International bank for reconstruction and development international development association international finance corporation
Recent Economic Developments and Outlook
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- The fall in oil prices in 2014 found Nigeria in a position of weakness
- The Buhari administration took office on May 2015 in a context of a severely weakened economy, large infrastructure gaps and poor service delivery that accumulated over the years.
- The collapse in oil prices unmasked another weakness in public finance institutions, namely the rules governing the intergovernmental fiscal relationship
- In 2015 the collapse of Nigeria’s terms of trade resulted in Nigeria being for the first time in decades a net importer of savings from the rest of the world.
- An evolving monetary policy coupled with a fixed exchange rate in the period 2014 – Quarter 1 of 2016 exerted additional pressure on the external accounts and on the real sector.
- Inflation has been accelerating and reached 16.5 percent in June 2016 (year-on-year).
- Due to significant exposure to the oil and gas sector (26 percent of the loan book), the quality of assets in the banking sector has deteriorated.
- In this context, GDP growth fell from 6.3 percent in 2014 to 2.7 percent in 2015, and further went into negative territory, -0.4 percent in Quarter 1 of 2016
- Outlook : Over the medium term, economic recovery is likely to be modest.
- Nigeria remains at low risk of debt distress under various scenarios, but will continue to face the challenge of a high debt service-to-revenue ratio
- To revive growth in the short term, reforms aimed at restoring macroeconomic stability will be critical.
- With oil prices projected to remain low, a new growth strategy for the post-oil economy will need to be adopted.
- National Income and Prices Annual percentage change, unless otherwise indicated
- Fiscal Account Percentage of GDP, unless otherwise indicated
- Selected Monetary Accounts Change in percent of broad money at the beginning of the period, unless otherwise indicated
- Balance of Payments Percentage of GDP, unless otherwise indicated
5.Recent Economic Developments and OutlookRecent Economic Developments: Three major economic transitions – the slowdown and rebalancing of the Chinese economy; lower commodity prices, especially the sharp drop in oil prices; and tightening financial conditions and risk aversion of international investors – have had a significant impact on the Nigerian economy. These shocks have compounded an already challenging development environment. The fall in oil prices in 2014 found Nigeria in a position of weakness. Economic management during the latter part of 2014 and 2015 was prudent, but mostly consisted in running down buffers such as the Excess Crude Account and international reserves, and critical structural reforms were not undertaken as the country prepared for Presidential elections in 2015. Economic management during the run-up to the 2015 elections focused on short term stabilization policy but key structural reforms – non-oil revenues, quality of expenditure especially on oil subsidy and state owned enterprises (SOEs) governance reforms – were not addressed. The Buhari administration took office on May 2015 in a context of a severely weakened economy, large infrastructure gaps and poor service delivery that accumulated over the years. Further decline in oil prices and a resulting decline in revenues, enhanced security challenges, and the overall uncertain global environment all manifested with force in Nigeria. Revenues which were already low at 10.5 percent of Gross Domestic Product (GDP) in 2014 declined to 7.8 percent of GDP – all of it on account of the decline on oil revenues – with an even more negative outlook for 2016. Oil exports almost halved from US$76.5 billion in 2014 to US$44.4 billion in 2015. The collapse in oil prices unmasked another weakness in public finance institutions, namely the rules governing the intergovernmental fiscal relationship. Similar to the federal government, states and local government budgets are also dependent on oil. However, the structural weakness went unaddressed given the buoyant liquidity during boom years. In 2013, oil revenue represented 73 percent of total revenue of the states. The collapse of oil prices and the liquidity crunch revived tensions on the burden of the adjustment between federal government and subnational governments that ended in a state bailout in July 2015. In May 2016, the liquidity situation had gotten worse given the drop in oil production due to the insurgent attacks on the oil and gas pipelines. Salary arrears have continued growing as the bail-out fund was not used for payment of salary arrears as intended, and debt service associated with the first bail-out increased resulting in negative federal account allocation for some states. Hence an extension of the bailout was agreed in 2016 under the Fiscal Sustainability Plan that includes 22 point reform agenda to rationalize expenditure, increase internally generated revenue, strengthen public financial management, increase transparency and accountability, and ensure fiscal and debt sustainability. In 2015 the collapse of Nigeria’s terms of trade resulted in Nigeria being for the first time in decades a net importer of savings from the rest of the world. From generating an average Current Account (CA) surplus of 3.5 percent of GDP in 2012-2014, the CA deficit reached around 3 percent in 2015 and is expected to remain at that level in 2016 and decrease gradually to a deficit of 1 percent of GDP by 2020. An evolving monetary policy coupled with a fixed exchange rate in the period 2014 – Quarter 1 of 2016 exerted additional pressure on the external accounts and on the real sector. The Central Bank of Nigeria (CBN) reacted to a growing gap since late 2015 between the official exchange rate, the interbank rate, and the market cash rate, and pressure on reserves by tightening administrative controls. These measures include directing limited CBN forex offerings on the interbank market to higher priority transactions; a ban on use of either export proceeds or forex markets for financing the importation of goods from 40 categories of items that are deemed of relatively low importance or seen as candidates for import substitution. In June 2016, the market exchange rate exceeded by 60 percent the official rate and lack of access by banks to foreign exchange has become a significant detriment to private sector activity and growth. Inflation has been accelerating and reached 16.5 percent in June 2016 (year-on-year). While the initial rise in inflation was partly due to the currency depreciation and pre-election spending, the recent acceleration has been due to a combination of factors, mainly higher electricity tariffs, increased prices of all fuels3, low food supplies at the beginning of the planting season, and a scarcity of foreign exchange. Due to significant exposure to the oil and gas sector (26 percent of the loan book), the quality of assets in the banking sector has deteriorated. According to recent Financial Stability Report, the Non-Performance Loan (NPL) ratio deteriorated from 2.9 percent in December 2014 to 4.9 percent in December 20154. It is estimated that the NPL ratio for the Nigerian banking sector would reach 12.5 percent by end-20165. In this context, GDP growth fell from 6.3 percent in 2014 to 2.7 percent in 2015, and further went into negative territory, -0.4 percent in Quarter 1 of 2016. The macro instability generated initially by external shocks was compounded by a combination of policy responses and outcomes, such as pegging the exchange rate, rationing the foreign currency, implementing a stop-go-stop monetary policy and delaying the execution of the budget. This growth rate is significantly below the historical standards, and below the potential growth rate of the economy even at low commodity prices. There is evidence that countries which grow fast and suddenly fall into a growth trap, i.e. growth below potential have two things in common: macro instability and lack of progress in institutional reform. Hence, the government’s program, and the proposed revision of the PLR, are oriented to supporting this reform agenda. Outlook: Over the medium term, economic recovery is likely to be modest. Growth in 2016 is expected to contract by -1.5 percent although the economy is expected to stop contracting in the third and fourth quarters if the militant attacks on oil and gas infrastructure can be halted and production restored to normal levels. In 2017, growth is projected to recover to 1 percent as recent initiatives start to bear fruit. These include adoption of a flexible exchange rate and improved governance in the oil sector which should facilitate an expansion in production, while the greater clarity in regulation and the gradual rebound in international oil prices should result in renewed investment6. The general government deficit is projected to widen in 2016 before improving in 2017, while the external CA deficit is likely to decrease gradually. The reduction in the deficit will result from slightly higher projected oil prices and production levels and increased non-oil revenues largely on account of increased efficiency in the value-added tax (VAT) collection. Nigeria remains at low risk of debt distress under various scenarios, but will continue to face the challenge of a high debt service-to-revenue ratio. Mostly domestic and maturing in the medium term, the public debt-to-GDP ratio is forecast to increase from 14.4 percent in 2015 to 25 percent in 2021, largely driven by larger than historical deficits, stemming primarily from lower oil revenues due to the recent drop in prices. The contribution of growth to debt reduction will not be large enough to offset adverse dynamics from real interest rates. Gross financing needs in percent of GDP are projected to increase to above 7 percent over the medium term. Though declining, public debt service will continue to represent a considerable share of general government revenue, remaining above 50 percent over the medium term. Nigeria’s debt remains sustainable but with increased vulnerability in the context of a shock to the non-interest CA – given the structure of Nigeria’s trade this can be interpreted as a decline in oil exports of substantial magnitude. In such context, the external debt-to-GDP ratio would more than double relative to the baseline. This assumption is based on the historical volatility of Nigeria’s CA balance due largely to fluctuations in oil prices. A combined (interest rate, growth, CA) shock would have a similar impact on debt, driven by the CA dynamics. Debt dynamics are also worsened under a one-time real depreciation of 30 percent, given the lower base of GDP in US Dollars. To revive growth in the short term, reforms aimed at restoring macroeconomic stability will be critical. These would include measures to increase non-oil revenues and to stimulate demand-driven growth, including through sub-national government spending. At the same time, measures are needed to remove supply-side policy bottlenecks and improve predictability of the policy environment, such as through the removal of exchange controls and real exchange rate realignment. With oil prices projected to remain low, a new growth strategy for the post-oil economy will need to be adopted. A new growth strategy would need to be based more on productivity growth than on capital accumulation. This will require greater emphasis on regulatory reforms to improve the business environment, and on governance reforms to improve the efficiency of the public expenditures. The new growth strategy will also need to enhance diversification by addressing sector-specific challenges, particularly in agriculture, manufacturing, and mining, as part of a medium- to long- term agenda to increase competitiveness and promote inclusive growth. Table . Selected Macroeconomic Indicators for Nigeria
Source: Nigerian authorities, IMF and The World Bank staff estimates and projections, 2016. Directory: curated curated -> Concept stage curated -> Concept stage curated -> Republic of Côte d'Ivoire Urbanization Review curated -> Report No: aus11011 Central America curated -> Report No. 94474-pk fiscal Disaster Risk Assessment Options for Consideration curated -> Environmental and Social Management Framework for the Costa Rica Telecommunications Sector Modernization Project curated -> Environment Impact Assessment For Jiangxi Shangrao Sanqingshan Airport Beijing Guohuantiandi Environmental Technology Development Center. Ltd. Oct. 2012 Content curated -> Growth through Innovation An Industrial Strategy for Shanghai By Shahid Yusuf Kaoru Nabeshima April 22nd, 2009 curated -> Report No: 70178. People's Republic of China Download 0.49 Mb. Share with your friends:
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