By Uche Uwaleke
Going by official figures, the outgoing year recorded a number of improvements on the economic front over the previous year. Helped by recovering crude oil prices and higher oil production, the year witnessed the return of the economy to positive GDP growth trajectory after a debilitating recession that spanned five quarters in a row. The foreign exchange market was less chaotic, enabled by a remarkable accretion to external reserves which surged from US$25.84bn on January 3, 2017 to US$37.35bn on December 18, 2017. Inflationary pressure moderated considerably from a peak of 18.72 per cent in January to 15.90 per cent in November 2017. The stock market was bullish on average posting impressive returns (the NSE All share index recorded 43.39 per cent year-to-date gain as of December 13, 2017) which significantly dwarfs the negative performance of the previous year. The World Bank’s Ease of Doing Business ranking in which Nigeria moved up 24 places was indicative of an improved business climate.
But it was not all cheering news in 2017. Reflecting the low growth environment and exposure to the oil and gas sector, the banking industry’s solvency ratios declined from about 15 per cent to 10.5 per cent between December 2016 and October 2017. Non-performing loans in the banking sector rose to 15 per cent as of October 2017 well ahead of the CBN’s regulatory threshold of five per cent. The recent disclosure by the National Bureau of Statistics that unemployment rate jumped from 14.2 per cent in the fourth quarter of 2016 to 18.8 per cent in the third quarter of 2017 seems to outweigh the many positive economic developments in the outgoing year. Against this backdrop, what then is the outlook in 2018?
According to my crystal ball, economic performance in 2018 will be a marginal improvement over 2017. Because government revenues are still highly dependent on the oil sector, it is a no brainer that the performance of the economy in the New Year will be powered by the outcomes in the international crude oil market. OPEC’s decision to extend the output cut agreement through 2018 provides a guarantee that the crude oil price will stay above the budget reference price of US$45 per barrel. There is a flip side though to the sustained oil price increase which has already manifested in the high cost of importing petroleum products. The Group Managing Director of the Nigerian National Petroleum Corporation, Maikanti Baru, is reported to have disclosed recently that the current Landing Cost of petrol is N171 per litre, a development compounded by hoarding, diversion and cross-border smuggling, on account of the wide price differential between Nigeria and neighbouring countries which has pushed up the demand for PMS in the country to over 50 million litres per day.
Whichever way the present crisis is resolved, the negative effects of the current fuel scarcity will likely linger into the first quarter of 2018. Headline inflation, which is beginning to prove sticky downwards, will spike in January. In response, the Monetary Policy Committee members in their meeting of January (that is, if a quorum is eventually formed) will leave the policy parameters (namely the Monetary Policy Rate at 14 per cent, Cash Reserve Ratio at 22.5 per cent and Liquidity ratio at 30 per cent) unchanged. There will be no significant departure from this monetary policy stance even during the MPC meeting of March 2018.The Federal Reserve’s policy of interest rates normalisation in the United States as well as the likely monetary tightening stance in the UK where inflation rate has exceeded the Bank of England’s target of two per cent will be a good reason to hold the policy rates throughout the first quarter of 2018.
The 2018 budget will be ready for implementation in the first quarter of 2018 but full implementation is not likely to commence till the end of this quarter. The level of capital importation, comprising mainly portfolio investments, will not be significant relative to the third and fourth quarters of 2017 since foreign investors are likely to adopt a wait-and-see attitude during this period. Expectedly, the stock market will largely be bearish. The first quarter of 2018 will be a good time for risk-taking investors to take positions in undervalued stocks. Overall, economic activities will progress at a snail’s pace in the first quarter of 2018 with higher unemployment rate than the previous quarter, a little shy of 20 per cent. Real GDP growth rate, year on year, will likely hit the two per cent mark but it will be more from base effect than actual expansion in economic activities considering that the economy was still in recession during the corresponding period of the preceding year.
The economy will be at a cruising point during the second and third quarters of 2018. Much of the expansion in economic activities will occur during this period. The IMF has forecast a real GDP growth rate of 2.1 per cent for Nigeria while the Federal Government’s target is 3.5 per cent as contained in the 2018 budget. Real GDP growth for 2018 will lie somewhere in-between. Improvements in security and oil infrastructure will likely boost oil production up to the level (2.3 million barrels per day) envisaged in the 2018 budget. Healthy external reserves, sufficient to finance over seven months of imports, will support a stable exchange rate and convergence of rates across all the segments of the forex market.
A liquid forex market, coupled with the Federal Government’s increased investment in agriculture and the CBN’s intervention schemes (especially the up-scaled Anchor Borrowers Scheme), will moderate inflationary pressure in the second and third quarters. Consequently, I predict that the MPC meeting of May 2018 will signal an easing of monetary policy through a reduction in the MPR. Moreover, interest rates are likely to come down during this period owing to the gradual reduction of the Federal Government’s influence in the domestic market. This will have a salutary effect on the manufacturing sector as the Purchasing Managers Index will be above the 50 index threshold throughout this period.
The World Bank’s Ease of Doing Business report that will be released about this time will show a further improvement in the ranking of Nigeria. Not surprisingly, the level of capital importation will likely peak in the third quarter of 2018. The stock market will be bullish, buoyed by the faster rate of economic expansion and the release of impressive half-year results of many quoted companies. For investors in the stock market, this could be the time to take profits. Both the Customs and the Federal Inland Revenue Service will record improvements in collection efficiency. Enhanced non-oil revenue from taxes and government independent revenue will support stronger execution of the Federal Government’s capital expenditure plans as well as social welfare programmes contained in the 2018 budget. This will rub off positively on jobs (resulting in marginal drop in unemployment and underemployment figures helped by the planting season) but will not be significant given the small scale of these interventions vis-à-vis the number of youths that enter the labour market annually.
Turbulence, from hyper political activities, will likely set in during the fourth quarter of 2018. General elections are only a few months away from this last quarter and so politically-motivated spending will shift the country’s inflationary challenge more from cost-push to demand-pull inflation. Core inflation in 2018 will be highest in the month of December. The CBN will likely tighten monetary policy once again in order to reduce inflation and anchor inflation expectations. The pressure to make last-minute impression on Nigerians through populist policies will result in increased government borrowings thereby widening fiscal deficits and undermining fiscal consolidation. Interest rates will spike, exacerbating the condition of deposit money banks that had extended credit facilities to politically-exposed persons. The rate of non-performing loans will surge during this period. The fourth quarter of 2018 will be full of uncertainty caused by political tension and so the stock market will be bearish especially with the exit of foreign investors who are not likely to return till the conclusion of the general elections in the first quarter of 2019. Uncertainty regarding the next OPEC move after the output cut agreement draws to a close by the end of the fourth quarter of 2018 will equally play a role.
Overall, I predict further improvements in the official figures by the NBS in 2018. However, the combined forces of double-digit inflation, high unemployment rate and a fragile GDP growth still below the rate of population growth will all conspire to prevent any significant effect of improvements in economic indices on the welfare of the ordinary Nigerian.