Nigeria Slips into Recession, FG Attempts to Allay Concerns

• Says economy will improve in second half of 2016
• Inflation rises further to 17.1%, unemployment jumps to 13.3%
• Oil production drops to 1.69mbpd, capital importation slumps to record low of $647.1m
• PDP calls for Buhari’s resignation

Tobi Soniyi, James Emejo, Chukwuemeka Maduagwuna in Abuja and Obinna Chima in Lagos

It’s official: The Nigerian economy is in recession. The National Bureau of Statistics (NBS) yesterday confirmed the public’s worst fears that the delayed response by the Muhammadu Buhari administration to the structural adjustments needed to avert an economic crisis has resulted in a contraction of the gross domestic product (GDP) growth rate of 2.06 per cent in the second quarter of 2016.

But instead of admitting that it had taken a number of missteps that could have averted the worst economic contraction in 29 years, the presidency and Ministry of Budget and National Planning attempted to put a spin on the damning economic data released by the NBS and engaged in a game of one-upmanship with the International Monetary Fund (IMF), assuring Nigerians that the economy will beat the fund’s gloomy forecast of -1.8 per cent for the year.
Nigeria officially slipped into a recession based on NBS’ GDP growth figures for Q2 2016, which showed that the economy contracted by 2.06 per cent, compared to the negative growth of 0.36 per cent recorded in Q1 2016.

Also, the increase in food prices and imported items pushed up the Consumer Price Index (CPI), which measures inflation, to 17.1 per cent in July, from 16.5 per cent in the month of June.

National unemployment rate also rose to 13.3 per cent in Q2 from 12.1 in Q1 2016, 10.4 per cent in Q4 2015, 9.9 per cent in Q3 2015, and from 8.2 per cent in Q2 2015.
However, labour productivity increased by 5.3 per cent to N637.5 in Q2 2016, from N605.27 in the previous quarter, the NBS stated wednesday.

According to the statistical agency, Q2 GDP declined by -2.06 per cent year-on-year in real terms, lower by 1.70 per cent from the growth rate of –0.36 per cent recorded in the preceding quarter, and also lower by 4.41 per cent compared to 2.35 per cent recorded in the corresponding quarter of 2015.

Quarter-on-quarter, real GDP increased by 0.82 per cent. But in normal terms, the GDP in Q2 stood at N23.48 trillion at basic prices, 2.73 per cent higher than estimates in Q2 2015 of N22.85 trillion and lower than the rate recorded in Q2 2015 by 2.44 per cent.

Daily oil production was estimated at 1.69 million barrels per day (mbpd), representing 0.42mbpd lower than Q1 production of 2.11mbpd and also lower than the corresponding quarter in 2015 by 0.36mbpd when output was recorded at 2.05mbpd.

The non-oil sector declined by 0.38 per cent in real terms in Q2, representing a growth rate of 0.20 per cent, which was lower than Q1 2016 estimate of -0.18 per cent, and 3.84 per cent lower from the corresponding quarter in 2015 of 3.46 per cent.

In real terms, the non-oil sector contributed 91.74 per cent to the nation’s GDP, but contracted by 0.38 per cent in the quarter under review.

On the spike in inflation, energy and energy-related prices recorded the largest increases reflected in the core sub-index in the July inflation figure. The core sub-index increased by 16.9 per cent during the month, up by 0.7 percentage points from 16.2 per cent.

The highest increases were seen in the electricity, liquid fuel (kerosene), solid fuels, and fuels and lubricants for personal transport equipment groups.

Also, in the unemployment report for Q2 2016, the NBS said the nation’s labour force population – those within the working age population willing, able and actively looking for work – increased to 79.9 million from 78.5 million in Q1 2016, representing an increase of 1.78 per cent in the labour force during the quarter.

The economically active population or working age population – persons within the ages of 15 and 64 – increased to 106.69 million in Q2 from 106 million in Q1, representing a 0.65 per cent rise over the previous quarter and a 3.02 per cent increase when compared to Q2 2015.

According to the NBS, the number of the unemployed in the labour force, increased by 1,158,700 persons, resulting in an increase in the national unemployment rate, while 26.06 million Nigerians were either unemployed or underemployed, compared to 24.5 million in Q1 and 22.6 million in Q4 2015.

Also, the total number of jobs added to the economy in Q1 2016 fell to 79,469 jobs, representing a sharp decline of 83.1 per cent (389,605) year-on-year and 84.1 per cent (420,056) from the previous quarter.

The NBS noted that the sharp decline in employment generation was strongly correlated to the weakening economic output within that period, where the Nigerian economy recorded a negative growth of -0.36 per cent.

It said of the 79,469 jobs created, 21,477 were in the formal sector and 61,026 in the informal sector. The public sector recorded a negative figure of -3.038 per cent in new jobs created within the period in review.

The NBC also released its report on Nigeria’s foreign capital importation for Q2 2016, showing that it dropped by 8.98 per cent to $647.1 million, compared to $710 million in the previous quarter.
It was the second consecutive quarter to witness record-low levels of foreign capital importation into the economy and also the largest year-on-year decrease.

The NBS attributed the continuing decline in capital imported to the “the difficult period that the Nigerian economy is going through”, adding that “the second quarter of 2016 saw the economy enter into the first recession during the rebased period (according to the technical definition of two consecutive periods of decline)”.

It said: “This may suggest less profitable opportunities for investment. In addition, in the second quarter there was considerable uncertainty surrounding future exchange rate policy, which may have deterred investors.
“The naira was allowed to depreciate towards the end of the quarter. These factors were likely to have contributed to the record decline in capital importation.”

According to the Foreign Capital Importation report for Q2, which was released by the NBS yesterday, portfolio investments recorded the largest decline of 88.76 per cent year-on-year, compared with declines of 37.00 per cent and 1.22 per cent for Foreign Direct and Other investments, respectively.

“Compared to the previous quarter, however, FDI recorded the largest decline of 23.75 per cent, compared with a decline of 9.49 per cent for portfolio investment and an increase of 1.24 per cent for other investments.

“As a result of these changes, other investments replaced portfolio as the largest component of capital importation, and accounted for 41.53 per cent, compared with shares of 37.91 per cent and 20.56 per cent for portfolio and FDI.
“In the same quarter of the previous year, portfolio investment accounted for 81.88 per cent of total investment, which highlights the fact that portfolio investment has been the hardest hit by recent economic events.

“This is possibly due to portfolio investment having a shorter term focus than other investment types,” the NBS stated.
However, other investments were the largest component of imported capital and accounted for $268.77 million, or 41.53 per cent.

This was despite the fact that only one type of other investment was recorded during the quarter: Other Investment Loans.

The second largest component was portfolio investment, which accounted for $245.32 million, or 37.91 per cent.
Portfolio investment was dominated by equities, which accounted for 83.18 per cent, a slightly lower share than the year before (when the share was 84.56 per cent), but higher than in the previous quarter when it accounted for 74.41 per cent.

Despite the overall fall in portfolio investment of 9.49 per cent, portfolio equity investment increased by 1.18 per cent. The bulk of the fall was accounted for by portfolio money investment, which fell by $26.60 million, or 39.20 per cent, although investment in bonds fell to zero from $1.50 million in the previous quarter, and from $50.54 million in the second quarter of 2015.

The decline to zero in capital imported in the form of bonds was particularly striking when compared to the high of $1,000.28 million recorded in the third quarter of 2014, at which time Nigeria was included in the JP Morgan Emerging Markets Bond Index, the NBS noted.

FG Foresees Growth

Despite the gloomy economic data released by the NBS wednesday, the presidency said that the nation’s economic outlook remained bright, irrespective of the contraction in the GDP growth rate recorded in the last quarter.
A statement issued in Abuja wednesday by the vice-president’s media aide, Mr Laolu Akande, assured Nigerians that the second half of the year would be better.

Quoting the Special Adviser to the President, Economic Matters, Dr. Adeyemi Dipeolu, the statement said the recession would be short-lived, assuring Nigerians that many of the challenges faced in the first half either no longer existed or had begun to ease.

The statement noted that the data released by the NBS on the GDP growth rate, while confirming a temporary decline, also indicated hopeful expectations for the country’s economic trajectory.

It also said that apart from the growth recorded in the agriculture and solid mineral sectors, the Nigerian economy, in response to the policies of the Muhammadu Buhari presidency, was doing better than the IMF’s forecast, with clear indications that the second half of the year would be much better.

The statement said the administration would continue to work diligently on the economy and engage with all stakeholders to ensure that beneficial policy initiatives are actively pursued and the dividends delivered to the Nigerian people.

“The data from the National Bureau of Statistics showed that Gross Domestic Product declined by -2.06 per cent in the second quarter of 2016 on a year-on-year basis.

“A closer look at the data shows that this outcome was mostly due to the sharp contraction in the oil sector due to huge losses of crude oil production as a result of vandalism and sabotage.

“However, the rest of the Q2 data is beginning to tell a different story. There was growth in the agricultural and solid minerals sectors which are the areas in which the federal government has placed particular priority.
“Agriculture grew by 4.53 per cent in the second quarter of 2016, compared with 3.09 per cent in the first quarter. The metal ores sector showed similar performance with coal mining, quarrying and other minerals also showing positive growth of over 2.5 per cent.

“Notably also, the share of investments in GDP increased to its highest level since 2010, growing to about 17 per cent of GDP.

“The manufacturing sector though not yet truly out of the woods is beginning to show signs of recovery while the service sector similarly bears watching.

“The data also showed a reduction in imports and an increase in locally produced goods and services and this process will be maintained, although it will start off slowly in these initial stages before picking up later.
“The inflation rate remains high, but the good news is that the month-on-month rate of increase has fallen continuously over the past three months.

“Unemployment remains stubbornly high which is usually the case during growth slowdowns and for reasons of a structural nature.

“The picture that emerges, barring unforeseen shocks, is that the areas given priority by the federal government are beginning to respond with understandable time lags to policy initiatives.

“Indeed, as the emphasis on capital expenditure begins to yield results and the investment as a percentage of GDP increases, the growth rate of the Nigerian economy is likely to improve further.

“As these trends continue, the outlook for the rest of the year is that the Nigerian economy will beat the IMF forecast of -1.8 per cent for the full year 2016.

“The IMF had forecasted a growth of -1.8 per cent for 2016, however, the economy is performing better than the IMF estimates so far. For the half year, it stands at -1.23 per cent, compared to an average of -1.80 per cent expected for the full year by the IMF,” the presidency stated.

In another statement by the Ministry of Budget and National Planning, the federal government said that as capital spending begins to yield positive results with investment/GDP ratio increasing, the GDP growth rate of the Nigerian economy would likely surpass the IMF’s forecast of -1.8% for the full year 2016.

The ministry, in the statement yesterday, said a closer look at the data from the NBS revealed that the outcome was mostly due to a sharp contraction in the oil sector due to huge losses of crude oil production as a result of vandalism and sabotage.

But it said there was room for optimism that the recent commitment to stopping attacks on oil installations in the Niger Delta would help to resolve this situation, while also improving government revenues.

This, it added, would however be a temporary solution in the sense that it still promotes the weak economic structure of the past, which the budget ministry said manifests in two ways – the over reliance on crude oil and the country’s economy being mainly consumption-driven with a high import propensity.

“With crude oil contributing 8-12 per cent of GDP and up to 50-53 per cent of the non-oil sector dependent on the oil sector, it is clear that the fortunes of up to 60 per cent of the Nigerian economy rest on a volatile sector.
“This shaky foundation was masked in the past by high oil prices and reasonably high foreign reserves.
“Again with the availability of foreign exchange it was possible to drive growth in national income through consumption without feeling the fallout of such structural weaknesses.

“These vulnerabilities were exposed when oil prices collapsed at a time the country did not have adequate revenues and reserves to cushion the effect, a situation further complicated by loss of production,” the ministry said.
It noted that the situation which pointed to the need for difficult but necessary structural reforms necessitated the federal government’s move to improve public financial management and change the structure of the economy through diversification and an investment driven model.

“The federal government therefore took policy actions to promote sectors like agriculture, solid minerals, manufacturing and services and to boost public and private investment in infrastructure and housing.

“It also acted to remove supply constraints with regards to foreign exchange and the supply of premium motor spirit while encouraging the private sector to add value to crude oil through refineries, petrochemical plants, fertilizer plants and gas infrastructure.

“In an attempt to maintain consumption demand in the short term, the federal government also assisted states to pay salaries and to encourage a private sector supply response by bringing about improvements in the ease of doing business,” the budget ministry added.

Market Analysts React

Also reacting to the data on the economy released by the NBS, the chief executive of Cowry Assets Management Limited, Mr. Johnson Chukwu, who said the lower GDP growth rate was expected, called for greater synergy between the fiscal and monetary authorities in the country.

“The government job is cut out for them. The key thing is how to use monetary and fiscal policies to address the situation. The emphasis should shift from fighting inflation to restoring growth.
“We expect the monetary and fiscal authorities to evolve expansionary policies that would inject liquidity into the economy and help jumpstart growth,” Chukwu said in a phone chat.

In his comment, Research Analyst at FXTM, Lukman Otunuga, said the signs of an imminent slowdown had been visible in the country as the nation struggled to support its currency.

“While naira’s vulnerability was highly expected following the official floatation, external risks such as a resurgent dollar have accelerated the devaluation of the local currency, consequently pressuring the nation further.
“With inflation and unemployment hovering around worrying levels, the CBN has been placed under immense pressure to act which may weigh on investor sentiment.

“While the news of Nigeria entering a recession may be painful, this should be no surprise as the incessant decline in oil prices has punished heavily oil export nations, with Nigeria being no exception.
“Although sentiment towards Nigeria remains bearish, it should be kept in mind that the blueprint to diversify and break away from the curse of oil reliance is already in progress.

“The government has already approved a conservative three-year medium-term framework, and plans to reinforce infrastructure, services, manufacturing and agriculture are in place.

“The naira’s weakness may attract foreign investors in the future which could ultimately uplift overall GDP. However, Nigeria is undergoing a major structural change and although there is a risk of extended periods of low growth, this transition could be something which exceeds all expectations,” the Cyprus-based analyst said.

The Financial Derivatives Company Limited, in a research note, said that the depreciation of the naira by 7.1 per cent on the parallel market during the month of July led to an increase in consumer price levels.
It stated that imported inflation continues to be a key factor precipitating the increase.

“The impact of the FX policy that kicked off on June 20 has been marginal as low dollar supply persists due to reduced dollar inflows.

“Foreign investors remain hesitant about participating in the Nigerian market due to policy inconsistency and lack of clarity as to the direction of monetary policies.

“High energy costs, a major driver of increasing inflation in recent times, also contributed to rising production costs. There were diesel supply shortages in July and this led to the increase of 12.61 per cent in the national average price of the product to N206.55 in July, compared to N183.41 in June.

“Additionally, a shortage of kerosene, which is used in most Nigerian households, led to an increase in its price to N600/ltr, far higher than the official price of N135/ltr.

“The average national price of petrol declined to N148/ltr in July from N149/ltr in June.
“With inflation increasing to an 11-year high, the central bank will be under intense pressure on the direction to adjust interest rates. This comes just after it increased the policy rate to 14 per cent in July, in spite of negative growth and increasing unemployment.

“An important fact is that with the average treasury bills stop rate for 182-day and 364-day at 17.8 per cent and 18.5per cent respectively in August, the MPR may be redundant as the anchor rate.
“The GDP report for Q2’16 shows a negative growth of (-2.06%). This is weaker than expected. With inflation slowing, and Nigeria in recession, the CBN is more likely to pursue an accommodative stance at its next MPC meeting,” FDC said in the note.

‘Buhari Should Resign’

In its reaction, the opposition Peoples Democratic Party (PDP) took a swipe at President Muhammadu Buhari over the data released by the NBS.
PDP, in a statement signed by its Director, New Media, Deji Adeyanju, said nothing better showcases the incompetence of the Buhari administration than the GDP growth rate, inflation and unemployment figures released by NBS.
“The result of these indices is that Nigeria is in its worst economic state in 29 years – dating back to 1987 when the nation had to take harsh steps to recover from President Buhari’s policies of 1984-85.

“As with 1984-85, companies are fleeing our shores in droves. The Manufacturers Association of Nigeria (MAN) recently stated that 272 companies have shut down in the past one year.

“Furthermore, like we suffered in 1984-85, we are suffering a brain drain where our best and brightest talents are leaving the country in search of a better life elsewhere.
“It is disheartening that the Buhari administration is destroying the Nigerian economy and our collective future by the implementation of his archaic and incoherent economic policies which failed in 1984-85 and are failing spectacularly now.

“Our dismay is worsened by the fact that every sphere of the Nigerian socio-political space, ranging from the conduct of elections, human rights, respect for the rule of law, security, technology, health, etc., is negatively affected by the Buhari administration.

“We join all well meaning Nigerians to call on @MBuhari to resign if he is unable to reverse the disastrous economic decline he has brought on Nigerians,” the party said.