacturing sector growth also entered the third month.
The sustained development in PMI readings since the turn of the second quarter coincides with the period the economy recorded improvements in forex liquidity and fiscal spending. That was as a result of rebound in oil earnings and external reserves, which are attributable to largely stable oil prices and increase in production volumes as well as increased flexibility in the CBN’s forex policy.
The July manufacturing PMI grew from 52.9 points in June 2017 to 54.1 points in July – the highest level since the CBN started the data series in 2014. The major drivers of the expansion were: production level (59.3 points), new orders (52.7 points), supply delivery time (51.3 points), employment level (51.8 points) and raw materials inventory (53.6 points), sub-indices which grew 1.1 percentage points, 1.7ppts, 1.0ppt, 0.7ppt and 1.3ppts.
The outcome of the enhancement in business sentiment was evident in 10 of 16 sub-sectors, which recorded growth in the period. They are: Appliances/components, computer/electronic products, cement, primary metal, chemical/pharmaceutical products, food, beverage & tobacco products, textile, apparel, leather/footwear, printing & related support activities, paper products, electrical equipment and transportation equipment all expanded.
However, petroleum/coal products, fabricated metal product, furniture/ related products, non-metallic mineral products and plastics/rubber products declined.
Likewise, the non-manufacturing PMI rose to 54.4 points (compared to 54.2 points in the previous month – June 2017) after two consecutive months of progress. The composite index was buoyed by increases in business activity (56.8 points), new orders (55.1 points), employment level (54.0 points) and inventory (51.9 points).
Accordingly, of the 18 non-manufacturing subsectors, 16 recorded growth.
Explaining the results, Managing Director of Afrinvest West Africa Limited, Ike Chioke, said a composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding, 50 points indicates no change and below 50 points indicates that it is generally contracting.
He said in an emailed report: “The positive trend reveals optimistic perception of manufacturers and business owners for the second half of the year on account of forex market flexibility and stability in cyclical anchors of the business cycle – oil production and prices – as well as economic development plans of the federal government; thus, further reaffirming our positive outlook for growth in 2017 (+0.8 per cent for 2017 fiscal year growth forecast).”
Nonetheless, he said that the Gross Domestic Product (GDP) growth below three per cent will have little impact on quality of life in the country as per capital income growth is likely to remain negative; hence, the need for more constructive policymaking to address structural constraints to high and sustainable growth – high interest rate, forex market distortion and low investment spending.
Equities
The equities market has equally benefitted from increased foreign exchange inflows into the economy. The All Share Index advanced on the last four trading days of last week, gaining 1.5 per cent week-on-week to settle at 37,425.56 points on Friday while year-to-date gain expanded to 39.3 per cent.
Investors also accumulated N194 billion as market capitalisation advanced to N12.9 trillion, while the activity level improved as average volume and value traded rose 26.5 per cent and 319.3 per cent to N502.6 million units and N22.8 billion respectively.
Chioke said: “Although valuation multiples have increased since the macro-themed rally started in April, that does not imply the market is overvalued and we remain convinced there are opportunities for investors to key into.
“Thus, even as the earnings season draws to a close, we expect the broader index to sustain the current momentum to deliver a positive return in the last five months of the year, albeit moderate in the single digit range.”
Forex market
Last week, the CBN conducted its weekly SMIS sales of $100 million in order to buoy forex liquidity whilst activities in other segments of the forex market recorded marginal improvements. At the official market, the CBN continued to keep rate steady, as the Naira maintained the penultimate Friday’s close of N305.65/$1 on the first session and appreciating slightly to N305.55/$1 at the weekend.
Meanwhile, at the parallel market, the Naira touched another 2017-high of N363.00/$1.00, both on Tuesday and Wednesday, but depreciated to N365.04/$1.00 on Thursday, eventually closing the week at that level, indicating a flat week-on-week close.
During the week, activities at the Investors & Exporters window remained robust, with $994 million recorded (as at Thursday) compared to $1 billion the previous week.
IMF on Nigeria
Between July 20 and 31, the IMF team, led by Amine Mati, was in the country to discuss recent economic and financial developments, update macroeconomic projections and review reform implementation.
At the end of the visit, Mati, who is the Senior Resident Representative and Mission Chief for Nigeria at the IMF, issued the following statement: “The economic backdrop remains challenging, despite some signs of relief in the first half of 2017. Economic activity contracted in the first quarter of the year by 0.6 per cent, mainly as maintenance stoppages reduced oil production. However, following four quarters of negative growth, the non-oil economy grew by 0.6 per cent (year-on-year), on the back of a rebound in manufacturing and continued strong performance in agriculture.
The various indicators suggest an uptick in activity in the second quarter of the year. Helped by favorable base effects, headline inflation decreased to 16.1 per cent in June 2017, but remains high despite tight liquidity conditions.
The IMF said that preliminary data for the first half of the year indicate significant revenue shortfalls, with the interest-payments to revenue ratio remaining high (40 per cent at the end of June) and projected to increase further under current policies.
The high domestic bond yields and tight liquidity continue to crowd out private sector credit. Given Nigeria’s low growth environment and the banking system’s exposure to the oil and gas sector, non-performing loans increased from six per cent in 2015 to 15 per cent in March 2017 (eight per cent after excluding the four undercapitalised banks).
The government has started implementing a number of important measures to steer the economy out of the challenges. The Economic Recovery and Growth Plan (ERGP) is driving the diversification strategy and the security in the Niger Delta improved through strengthened engagement.
The new Investor and Exporter FX Window has provided impetus to portfolio inflows, increased reserves above $30 billion, and contributed to reducing the parallel market premium.
The IMF said the important steps have also been taken in implementing the power sector recovery plan, introducing a voluntary income and asset declaration programme and moving forward the 60-day national action plan to improve the business environment. Progress is also ongoing within the oil and energy sector through implementation of a new funding mechanism for cash calls.
It said: “However, the near-term vulnerabilities and risks to economic recovery and macroeconomic and financial stability remain elevated. At 0.8 per cent, growth in 2017 will not be sufficient to make a dent in reducing unemployment and poverty.
“Concerns about delays in policy implementation, a reversal of favorable external market conditions, possible shortfalls in agricultural and oil production, additional fiscal pressures, continued market segmentation in a foreign exchange market that remains dependent on central bank interventions, and banking system fragilities represent the main risks to the outlook.
“Acting on an appropriate and coherent set of policies to enhance an economic recovery remains urgent. This includes the immediate implementation of specific priorities that will help achieve the ERGP goals.
“In the near term, a stronger push for front-loaded fiscal consolidation through a sustainable increase in non-oil revenues would be needed to create space for infrastructure spending, social protection, and private sector credit.
“This should be simultaneously accompanied by a monetary policy that avoids direct financing of the government and is kept sufficiently tight, a unified and market-based exchange rate, and rapid implementation of structural reforms.
“Pursuing these policies would help reduce macroeconomic vulnerabilities and create an environment for a diversified private-sector led economy.
“The team held productive discussions with senior government and central bank officials. It also met with members of parliament, representatives of the banking system, private sectors, civil society, and international development partners. The team wishes to thank the authorities and all those with whom they met for the productive discussions, excellent cooperation, and warm hospitality.”
Inflation figures drop
The nation’s inflation rate fell for a fifth consecutive month in June even as food-price growth surged. Inflation eased to 16.1 per cent from 16.3 per cent in May, the NBS said. The median of 15 economists’ estimates compiled by Bloomberg was for 16 per cent. Prices rose 1.6 per cent in the month.
Inflation has been above the upper end of the central bank’s target band of six percent to nine per cent for two years. The CBN Governor, Godwin Emefiele, kept the main policy rate at a record high of 14 per cent since last July to fight price growth and support the Naira even as the economy has contracted for five consecutive quarters.
Forex restriction on 41 items
The CBN restriction of 41 items from accessing forex from official windows has also helped to resuscitate domestic industries and improve employment generation.
More than two years after the policy shift, its objectives, such as encouraging local production of the affected items and boosting local industries, suffocated by the importation of competing products are being realised.
The policy implementation was part of the homegrown solution, introduced by Emefiele, to sustain forex market stability and ensure the efficient utilisation of available forex to grow critical segment of the economy.
This policy implies that, those who import these items can no access foreign currency through the official window to pay their overseas’ suppliers. Rather, they will have to source forex from the parallel market or Bureaux de Change (BDCs) to pay for their imports.
The CBN chief said the bank has been developing home-grown policies to surmount challenges that confronted the economy in recent times.
For instance, over the last 10 years, the CBN had invested over N2 trillion in funding agriculture, Small and Medium Enterprises (SMEs) and other manufacturers in the agriculture value-chain.
The regulator said the apex bank would continue to support operators in the agriculture, SMEs and manufacturing enterprises through its development finance initiatives, with a view to complementing the federal government’s efforts at diversifying the economy and ensuring that the nation is self-sufficient in food production.
Speaking on the 41 items on Arise Television, Emefiele said: “The issue of those 41 items, unfortunately, is one that has been on my table. But, I think it is important that in the life of an economy, there is a need for us to take a look and ask ourselves: what really are we importing into this country?
“When this thing started, we said: why should we import rice? Why should we import toothpick? Why should we import palm oil? At a point in this country, Nigeria was the largest producer and exporter of palm oil and we were controlling 40 per cent of the market share.
“So, there is the need for us to say at this time when there is a scarcity of forex, it should be set aside for the import of items we cannot produce in this country.”
Emefiele’s logic is that when items, such as palm oil, are imported, the local producers are made poorer.
He said: “When we import rice, we impoverish the rice producers in Abakaliki, Kebbi, Sokoto, Katsina and other parts of the country. We need to look at that very seriously because God has blessed this country, with good climate, good weather, which should be taken advantage of.
“Since we can produce these things, let’s use them to feed our people so that we can save foreign exchange for the country.”
