With rising inflation, poor growth, declining consumer demand, high interest rate, and businesses struggling to post positive figures, the state of the economy is worrisome. The trend could worsen with a confirmation by the figures released by National Bureau of Statistics (NBS) that the economy slipped into recession last month. Will the economy ‘quickly’ recover as government is promising? COLLINS NWEZE writes on the intricacies of looming economic recession.
AS a rule, Mrs. Rita Martins keeps a shopping secret she hardly shares with anyone. The Lagos-based civil servant, who has spent over 18 years in the city centre, knows that weekends are not the best of days to visit one-stop ware point – Shoprite – in Ikeja Shopping Mall. Her reason: Many customers usually queue at the pay points for the cashiers’ attention. A shopping that should not last more than 30 minutes takes more than two hours.
But on Sunday, June 26, Mrs. Martins decided to visit the mall to buy groceries. To her chagrin, the mall, usually a beehive of activities was virtually empty. Within 15 minutes, she picked all she needed from the shelves and made payment at the counter. “I was so surprised and thought something terrible had happened,” she said.
Three weeks after, Mrs. Martins understood that the reduction in traffic to the mall was the corresponding effect of the decline in the economy which has cut every household’s disposable income.
The National Bureau of Statistics (NBS) data showed that the Gross Domestic Product (GDP), which measures volumes of economic activities in the economy, contracted by 0.36 per cent in the first quarter of this year.
A further contraction of 1.5 per cent is expected in the second quarter, pushing the economy into a recession. Two consecutive quarters of negative economic growth as measured by a country’s GDP leads to recession. Nigeria’s case was triggered by a dip in government revenues and spending in the wake of the fall in prices of crude oil prices at the international market.
As at today, every sectors of the economy is in turmoil. From energy to housing; maritime to banking; insurance to manufacturing and textiles to service industries, there is huge economic crisis.
The Executive Vice-Chairman, ENL Consortium Limited and Chairman Seaport Terminal Operators of Nigeria, Princess Vicky Haastrup, painted a picture of what is happening at the ports when she said: “If you look at the port terminal like ours, the number of ships we have handled from January to date is equal to the number of volumes we usually handle on monthly basis. The reason is that the importers do not have access to foreign exchange (forex).
“That affected their operations and for us, it was a major constraint. So, the volume of importing dropped drastically. I have never seen that level of decline in my life.”
Earnings from both oil and non-oil segments of the economy have been plunging. Going by the Central Bank of Nigeria (CBN) data, the gross monthly collections of non-oil revenue from January to December last year stood at N3.12 trillion figures. But from January this year, non-oil revenue dropped to N196 billion compared with monthly average of N477 billion projected in this year’s budget.
Besides, Nigeria earned N143 billion from its non-oil exports in the fourth quarter of last year, a drop of 39.1 per cent (or N90.6 billion) from N234.43 billion recorded in the third quarter of the year.
Average oil price in June was $49.99 per barrel while headline inflation spikes to 16.5 per cent, making the country the eight highest inflation rates in sub-Saharan Africa, 6.6 per cent above the nine per cent inflation ceiling of the CBN.
The Customs and Excise is the weakest of the four components of gross non-oil revenue. Customs Service contribution of N50 billion in January this year compares with a pro rata average of N72 billion in the budget is worrisome.
The Nigerian Customs Service (NCS) has blamed the shortfall on CBN policies. To the Service, the CBN circular classifying 41 import items as finished products and barring their importers from accessing forex reduced import revenues.
Haastrup urged the CBN to review the 41 items on the forex restriction list.
His words: “They said those products are not valid for forex. So, what people do is to go to the parallel market to source for it. That is not good for the business. It is not even good for local manufacturers.”
The recession fever has become so deep that not a few Nigerians have been seeking more knowledge on the matter. According to search results released by Google Nigeria last week, interest in the search for ‘recession’ peaked in July after CBN Governor Godwin Emefiele and Finance Minister Mrs. Kemi Adeosun announced that the economy is in ‘technical’ recession. Growth was negative in the first quarter for the first time since 2004 and a recession, or two consecutive quarters of contraction, is imminent, the Emefiele predicted.
Anambra State tops the list of states in the country combing the search engine for all terms related to “recession”, trailed in the second position by the Federal Capital Territory (FCT). Rivers State is third with cosmopolitan Lagos following. Apparently, other states do not have a significant number of queries. Not surprisingly, related questions asked on Google include “what is recession / recession definition”; “how to survive in economic recession” and “how to make money in a recession”.
More data releases, which are leading indicators of economic activity, continue to underperform. The manufacturing and non-manufacturing Purchasers Managers Index data for May were disappointing. It indicated activities contracted across both sectors, although at slower pace.
The resumption of hostilities in the Niger Delta region which has disrupted oil production has also constituted a headwind on fiscal revenue, budget implementation, net exports/imports and aggregate consumption expenditure.
Mrs. Adeosun said Nigeria will face only a short recession if economy contracts again in the second quarter as the removal of fuel subsidies and policies to lower dependency on oil will pay off.
According to the International Monetary Fund (IMF), Nigeria’s economy is likely to contract by 1.8 per cent this year due to a slump in oil prices and a shortage of hard currency.
“I think if we are in recession. What I will like to say is that we are going to come out of it and it is going to be a short one”, Adeosun said.
“I don’t think we should panic”, she said in government’s first reaction to the IMF forecast.
The minister assured that measures such as the removal of fuel subsidies and boosting of non-oil production would lift the economy out of the doldrums.
Her words: “We were subsidising around 45 million litres of fuel per day. These are real savings to the economy which we are now redirecting into the essential infrastructure that will keep the economy going.”
Also talking on the economy, Budget and National Planning Minister Udoma Udo Udoma admitted that the forex restrictions adversely affected the economy in the first half of the year.
The minister explained that inflation hit 16.5 per cent in June; unemployment increased to 12.1 per cent in March from 10.6 per cent in December 2015 and created challenges for some state governments in the areas of paying salaries, in addition to the Federal Government giving bailout to states.
An economist and Chief Executive Officer of Nextnomics, Dr. Temitope Oshikoya, described the falling living standard with worsening misery index as woprrisome.
“It paints a bleak future for the country but other oil producing countries are also affected”, Dr. Oshikoya said.
He said oil prices had declined by more than 70 per cent from about $115 in June 2014 to $27 in February this year.
Since 1973, this reverse oil shock was matched only twice: in the 1980s, when oil prices fell below $10; and in 2008 to 2009, when it fell from around $147 to about $40.
He said: “The real question to ask is why is Nigeria’s economy so susceptible to the vicissitudes of oil commodity boom and bust cycle in spite of the devaluation of the naira from less than N1 to N350 to the dollar over the past three decades?
An economist and Managing Director of Financial Derivatives Company Limited, Mr. Bismarck Rewane, said: “We expect June 2016 GDP data to confirm the economy to be in a recession with our forecast pointing at a real contraction.
“However, dividend of a more accommodative forex regime, strong harvests in the last quarter of the year due to improved security in Northern Nigeria as well as implementation of the 2016 Federal Government of Nigeria budget will likely move the economy towards a rebound in the second half of 2016.”
Co-founder and Board chair at ReadyCash Nigeria, Richard Obire, said: “The implications of the recession are already affecting the economy and businesses but whether they will get worse after the announcement remains to be seen. What happens next would depend on what the government does with a critical tool in its hand, which is the N6.06 trillion 2016 Budget.”
Also key in tackling the impact of the recession are the budget for the 36 states of the federation and that of the FCT.
Obire said: “Right now, governments at all levels need to stimulate growth and create jobs for the people. If governments spend more, businesses will grow and make new investments that will lead to more hiring. For now, what companies are doing is disengaging their staff and that has to stop.”
He noted that the devaluation of the naira and removal of 16-month currency peg by the apex bank has made more cash available to government from petrodollars as seen in the money shared by the three tiers of government from Federation Accounts Allocation Committee (FAAC) rise from N305 billion in May to N559.032 billion last month.
“The economy has witnessed rising inflation and poor demand for goods and services which should not be the case. People are not buying company products and prices are also rising”, Obire said.
He argued that the devaluation of the naira has made investing in the country cheaper, because foreign investors will need fewer dollars to invest in local companies.
He said: “Government should also release the N500 billion Social Welfare Fund (SWF) vote and start immediate disbursement to stem the tide of job losses. Right now, government is not acting fast and intelligently. When the flexible forex policy was announced, President Muhammadu Buhari distanced himself from the policy and that made foreign investors to adopt wait and see attitude, hence depriving the economy of expected benefits.”
He said investors in real asset will still come, adding that “it takes time and due diligence to attract such investments. Government should create stable polity to attract new investments. If government works hard in a coordinated manner, there will be positive results.
“For instance, I want to see the passage of the Petroleum Industry Bill (PIB) that makes clearer, the terms on investment in the oil and gas sector. There is need for dynamism, focus and speed. I do not see any sense of urgency in this government.”
Head of Treasury at Ecobank Nigeria, Olakunle Ezun, explained that when a country gets into recession, there is slowdown on consumer expenditure, which is expected to stimulate the economy.
“During recession, companies lay off workers. Export is usually nowhere. Most economies do everything to avoid getting into recession because getting out is very tough because you need to do more than enough to get out. The fiscal authorities have so much to do on spending for the economy to recover,” Ezun said.
Companies’ earnings dip
With the NBS data still being awaited, companies’ performances have been thrown off balance. Analysis of results of Flour Mills of Nigerian (FMN), Unilever Nigeria, Nigerian Breweries, Lafarge Africa, First City Monument Bank (FCMB) and Diamond Bank all showed disturbing trends.
The FMN fourth quarter ended March 31 results showed no positives. The FMN reported a pre-tax loss of –N8.3 billion, driven mainly by a 48 per cent year-on-year and 58 per cent year-on-year rise in interest expense and other (non-operating) losses, compared with Profit Before Tax (PBT) and Profit After Tax (PAT) of N4 billion and N6.8 billion in same periods of last year.
The pre-tax loss was mainly driven by a combination of factors including a 58 per cent year-on-year rise in other (non-operating) losses, a 49 per cent rise in interest expense to N5 billion.
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