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Saturday, March 6, 2021

Bad Policies Explain Poor Growth 5-years into Buhari’s Tenure

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In 2008, the global economic recession destroyed demand for energy and toppled crude from its all-time high above $147 a barrel in July 2008 to a low of $33 in February 2009, a historic plunge at the time.

Nigeria however recorded a gross domestic product (GDP) growth rate of 6.8 percent for 2008 and 8 percent in 2009.

Barely five years later, oil again plunged from more than $100 a barrel in 2014 to less than $30 in 2016.

This time around, Nigeria recorded its lowest growth rate in 15 years in 2015 when its GDP expanded by just 2.79 percent, and stumbled into negative growth and recession in 2016 when its economy contracted by -1.58 percent on an annual basis.

Adjusting for variables like oil production, MoneyCentral’s analysis of available data from the National Bureau of Statistics (NBS), the Central Bank of Nigeria (CBN) and World Bank, shows that policy choices made by President Muhammadu Buhari and his economic team has been the major reason for the historic collapse in growth rates for Nigeria between 2016 and 2020.

In other words, the president and his team made a bad situation worse by implementing often heterodox policy choices in response to the oil price collapse, which then led to a negative feedback loop for the economy as a whole.

Nigeria’s GDP growth expanded by a miserable 0.3 percent per annum on average between 2016 and 2020. However, between 2010 and 2014, Nigeria’s economy was expanding at an average rate of 5.8 percent per annum (20 times the level in the latter part of the decade).

A look over the past decade shows an almost biblical split reminiscent of Joseph’s prophesized years of abundance, followed by years of famine in Egypt.

However, in this case there’s nothing in the stars to suggest that Nigeria has been condemned to poor growth rates, except that it comes from the policy choices the country has made in the period.

Foreign Exchange market as transmission mechanism for bad policy

One difference between the 2008/2009 period when oil prices collapsed and now is that Nigeria in 2008, had a well-functioning interbank foreign exchange market that served as a shock absorber, with the currency the naira, adjusting as necessary according to demand and supply of FX.

Nigeria which is Africa’s largest oil producer for which oil exports is a major source of foreign exchange (FX), did not particularly get the benefits of higher oil prices in the first half of 2008, as that was at the peak of the Niger Delta militancy before the amnesty issued by then President Umaru Yar’Adua.

As of May 1, 2008 about 1.36 million barrels per day of Nigerian production was shut in due to a combination of militant attacks on oil facilities, sabotage, and labor strife.

On June 20, 2008 just days before the price of oil reached its historic peak, protesters in the Niger Delta blew up a pipeline that forced Chevron to shut in 125,000 barrels per day.

Despite the oil sector being in recession for most of 2008, the country recorded positive growth in the period, showing that lower oil prices or low FX earnings from oil must not necessarily translate into a recession like has been witnessed twice under Buhari.

In 2011 as well, the Nigerian oil sector witnessed unprecedented levels of disruption due to temporary shutdown of facilities such as at Bonga, a 200,000 barrel per day (bpd) facility, which supplies close to 10 percent of Nigeria’s total crude output.

The Shell Development Company of Nigeria also declared a force majeure on its Forcados export programme for the fourth quarter of 2011 due to a sabotage leak on Trans Forcados Pipeline.

While oil GDP growth was negative for most of 2011, Nigeria’s GDP as a whole rose by 5.3 percent as businesses, and manufacturers did not suffer any shortage of foreign exchange (FX), due to the well-functioning, market driven interbank FX market.

By the end of 2015 however, after Buhari was elected and sworn in, this well-functioning FX market had ground to a halt as Central Bank of Nigeria (CBN) Governor, Godwin Emefiele began to implement a restrictive FX regime, that effectively undermined the free trading of foreign exchange by banks, and other dealers, through two-way quotes.

Not too long afterwards Nigeria’s economy fell into recession after contracting by 2.06 percent in the second quarter (Q2), of 2016.

The CBN forex policy spawned black market supremacy of forex deals, and multiple FX rates with wide disparity and lack of convergence.

The naira soon hit N500 per dollar on the black market, as there was a lack of transparency, no price formation and hence no liquidity in the CBN engineered FX market, forcing participants such as manufacturers and importers to seek forex elsewhere as the dollar shortage worsened.

The shutdown of the free functioning interbank FX market by the CBN, led to a collapse in supply of dollars into the Nigerian economy as other sources of FX inflows such as remittances and foreign portfolio investors reduced.

In 2016, the CBN began setting the exchange rate at which licensed money transfer companies could sell Naira to Nigerian banks, leading to a reduction in official remittances.

Offshore funds began to shun or underweight Nigeria assets as a lack of convergence between the official, bureau de change (BDC) and black market rates, sapped investor confidence.

The continuing currency crises in Nigeria may make the current low growth environment more prolonged and painful many analysts have warned.

“Multiple rates, limited flexibility, and foreign exchange shortages are posing challenges,” the IMF said in a statement earlier this month (February 8th) after concluding an article IV virtual mission.

They recommended a gradual and multi-step approach to establishing a unified and clear exchange rate regime with the near-term focus on allowing for greater flexibility.

Nigeria slid into its second recession in four years in 2020, which it exited in the fourth quarter of 2020 as GDP barely expanded by 0.11 percent.

Impact of Buhari’s poor economic policies

Solid exchange-rate management and macroeconomic policies are vital for Nigeria to lift millions out of poverty, according to the World Bank country director in Nigeria, Shubham Chaudhuri.

Analysts say the restrictive FX regime in place has taken a toll on economic operations, shut down a large number of manufacturing firms and is affecting the Nigerian economy across the board.

According to the IMF, Nigeria’s risks are tilted to the downside and include the resurgence of the pandemic, security situation and unfavorable external environment, while capital outflow risks arise from the record-low domestic interest rates and large foreign holdings of domestic securities.

“Socio-economic conditions have deteriorated, with rising food inflation, elevated youth unemployment, mass protests in October 2020, and surveys show worsening food insecurity with a significant impact on the vulnerable,” the IMF said.

Nigeria’s headline inflation rose by 16.47 per cent in January 2021, the National Bureau of Statistics (NBS) said on Tuesday.

Rising inflation is a reflection of supply shortages due to the land-border closure, herdsmen farmer’s crisis and continued import restrictions.

The unemployment rate reached 27 percent in the second quarter of 2020, with youth unemployment at 41 percent, while the current account remained in deficit in the first half of 2020.

The ill-advised border closures, poor infrastructure at the Apapa ports complex in Lagos, inability to tackle widening insecurity, and lackluster performance of cabinet Ministers chosen by the President are more examples of policy actions and inactions holding growth back in Africa’s largest economy.

Borrowings provide little lift

As Nigeria failed to grow its economy at a faster clip over the past 5 years and hence boost tax revenues as well as attract inflows of foreign direct investments (FDIs) or portfolio investments, it has had to borrow more and more domestically to plug its fiscal deficits.

Data obtained from budget documents show that between 2015 and 2020 Nigeria generated an estimated revenue of around N21.9 trillion but spent an estimated N40.1 trillion in hope that it will spur strong economic growth.

However, after accumulating a fiscal deficit of more than N18 trillion in 6 years, average annual economic growth between 2016 and 2020 was a mere 0.3 percent.

The data shows that massive government spending in hopes to achieve a Keynesian lift without the right policies is an exercise in futility.

Nigeria’s inability to attract foreign investment in a world awash with liquidity is a testament to the failed policy approach of its Federal Government.

Abnormally low treasury yields engineered by the Central Bank of Nigeria (CBN), are deterring foreign portfolio investors from considering Nigeria’s fixed income securities in their investment portfolios, while lack of reforms are repelling foreign direct investments (FDIs).

From as high as $4.3 billion invested in Nigerian equities, bond and money market securities in the first quarter of 2020, data from National Bureau of Statistics (NBS) shows that by Q4, total portfolio investments had dropped to a tiny sum of just $35.2 million, translating to a dip of as much as 99 percent in just 9 months.

Investments in money market securities which essentially flows largely to Nigeria’s treasury bills, fell from $3.4 billion to as low as $17 million, marking a decline of 99.5 percent.

The story is even worse for bonds which has seen zero foreign portfolio investments in Q2, Q3 and Q4 2020.

Year on year, Foreign Direct Investments (FDI), which are funds invested directly in the real economy in Nigeria rose 10.2 percent from $934 million to $1.03 billion.

However, the figure which is equivalent to about 0.22 percent of GDP is too minuscule to make much of a difference.

While Eurobond spreads have tightened, Nigeria is missing an opportunity to take advantage of such lower yield spreads to refinance some of its dollar borrowings, according to Razia Khan, Chief Economist and Head of Research, Africa and the Middle East at Standard Chartered Bank.

In order to achieve faster economic growth amid an environment where the government does not seem able to increase savings to reduce oil induced macro-economic shocks, Khan says the Federal Government should put in place a consistent medium to long term plan to grow non-oil revenues.

“With poverty high and the human cost of covid rising, the long term policy should look at formalizing the informal economy and growing the revenue base as the tax base is too narrow,” Khan said.

“The key priority should be how to make economic activity count from a revenue perspective.”

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