Calls for the Federal Government to urgently execute fiscal policy reforms got louder in the last few days following the National Bureau of Statistics’ (NBS) release of second quarter 2019 Gross Domestic Product Report (GDP), which showed a slowdown in growth, writes Tony Chukwunyem
oing by reactions that have trailed last Tuesday’s release of second quarter 2019 Gross Domestic Product (GDP) data by the National Bureau of Statistics (NBS), it is clear that while many financial analysts had predicted that the country would record sluggish growth, they did not expect the GDP numbers to be so weak.
According to the Q2 ’19 GDP report released by the NBS last Tuesday, Nigeria’s economic growth slowed to an annual rate of 1.94 per cent in the three months to the end of June, the second quarter in a row of decline. That compared with a revised expansion of 2.1per cent in the first quarter.
The consensus among analysts is that the highlight of the report was the performance of the oil sector, which recorded positive growth while the non-oil sector either slowed or contracted.
Specifically, the oil sector expanded by 5.15 per cent in Q2’19, after four quarters of negative growth, while the non-oil sector’s growth slumped to 1.6 per cent from 2.5 per cent in Q1’19.
Analysts note that the sluggish performance of the non-oil sector was due to slower growth in the agriculture, construction and ICT sectors alongside contraction in manufacturing and trading activities.
As the Lagos-based firm, Financial Derivates Company Limited (FDC) pointed out in a note last Thursday: “A breakdown of the GDP shows that the fastest growing sectors were mainly in services – oil & gas (5.15 per cent), human health (1.13per cent) and education (0.96per cent). These sectors contribute approximately 12per cent to GDP and employ less than 10per cent of the Nigerian labour force.
“The decelerating sectors are also interest rate sensitive and employment elastic – agric (1.79per cent) and construction (0.67per cent). This tepid performance was largely due to seasonal factors. Q2 is usually the planting season of most agric commodities, thereby creating scarcity and pushing up prices. The rainy season also commenced in Q2 and slowed construction activities.
“The sectors with negative growth include – manufacturing (-0.13per cent), trade (-0.25per cent), and real estate (-3.84per cent). These sectors employ more than 30per cent of the labour force,” the firm stated.
Commenting on the GDP report, the Chief Economist for Africa and the Middle East at Standard Chartered Bank, Razia Khan, was quoted by Bloomberg to have said: “Firmer GDP recovery will require stronger, largely fiscal and reform stimulus. Monetary easing alone is unlikely to be sufficient.”
In fact, Khan noted that although the latest GDP data shows that the oil sector expanded by 5.15per cent- the quickest pace since the third quarter of 2018- softening oil prices may make this pace of growth unsustainable.
She said: “The recovery in oil GDP looks promising. However, given softer oil prices in subsequent quarters this pace of growth may not be sustained.”
Likewise, in their reaction to the GDP data, analysts at Cowry Asset Management Limited stated: “The slower improvement in the non-oil sector indicates that the fiscal authority still needs to rejig its policies as current efforts appear to be less effective – given that the increase in output over the past few years is not commensurate with its average annual expenditure. Hence, market-driven policies are expected to be implemented in order to stimulate the real sector for increased productivity.”
Also, commenting on the GDP numbers during a business programme on Channels TV, last Wednesday, the Managing Director, Afrinvest Securities Limited, Mr. Ayodeji Ebo, said that the Q2 GDP report, when compared with Q1 data, indicates that economic growth is decreasing, adding that the development will not send a positive signal to foreign investors. He disclosed that in the wake of the Q2 GDP data released by the NBS, Afrinvest had reviewed its GDP forecast for the year down to 2.2 per cent from the initial 2.5 per cent.
The Afrinvest Securities boss also argued that monetary policy measures alone would not be able to produce the kind of economic growth, the country’s economy urgently needs and that this can only be achieved if the fiscal authorities come up with the appropriated policy reforms.
Noting that the late submission of the national budget in recent years has always adversely impacted the economy, Ebo stressed that for the new leadership of the National Assembly to be able to fufil its promise of passing the 2020 budget by December, the executive should submit the appropriation bill last week at the latest.
He disagreed with the view in some quarters that the sluggish GDP growth could make the Central Bank of Nigeria (CBN) to cut interest rates. According to him, given that the Apex Bank continues to be concerned about maintaining exchange rate stability, it is not likely that the weak GDP will lead to monetary policy easing.
Similarly, analysts at ARM Research stated that while the weak GDP numbers will encourage the CBN to continue with its stance of boosting economic growth, concerns over exchange rate stability will prevent it from slashing its Monetary Policy Rate (MPR)-the benchmark interest rate.
The experts stated: “For us, while the growth numbers was not surprising, we believe it would only support CBN’s posture on fuelling economic growth this year. Nonetheless, we see no room for a cut in MPR over the rest of the year buoyed by looming currency concerns. We believe the focus would be on the use of unorthodox methods to spur growth. Regardless, we retain our growth forecast of 2.2% for FY 19 with support from both oil and non-oil sectors.”
Also, in its reaction to the GDP report, the Lagos-based Financial Derivatives Company (FDC) Limited stated: “The weak Q2 GDP growth indicates that the economy is in need of a fiscal stimulus. This should be the focus of the fiscal team as they formulate the 2020 budget and the medium term policy framework.”
But the firm added: “The fiscal catalyst, however, needs to be supported by pro-cyclical monetary policy. Although, the 50bps cut in the monetary policy rate (MPR) to 13.5 per cent per annum. In May was expected to induce credit growth and boost output, the Q2 numbers suggest that this measure is inadequate or untimely.”
Furthermore, it pointed out : “Though weaker than widely expected, the growth is the strongest Q2 GDP expansion since 2015. This year (Q1+Q2), the economy has achieved an average growth of 2.02%. This is 0.28% below the IMF’s forecast of 2.3%. To achieve this growth target, the economy needs to grow by at least 2.6% in H2’19. This calls for the use of proactive policies to boost aggregate investment and stimulate growth.”
Still expressing optimism about the economy, FDC stated: “The Q2 GDP growth corresponds with the Q2 PMI readings. The readings contracted (49.5 points) in July before recovering to 50.9 in August. If this growth momentum is sustained in September, it suggests that the level of economic activities will improve.”
Poor Q2 capital importation data
However, weak Q2 capital importation data released by the NBS late last Thursday may have dampened the optimism the FDC and other such analysts have about the economy’s prospects.
According to the NBS, the economy recorded a decline of $3.2 billion in investment inflow from $8.48 billion in the first quarter of this year to $5.82 billion in the second quarter.
The report stated: “The total value of capital importation into Nigeria stood at $5.82 billion in the second quarter of 2019. This represents a decrease of 31.41 per cent compared to Q1 2019 and 5.56 per cent increase compared to the second quarter of 2018.”
It disclosed that the largest amount of capital importation by type was received through portfolio investment, which accounted for 73.76 per cent or $4.29 billion of total capital importation. The study added that this was followed by “other investment,” which accounted for 22.41 per cent of $1.3 billion of total capital imported and Foreign Direct Investment (FDI), which accounted for a paltry 3.83 per cent or $222.89 million of total capital imported in the second quarter of this year.
Although the NBS did not give reasons for the decline in investment inflows, the general belief in financial circles is that delay in appointing and assigning portfolios to cabinet members may have affected investors’ confidence.
In addition, analysts believe that President Muhammadu Buhari’s decision to appoint mainly experienced politicians and very few technocrats as ministers sent a signal to foreign investors that the president is not disposed to carrying out major fiscal reforms in his second term in office.
Although, the feeling in industry circles, last weekend was that the Federal Government would probably not heed calls to embark on key reforms, analysts believe that as more grim data is released by the NBS in the months ahead, government will eventually realise that unless it acts fast, the economy could soon slip back into recession.