Nigerians will be excused for feeling palpable relief at the conclusion of 2016; it was that kind of year. The roll call of negative economic news was extensive: the economy slipped into a recession, inflation doubled between January and December, unemployment rate rose from 10% at the end of 2015 to 14% in September, and the official exchange rate closed off at 305 to the dollar, with the black market rate significantly worse. Basically every economic indicator went south, and the harsh conditions were felt across the board. 2017 could not come soon enough.
The Nigerian Economic Tripod
Like all new years, 2017 offers unbridled hope. And while a quick turnaround is needed, Russia's recent experience shows that with the right policies, success will be within reach.
Nigeria's economy currently sits atop a tripod of foreign exchange, petrol availability, and fiscal & monetary policy. The evolution of these three will determine the fate of the economy so must be well managed. A closer look reveals their precise importance, and what may need to be done during the year.
Foreign Exchange Flexibility
FX scarcity was a recurring theme in 2016, even after the CBN "floated" the naira. After falling from ₦195, the official rate settled around ₦305 as many began to doubt the legitimacy of the float, accusing the CBN instead of maintaining a new peg. Meanwhile, strict dollar supply allocation and the retention of the 41-item ban kept the pressure on the naira and exacerbated the imbalance in the parallel market, causing the secondary rate to plunge further as dollars remained scarce.
While CBN's reticence to further devalue the currency is understandable given obvious concerns about inflation, the longer this line of action is delayed the deeper the crisis becomes. A cue can be taken from Egypt who floated their currency in November and has recorded striking results – though inflation surged from 14% in October 2016 to 28% in January 2017, foreign reserves grew by nearly 40% in the first few months as foreign inflows shot up to diffuse the currency crisis.
For Nigeria, the prevailing concerns are the multiplicity of rates and continued dollar scarcity, despite rising CBN reserves. Nigeria quickly needs a convergence of rates to restore confidence in the market and create a situation that gets FX flowing into the country again.
Petrol availability is critical to the Nigerian economy. Beyond the cost of passenger transport and freighting, petrol is a dominant fuel source in a country that struggles with consistent power supply.
While high oil prices are a welcome situation for Federal Government (FG) revenue, they put pressure on the petrol pricing band. Add in the aforementioned depreciation pressure on the currency and the subsidy conversation may need to be reopened, as this article points out. This needs to be nipped in the bud in order to prevent fuel scarcity which would be extremely harmful to an economy looking to recover. The present situation with NNPC as the sole importer is unsustainable, as we saw in 2015 when marketers hoarded fuel.
Unfortunately, a petrol price increase will feed into almost everything else, leading to an inevitable spike in inflation. With the Dangote Refinery expected in 2018/2019 and some positive sentiment around the three main refineries, the FG may begrudgingly accept subsidies in the short term – though the timing of the 2019 elections cannot be explored. Of course, a supplementary budget would need to be drafted as no provision was made in the still unpassed 2017 Budget.
Fiscal and Monetary Policy Harmonisation
The final leg of the tripod is the combination of fiscal and monetary policy measures. First of all, fiscal policy. Fiscal stimulus can be extremely potent in a recession and the 2017 Budget offers some promise. In line with the FG's expansionary stance, this year's edition is a fifth larger than last year's, with nearly a third dedicated to capital expenditure – much needed to provide the fiscal multiplier the economy currently craves.
For most of 2016, monetary policy was far from expansionary. And January's Monetary Policy Committee meeting reinforced the conservative stance adopted by the CBN in retaining the base interest rate at 14%. This is the rate at which the CBN lends to banks who then add a margin before lending to customers. When trying to stimulate economic activity, central banks lower policy rate to encourage borrowing which should lead to investment. CBN has taken the opposite action, showing greater concern for inflation.
In 2017, fiscal and monetary policy may need to be in harmony. If the FG is pushing a fiscal expansion agenda, clarity demands a similar monetary policy outlook. The CBN may be forced to once again choose between inflation and growth if price pressures persist during the year. However, their task is complicated by the need to watch for a potential financial crisis as the rising cost of credit looks to have deepened the asset quality problems in the financial sector.
An Outlook of Cautious Optimism
The 2017 economic outlook is an improvement of the year just past. But as shown above, there are potentially troubled waters ahead. Recovery must focus on supporting private enterprise and fostering a conducive environment for them to succeed. Performance will likely vary based on the degree of FX exposure – at both the individual and corporate levels. In the absence of further petrol price increases, consumption should recover slightly as consumers grow more accustomed to the recessionary climate.
If government hits its revenue and debt financing targets, as well as achieves an 80% budget performance, the wider economy will surely feel the impact of the fiscal boost. There is potential for 2017 to be a significant improvement over 2016 but all legs of the economic tripod must function optimally for this to happen.