Nigeria Grapples with First Full-Year Recession in 29 Years

Central Bank of Nigeria

• ‘Naira devaluation not likely to help’
• Economists warn of stagflation
• Growth will dip further this quarter, say Ukpong, Kelikume

The Nigerian economy faces first full-year recession in 29 years, after output contracted 0.4 per cent in the first quarter from a year earlier, according to Mark Bohlund, Bloomberg’s Africa and Middle East Economist.

Bohlund, in his comprehensive assessment of the challenges being faced by the Nigerian economy, concludes that a technical recession – two successive quarters of contraction – could come as soon as the second quarter ends. The first time the country recorded a full-year recession was in 1987.

The Bloomberg independent analysis of the Nigerian economy used data from the National Bureau of Statistics (NBS), the Central Bank of Nigeria (CBN) and other data agencies to show that the economy is at the risk of experiencing its first full-year recession due to drop in oil output to a 27-year low and “paralysis” in other sectors as a result of fuel and foreign-exchange shortages.

Bohlund, in his assessment, which was sent to The Guardian, said “economic growth is likely to remain negative for the rest of this year.” The report noted that “naira devaluation is unlikely to help much,” especially as the beneficial impact cannot be expected until after the end of year 2016.

The Head of the Department of Economics, Finance and Accounting at the Lagos Business School, Dr. Ikechukwu Kelikume, and the Dean of the Faculty of Business Management, University of Uyo, Prof. Leo Ukpong, yesterday corroborated this position.

Both Kelikume and Ukpong agreed that ‘we are not on the positive side. Whichever way, we are going into full-year recession,” said Ukpong.

Dr. Kelikume of the LBS in a telephone conversation with The Guardian last night, said that all indices actually show that growth would dip further in the second quarter (end of June), especially the country recorded negative growth (-3.6 per cent) in GDP in the first quarter.

“Now, what makes it so complicated is that the first quarter growth data showed that we have entered a stage called stagflation. This is when unemployment is rising, inflation is rising and GDP is coming down.”

Describing Nigeria’s situation as precarious, Kelikume stressed that it is unusual for an economy to be experiencing inflation and unemployment going on in the same direction while GDP is coming down. “That is what we experienced in the first quarter (Q1).”

He, however, observed that, for the second quarter, oil price suddenly saw a rebound, as the commodity is currently trading at plus/minus $50 per barrel. “Oil price is high, but Nigeria, in our projection said we are going to produce 2.2 million barrels per day; currently, we are producing less than 1.6 million barrels per day.

“We are producing below 1.6 million barrels per day because of the Niger/Delta Avengers. So, we are not leveraging on the positive side of the oil price; meaning that, for the next quarter, output would be reduced. Government revenue has also gone down due to oil crisis.”

Kelikume projected that output would experience further reduction, “meaning we are going to have a negative growth in GDP in the second quarter, which officially put us into recession whichever way you want to look at it. So, they (Bloomberg’s analysts) are right.”

Upkong, on his part, said: “Over all, I agree with Bloomberg: The exchange rate could stabilise at N350 per dollar but oil production and oil price are not moving in favour of the Nigerian economy, especially with the disruption of production in the Niger Delta region,” he said.

Ukpong argued that oil price could inch up but “we cannot sell; so, we have to depend on very prudent economic management. Frankly, it doesn’t look good; I think the Bloomberg is very much right with its analysis based on all indicators – foreign exchange, instability, oil price and unemployment.”

“Based on all economic and financial indicators, we would likely see a full-year recession. At best, you might have additional three months of drop in Gross Domestic Product (GDP). The Economic Team should put together a good stimulative economic package so that we could possibly see a reversal in the last quarter of the year,” Ukpong said, reacting to Bloomberg’s statement on the Nigerian economy.

Bloomberg’s Bohlund, in his analysis, stated that the first quarter contraction does not come as a surprise, but the drop in oil production was actually less damaging to activity than anticipated, dragging on real GDP growth by only 0.2 percentage point in the period compared with 0.7 percentage point in the fourth quarter, and 0.6 percentage point in 2015.

He also observed that oil production of 2.11 million barrels per day for the first quarter, as reported by the NBS, was at the top end of estimates of 1.8 to 2.1 million, in a Bloomberg survey and as quoted by the U.S. Department of Energy; instead, it was manufacturing that had the sharpest drop in activity, having fallen by 7.0 per cent year-on-year. “This is likely to have been partly connected to a decline in domestic demand but also to the difficulties of importing input materials, due to foreign-exchange controls,” the economist said.

Making reference to Bloomberg analysis (using functions on the Bloomberg terminal), James Batty of the Bloomberg Brief, had noted that the Nigerian U.S. dollar sovereign bond yields tightened over the past month.

Again, while service-sector growth was positive, it was a mere 0.8 per cent year-over-year compared with 4.8 per cent in 2015. As a result, services contributed only 0.4 percentage point to headline growth in first quarter, compared with 2.5 percentage point in 2015; 3.6 percentage point in 2014; and 4.2 percentage point in 2013.

“This,” according to Bohlund, “shows how the dwindling of hydrocarbon revenue since the drop in the price of oil in late 2014 has affected domestic demand.”

Bloomberg also noted that while “agriculture was the only sector growing at close to recent trend rates – 3.1 per cent compared with 3.7 per cent in 2015 and 4.3 per cent in 2014 – it appears not to have benefited materially from any import substitution as the cost of overseas foodstuff has risen.”

Also, Bloomberg Intelligence (BI) Economics’ estimates of quarterly growth, on a seasonally adjusted basis, according to Bohlund, suggest the Nigerian “economy contracted by 1.5 per cent in the first quarter, the first negative reading since third quarter 2011.

“Attacks by Niger Delta militants have reduced oil output by 30 per cent this year, bringing it to 1.4 million barrels per day in May, the lowest in 27 years, according to Oil Minister of State, Emmanuel (Ibe) Kachikwu.

“A number of foreign oil companies have declared force majeure on shipments from oil terminals so far this year, starting with Shell in February. There is a risk of further attacks, as it is unlikely that the government and the militants will resolve the dispute in the near term. With the fiscal deficit legally capped at 3.0 per cent of GDP, lower oil production will also have a direct impact on how much the government can spend this year – the prolonged delay in passing the 2016 budget until early May has also affected expenditure.

“Add to this, the shortage of fuel and foreign exchange and it is clear that economic growth could be more sharply negative in the remaining quarters of the year.

“With Nigeria’s population estimated to be growing by 2.5 per cent annually, living standards are now stagnating following the drop in oil prices in mid-2014. GDP per capita is likely to slide further as higher black-market rates for foreign exchange push up inflation, which has prompted a reaction from the Central Bank of Nigeria.”

“The CBN held its policy rate at 12 per cent on May 24, but Governor Godwin Emefiele said it was time to introduce greater flexibility in the management of the foreign-exchange market. He has yet to release the details of the new policy.

“A weaker currency would undoubtedly weigh on domestic demand and growth in the near term but should spur foreign investment and increase the competitiveness of domestically produced goods. The latest Bloomberg survey was published before the first quarter GDP data were released, and the weakness of growth means the expectations of a 2.5 per cent expansion for 2016 will probably be disappointed.”