Where’s Nigerian Economy Headed?

The gross domestic product stood at -6.1 percent as at end of second quarter in 2020, according to the National Bureau of Statistics. This is not cheery news for the largest economy in Africa, as the report indicates that all is not well with the country. By implication, Nigerians, especially the poor, are to prepare for more difficult times, even as the federal government confirms that figures from the remaining two quarters may be worse. Howbeit, there might be hope as government says it will do everything in its powers to assuage the on the people by formulating the right policies. Bamidele Famoofo writes

It is no longer news that rather than for the economy of Nigeria to grow in the second quarter, it dropped significantly by 6.1 percent. The figure beats the 5.4 per cent contraction projected by the International Monetary Fund (IMF) in 2020, but still lower than 8.9 per cent shrink expected by the government in 2020.

It is reported that the GDP in Britain for the same period was negative 20.3per cent while the decline of the US economy is steeper at 32.9per cent. The South African economy is projected to experience a worse contraction of 44.5per cent while the results of economic performance in other Africa countries are anticipated but not expected to deviate from the trend as reported.

Analysts have said the economic output, published by the NBS, did not come as a surprise, as they have envisaged that the downturn in global oil price would take its toll on the economy. But more than the impact of oil, economic slowdown arising from the COVID-19 pandemic was the last straw that broke the camel’s back.

A report published by United Capital Research said the decline was “significantly more than our estimate representing the steepest economic decline in Nigeria in over three decades. “Clearly, this is attributed to the negative impact of the COVID-19 pandemic and the global lockdown measures on the various sectors of the economy.”

Meanwhile, of the 19 sectors in the NBS’s classification, 13 recorded contraction while six sectors recorded expansion. The bright spots included financial services, telecoms, coal mining, utilities, and agriculture. Specifically, the financial institution and telecommunication sectors were stand-out performers with 28.4 per cent and 18.1 per cent expansion, respectively.

United Capital Research attributed the expansions recorded in both sectors to policy impacts. “Clearly, credit growth amid CBN’s LDR policy, FX revaluation gains, increased digital adoption and strategic positioning of these sectors supported their performance.” But on the contrary, oil refining, road, air, rail & pipelines transports, accommodation & food services, as well as construction were the worst hit with over 30 per cent contraction each or -52.0 per cent on average.

“As expected, the Nigerian oil sector steeply contracted by -6.6 percent y/y in real terms in Q2-2020 (vs. +7.2 per cent and +5.1 per cent in Q2-2019 and Q1-2020 respectively). Notably, the y/y contraction was fueled by a 12.6 per cent y/y decline in oil production to 1.81mbpd in Q2-2020 (the lowest level since Q1-2017) amid the country’s compliance to OPEC+ output quota during the period. In terms of contribution to overall GDP, the oil sector’s contribution slid to 8.9 per cent, (vs 9.0 percent and 9.5 percent in Q2-2019and Q1-2020 respectively),” United Capital Research said.

Breakdown of the report from NBS showed that the non-oil real GDP contracted for the first time since Q3-2017 by -6.1 per cent in Q2-2020 (vs. +1.6per cent in Q2-2019 and Q1-2020, respectively. This was on the back of slow growth in the agriculture sector which grew 1.58 per cent (vs 1.79 per cent in Q2-2019 and 2.20 per cent in Q1-2020), coupled with contraction in services sector, -6.78 per cent in Q2-2020 (vs 1.94 per cent in Q2-2019 and 1.57 per cent in Q1- 2020) and the Industrial sector, down 12.05 per cent (vs 2.84 percent in Q2-2019 and 2.26 per cent in Q1-2020). However, there were a few bright spots within the non-oil sector. Notably, the Financial Services and the ICT sector which contributed a total of 22.0 per cent to real GDP jumped by 28.4 percent and 18.1 per cent respectively in Q2-2020. Overall, 13 sub-sectors within the non-oil GDP classification grew while 32 contracted.

Agriculture sector GDP slowed to 1.58 percent in Q2-2020 y/y as restriction in movements coupled with extension of planting season into Q2-2020 left an underwhelming imprint on the sector. This is a slowdown relative to the 1.8 per cent and 2.2 per cent recorded in Q2-2019 and Q1-2020, respectively. Specifically, Crop Production, which accounts for above 85.0 percent of the sector’s GDP was marginally up by 1.4 per cent (vs. 1.9 percent and 2.4 per cent in Q2-2019 and Q1-2020, respectively). Similarly, growth in the Forestry sub-sector slowed to 1.1 per cent y/y in Q2-2020 (vs 3.2 per cent and 1.7 per cent y/y in Q2-2019 and Q1-2020, respectively). Meanwhile, the Livestock sub-sector – the second largest contributor to Agric. GDP (at c. 7-8 per cent) saw a faster growth of +2.26 per cent (vs -0.1 per cent and +0.6 percent in Q2-2019 and Q1-2020, respectively). Also, Fishery sub-sector recorded a faster growth of 5.68 per cent (vs 1.1 per cent and 1.5 per cent in Q2-2019 and Q1-2020, respectively).

The manufacturing sector was one of the worst hit sectors in Q2-2020; declining 8.78 percent y/y. Analysing the component of the subsector showed that only 2 out of the 13 sub sectors recorded growth. Specifically, the Chemical and Pharmaceutical sub-sector (+3.8 percent y/y) posted its fastest growth in more than three years in Q2-2020. This is unsurprising considering the intervention fund channeled towards the pharmaceutical companies as well as the increased demand for pharmaceutical products in the wake of COVID-19 pandemic. Similarly, the Motor Vehicles and Assembly sub-sector was up 6.95 per cent y/y (vs 1.04 per cent y/y in Q1-2020). Meanwhile, the Oil Refining (-67.66 percent y/y), Electrical and Electronics (-28.41 percent y/y), Pulp Paper and Paper Products (-28.16per cent) as well as Non-metallic Products ( -22.78per cent y/y) recorded the sharpest decline within the sector. Overall, the manufacturing sector contributed 8.82per cent to aggregate GDP in Q2-2020, down 83bps compared to Q1-2020.

Outlook

“For the rest of the year, we believe the sharp contraction recorded in Q2-2020 is as worst as it can get for the year as the government continues to phase out lockdown measures implemented to curb the spread of COVID-19 within the country. However, we expect economic performance to remain contractionary through half year 2020 as business activities continue to struggle to return to their pre-COVID-19 levels,” analysts said. They hinted that what happened in Q2 2020 as reported by the NBS, “Signals that recession will kick in fully by Q3-2020E, as key sectors such as Oil & Gas, Trade, Agric, Aviation, other Manufacturing & Services, accounting for over 50per cent of real GDP, may not rebound fully by end of September 2020.”

“Specifically, we expect Nigeria’s compliance to OPEC+ production cut agreement (capped at 1.50mbpd from August-2020 to Dec-2020) and compensation for prior months’ overproduction with deeper cut to limit production to below pre-COVID-19 levels of above 2.0mbpd. Hence, oil sector GDP is expected to remain pressured. Also, contrary to our initial optimistic position for the non-oil sector to recover by Q4-2020, we now assume the sector will remain contractionary through Q3 and Q4-2020E. This assumption is predicated on the negative impact of the current FX scarcity, pressure on consumer spending amid rising inflation and unemployment rates, would continue to have on volumes growth,” United Capital Research projected.

Economic pundits believe sectors such as the ICT, Agriculture, and Financial Services, which contribute c. 45.0per cent to real GDP, will continue to stay resilient during the dark times in Q3 and Q4-2020.

A Lagos-based economist, Dr. Boniface Chizea, noted that there was the need for intentional and properly focused policies by government to move the economy in the desired path of rapid growth. “We believe that what needed to be done has been well canvassed but what has been badly lacking is determined and focused implementation. And unless a vaccine against Coronavirus is found, no one is in a position to predict when the pandemic induced disruptions will abate. As a nation we must rise stoutly to the challenge of this unfamiliar economic environment if we must have a chance of moderating its devastating and far-reaching negative economic consequences as we brace up for the long haul,” he warned.