Nigerian Economy Contracts by 1.5% in 2016, Marginally Beating IMF Forecast

•  Presidency says country is on the mend, recession may have bottomed out
• NNPC puts oil production at 2.1mbpd

Tobi Soniyi, James Emejo, Chineme Okafor in Abuja and Obinna Chima in Lagos

The Nigerian economy contracted by 1.5 per cent in 2016, the first full-year contraction since 1991, and slightly beat the forecast by the International Monetary Fund (IMF), which initially predicted a contraction in the country’s Gross Domestic Product (GDP) by 1.8 per cent, but later revised it to 1.7 per cent.
In contrast, the Nigerian economy grew by 2.8 per cent in 2015.

GDP data released tuesday by the National Bureau of Statistics (NBS) also showed that the economy shrank by 1.30 percent in the fourth quarter of last year (Q4 2016), compared to -2.26 per cent in the previous quarter.

Though the decline was less severe than the contraction in the previous quarter, it was lower than the 2.11 percent growth attained in Q4 2015.

Reacting to the latest growth data from the NBS tuesday, the presidency stated that there were indications that the country was on its way out of the recession, considering the overall contraction in 2016 and the NBS data showing that the contraction in the last quarter of 2016 had slowed down.

This is just as the Nigerian National Petroleum Corporation (NNPC) announced that the country’s oil output has risen to 2.1 million barrels per day (mbpd), signaling the in-roads the federal government has made in restoring peace in the Niger Delta, where attacks by militants on oil installations last year slashed Nigeria’s production to 1.3mbpd.
According to the NBS, in real terms, Nigeria’s GDP was valued at N18.29 trillion in Q4 2016, compared to N18.53 trillion in Q4 2015.

For the full year, NBS said GDP contracted by 1.51 per cent, indicating a real GDP of N67.98 trillion.
However, nominal GDP in Q4 2016 was valued at N29.29 trillion at basic prices, representing a year-on-year nominal growth of 12.97 per cent.
For the entire year, aggregate nominal GDP stood at N101.59 trillion, compared to N94.14 trillion in Q4 2015.
In contrast to real growth, this was 5.84 per cent higher than Q4 2015, implying that the GDP deflator increased faster than the earlier period, the NBS stated.

The contraction in the quarter under review, it added, reflected “a difficult year for Nigeria, which included weaker inflation-induced consumption demand, an increase in pipeline vandalism, significantly reduced foreign reserves and a concomitantly weaker currency, and problems in the energy sector such as fuel shortages and lower electricity generation”.

Quarter-on-quarter, real GDP increased by 4.09 per cent, which partly reflected seasonal factors, as well as a rise in the general price level, NBS added.

Oil production was estimated at 1.90mbpd in Q4, 0.27mbpd higher than the 1.63mbpd production volume in the previous quarter but lower than Q4 2015 estimates by 0.25mbpd when output was put at 2.16mbpd.
For the full year 2016, however, oil production was estimated at 1.833mbpd, compared to 2.13mbpd in 2015.
The oil sector contracted by 13.65 per cent in the year, representing a more significant decline of -5.45 per cent in 2015.

The oil sector’s share of real GDP also declined to 8.42 per cent in 2016 compared to 9.61 per cent in 2015.
According to the NBS, “This reduction has largely been attributed to vandalism in the Niger Delta region. As a result, the sector contracted to -13.65 per cent, a more significant decline than in 2015 of -5.45 per cent.”
The oil sector also declined to -12.38 per cent in real terms (year-on-year) in Q4, indicating an improvement relative to the previous quarter, when the sector declined to -22.01 per cent, but a more severe decline than in Q4 2015, when a contraction of -8.23 per cent was recorded.

Quarter-on-Quarter, real oil sector GDP grew by 8.07 per cent and represented 7.15 per cent as a share of the economy, compared to 8.19 per cent in Q3 2016 and 8.06 per cent in Q4 2015.
On the other hand, the non-oil sector shrank by 0.33 per cent in real terms in Q4, but increased its share of GDP to 92.85 per cent from 91.94 per cent in Q4 2015.

In 2016, the sector shrank by 0.22 per cent in real terms, compared to a growth rate of 3.75 per cent in 2015, a difference of 3.97 per cent.
A breakdown of the non-oil sector showed that real estate shrank by 9.27 per cent and contributed –0.77 per cent to year-on-year growth in total real GDP.

According to the NBS, manufacturing, construction and trade also shrank, ameliorated slightly by continuing strong growth in agriculture especially crop production.

Mining and quarrying contributed 7.32 per cent to real GDP in Q4, representing a decline of 0.89 per cent relative to the corresponding quarter of 2015 and a decline of 1.02 percentage points relative to the third quarter of 2016.
Agriculture contributed 25.49 per cent to overall GDP in the quarter under review, higher than its share of 24.18 per cent in Q4 2015, but less than its share in the previous quarter of 28.65 per cent.

For 2016 as whole, agriculture increased its share relative to 2015 to 24.43 per cent due to relatively strong growth in the sector.

However, the contribution of manufacturing to nominal GDP was 8.34 per cent, lower than the 9.09 per cent in the corresponding period of 2015, and 8.59 per cent in the third quarter of 2016.
Real GDP growth in manufacturing remained negative in Q4 2016, contracting by 2.54 per cent (year-on-year).
For 2016, the manufacturing sector in real terms contracted by 4.32 per cent compared to a decline of 1.46 per cent in 2015.

According to the NBS, this was reflective of the number of challenges faced by manufacturing in 2016 such as higher costs of imported inputs as a result of the exchange rate and higher energy costs as a result of the fall in electricity generation and more expensive fuel.

Recession Has Bottomed Out

In its reaction to the latest GDP data from the NBS tuesday, the presidency expressed confidence that the country was on the mend, considering the overall contraction in 2016 and data showing that the contraction in the last quarter of 2016 had slowed down.
The Presidential Adviser on Economic Matters, Dr. Adeyemi Dipeolu said this in a statement released by Mr. Laolu Akande, media aide to acting President Yemi Osinbajo.

Dipeolu said a review of the GDP figures released tuesday by the NBS showed a contraction of 1.30 per cent in the fourth quarter of 2016, translating to an estimated economic growth rate of -1.51 per cent for the full year.
According to him, these figures reflected the slowdown in the economy for most of 2016, but also showed that the recession may have bottomed out because of improving trends in several key sectors.

He said: “The Nigerian economy actually performed better overall last year as the growth rate was higher with a contraction of -1.5 per cent, compared to -1.8 per cent predicted by the International Monetary Fund (IMF), raising hopes that the recession may have bottomed out with the improving trends in several key sectors of the economy including agriculture and mining.

“Overall, the Nigerian economy performed better than expected, even though we are still in the early stages of recovery. It is indeed noteworthy.”

He said government was also optimistic that with the ongoing engagement with the oil producing communities in the Niger Delta, increased oil production will be sustained.
“In a similar vein, the ongoing implementation of the Social Investment Programme (SIP), significant infrastructure spending of the federal government, and possible early passage of the 2017 budget, are all expected to trigger a positive multiplier effect on the Nigerian economy,” he added.

Dipeolu said government would not relent in its efforts and comprehensive approach to bring about the full recovery of the Nigerian economy and set it on a solid path of sustainable growth.

“Our work continues and we renew the pledge to do it with diligence and the firm commitment it deserves,” he stated.

He noted that even though the oil sector contracted to -12.38 per cent on a year-on-year basis, this, he said, was a relative improvement compared to the third quarter when the decline amounted to -22.01 per cent.

He said: “This outcome was due mainly to the increase in (oil) production such that the quarter-on-quarter growth for the oil sector between the third and fourth quarters was 8.07 per cent.

“The non-oil sector however declined by 0.33 per cent after showing some resilience in the third quarter when it grew by 0.03 per cent at the height of the recession.”

The NBS figures showed that agriculture grew at 4.03 per cent in the fourth quarter of 2016, a marginal decrease over the 4.54 per cent growth in the third quarter, he said.

Dipeolu explained that this was mainly because agriculture (especially crop production, which accounts for the bulk of agricultural production) is seasonal, with growth in the third quarter of the year usually higher than others.
He observed that the overall outcome for the year showed that the agricultural sector grew by 4.11 per cent, higher than 3.72 per cent in 2015.

He further observed that manufacturing actually grew on a quarter-on-quarter basis by 1.89 per cent but declined over the year by 4.32 per cent, reflecting the problems that the sector faced in the course of the year due to a combination of factors including the depreciation of the naira and higher energy costs.

“The metal ores sub-sector grew by 7.03 per cent in Q4 of 2016, compared to 6.93 per cent in the last quarter of 2015, thus justifying the priority that the federal government continued to give to solid minerals.

“The services sector, which accounted for 53.55 per cent of GDP in 2016, experienced a decline in growth to -0.82 per cent over the year, compared to a growth of 4.78 per cent in 2015.

Dipeolu explained that this slowdown in the services sector arose from generally fragile economic conditions.
“This is because its fortunes depend to a large extent on consumer spending and government expenditure which were both adversely affected by difficult economic conditions,” he added.

He explained that the Social Investment Programme of the federal government, relatively high level of infrastructure spending in late 2016, as well as 2017 capital spending plans should begin to have a multiplier effect on the economy.

He stated that the data for nearly all the sectors showed an improvement in growth in nominal terms although such effects were outweighed by inflationary factors.
“The expectation is that this trend and the slowing down of month-on-month inflation will enable an early return to positive growth in the economy. This positive trajectory will also receive a boost from the positive news emerging from other parts of the economy,” he observed.

He cited the approval and release of the Nigerian Economic Recovery and Growth (NERG) plan by the Federal Executive Council, which sets the stage for the government’s economic reform programme, as being critical to the country’s recovery path.

Dipeolu also expressed hope that the likely early passage of the 2017 budget estimates would also lend further momentum to economic growth.
“Similarly, the recent Eurobond issue of $1 billion which was oversubscribed by almost 8 times will reinforce the trend of increasing reserves.

“Indeed, foreign reserves rose from $23.9 billion in October 2016 to $27.8 billion in January 2017,” he added.
In his views, the outlook for revenue from the petroleum sector was also positive, adding: “This improved outlook for the oil and gas sector is closely linked to the ongoing engagement and dialogue between the federal government and various communities in the Niger Delta.”

Analysts React

Also commenting on the fourth quarter GDP figures released yesterday, Chief Economist for Africa, Standard Chartered Bank, Razia Khan, while acknowledging that she was expecting a full-year contraction, the -1.5 per cent growth rate recorded for 2016, was marginally better than expectation of -1.7 per cent year-on-year.
Khan, in a note yesterday, said: “The very shallow contraction in non-oil GDP growth in Q4 2016, raises hope for a more meaningful recovery in non-oil GDP in Q1 2017, buoyed both by improved budget spending and some improvement in FX availability.

“We have not yet seen a sufficient turnaround in oil production, but even in Q4 last year, the extent of contraction had lightened. This is a good sign.
“Recovery in the oil sector in 2017 will be driven by higher prices and production gains. A continued double digit contraction in the oil sector, especially given the weak base, is unlikely.
“So while today’s GDP release for Q4 confirms the full year contraction in Nigerian GDP, recovery is nonetheless underway.

“How quickly the Nigerian authorities put in place much-needed reforms will determine the strength of that recovery.”

The Chief Executive Officer of Cowry Assets Management Limited, Mr. Johnson Chukwu also said the slow pace of economic contraction was an indication that there was some improvement in the performance of the economy.
He, however, said if the appropriate policies are put in place, the economy might fully recover latest by the end of the second quarter of the year.

Chukwu stressed that for the economy to fully recover, the government must facilitate business transactions.
“There is need to continue to liberalise the forex market as we have seen with the new forex policy, to make forex easily accessible by businesses.

“The sectors that experienced a decline are sectors that are heavily dependent on forex, such as manufacturing, telecommunications, and others.

“So, we need to stimulate those sectors that account for eight per cent and above of GDP. The government also needs to ensure that peace and tranquility is restored in the Niger Delta so that our oil production would continue to recover,” Chukwu added.

Also, Research Analyst at FXTM, Lukman Otunuga said that the country’s full-year economic contraction of 1.5 per cent for 2016 highlighted how the terrible combination of depressed oil prices, foreign exchange shortages, and overall sluggish economic fundamentals exposed the nation to downside shocks.

“While the outlook for Nigeria still remains bearish in the short term, it must be kept in mind that markets have acknowledged that the nation is currently in the process of a critical structural transformation.
“Since the start of the year, the positive report of a successful Eurobond issue coupled with recent interventions from the CBN have bolstered the investor risk sentiment towards the nation.

“It should be understood that Nigeria’s web of alternative foreign exchanges remains a major stumbling block to sustainable economic recovery while also effectively repelling foreign direct investment (FDI).
“While recent reports of the CBN releasing an additional $180 million to the forex market in an effort to ease business transactions may strengthen the naira further, speculation is rife on the central bank’s devaluation of the local currency to improve liquidity and regain more stability,” the Cyprus-based analyst added.

Oil Production Rises

Meanwhile, NNPC tuesday announced that Nigeria’s oil production has risen to 2.1mbpd as a result of the government’s sustained peace initiatives in the Niger Delta.
The state-run oil firm also stated that with the current peaceful atmosphere in the oil-rich region, it was expecting tthe country’s oil production to grow above 2.2mbpd, effectively exceeding the 2017 budget benchmark of 2.2mbpd.
The Group Managing Director of NNPC, Dr. Maikanti Baru, stated this when he spoke on the corporation’s commercial strategy and priorities at the 2017 Nigeria Oil and Gas Conference and Exhibition in Abuja.

Baru’s remarks came at the same time the Minister of State for Petroleum Resources Dr. Ibe Kachikwu described Nigeria’s continued importation of petroleum products as shameful and fraudulent.
Kachikwu equally stated that the country’s refineries in Warri, Kaduna and Port Harcourt have continued to operate below profitability levels, adding that their inoperative condition had resulted in the waste of crude oil and human capacity.
The minister said the country has an oil sector infrastructure gap of over $45 billion which would need to be bridged within the next five years to reactivate the efficiency levels of Nigeria’s oil and gas sector.
Baru, in his presentation at the conference, said: “Crude production declined to as low as 1.5mbpd in July 2016, but this has steadily increased to 2.1mbpd in recent times due to the strategic steps taken by the NNPC and her partners to produce from assets that were affected by pipeline vandalism.

“We must also mention that the improvement in production is also as a result of the success of the recent dialogue held by the federal government in the Niger Delta areas.

“We are hoping that by the end of Q2, 2017, we should ramp up production above the budget benchmark of 2.2mbpd.”
He stated that NNPC encountered considerable challenges that impacted on its operations in the past year, adding however that the final resolution of joint venture cash call obligations in December 2016 re-established the confidence of joint venture partners in the business capacity of the corporation.

“The problem of the joint venture cash calls has been addressed after rigorous negotiations with our joint venture partners.

“The initial sum of about $8.1 billion was reduced to about $5.1 billion that will be paid over five years through incremental production. This notable achievement has saved the nation about $3 billion.
“The resolution of cash call arrears is expected to increase the confidence of JV operations in the system and therefore ginger more investments in new capital projects,” Baru stated.

Kachikwu also said that the infrastructure gap was limiting productivity levels in the sector.
In an apparent plea for a revision of the government’s policy of holding on to oil and gas sector assets, which it cannot fund, he said for Nigeria to bridge the gap, the nation would have to attract and allow private investment in the upgrade of most of the oil assets that are moribund.

“There is a sense of urgency needed here on infrastructure. The government is not in a position to fund most of the infrastructure and so we are left with little alternatives than to bring in private investors and work out terms that will enable us to begin to massively address the $45 billion infrastructure gap.

“Over the next four or five years, we have to find a way of bringing into this country an average of about $10 billion every year and that is essential whether in infrastructure, in pipelines, refineries or depots.
“We also have to be bold enough to take steps that have not been taken before, and they are steps that could be challenged by people but make a lot of commercial sense.

“It is no longer profitable to handhold all the assets, we have got to release those assets to the private sector under some operational and corporation mechanisms that enable us to reactivate those assets, charge the right tariff and get them to work efficiently.

“Whether it is for the gas pipelines, crude pipelines or refined products pipelines, the time has come to move away from the old model.”

On the importation of petroleum products and government’s commitment to end it, Kachikwu said: “Importation of petroleum products would have to cease, there is absolutely no reason why a country with the resources that we have will continue to import petroleum products.

“It is a shame to this country, it is fraud on the system and we have got to end it. We are committed to do this by 2018/2019.

“The refineries are not performing in the capacity they are supposed to perform. It is waste of crude and a waste of everybody’s intellectual capacity.

“If we do that, the downstream sector will survive. But if we don’t, by the first quarter of 2020 when the Dangote refinery would have come on stream, then we will have an issue in our hands.”