Recent reports issued on Nigeria by the World Bank and Moody’s Investors Service, a global rating agency, earlier this month, have sparked worries in financial circles about the direction, which the country’s economy is headed.
These reports are in contrast to the recently released quarterly Gross Domestic Product (GDP) by the National Bureau of Statistics (NBS) which showed that the nation’s GDP increased by 2.28 per cent in the third quarter of this year compared with 2.12 per cent growth rate in the previous quarter.
The World Bank report in its “Nigeria Economic Update” report published on December 2, it stated that although Nigeria’s economy continued to recover from the 2016 recession, the country’s growth outlook was still vulnerable to external and domestic risks, including geopolitical and trade tensions that may affect inflows of private investment.
The World Bank said if the country does not take significant action now, by 2030 over 30 million Nigerians could be living in extreme poverty. Warning further, the bank said Nigeria could slip back to recession, if crude oil prices fell to $50 per barrel.
“Economic and demographic projections highlight the urgent need for reform. With population growth (estimated at 2.6 per cent) outpacing economic growth in a context of weak job creation, per capita income is falling. Today, an estimated 100 million Nigerians live on less than $1.90 per day.”
“The cost of inaction is significant. Under a business-as-usual scenario, where Nigeria maintains the current pace of growth and employment levels, by 2030 the number of Nigerians living in extreme poverty could increase by more than 30 million.”
The World Bank while projecting a 2.1 per cent growth for Nigeria in 2020 and 2021, called on the Federal Government to increase domestic revenue, remove trade restrictions and improve the predictability of economic policy. It also urged the government to remove fuel subsidies and reduce central bank lending to targeted sectors that, according to it, crowds out lenders.
It stated: “Nigeria’s economic productivity is low by international standards. Productivity has grown slowly, and since the recession, it has been declining, affecting growth. The productivity gap between Nigeria and comparator countries reflects both its lower relative stocks of physical and human capital and the inefficiency with which inputs (capital and labor) are transformed into outputs.
“The vulnerability of Nigeria’s economy to volatile oil prices has also inhibited sustained productivity gains: labor has repeatedly shifted from agriculture to services when oil prices were high, then shifted back when oil prices were low, thereby limiting the economic transformation that is needed to produce more and better-paid jobs.”
The World Bank Country Director for Nigeria, Mr.Shubham Chaudhuri, said: “Reforms would help achieve faster, more inclusive, and sustained growth with jobs. Building on recent efforts, going forward, we recommend actions in priority areas, such as increasing fiscal revenues and improving the quality of spending to manage oil-sector volatility, investing in much-needed human capital and infrastructure, and improving the business climate to unlock private investment and tackle Nigeria’s jobs challenge.
“Investing in people and removing barriers that make it difficult for new firms to compete and grow will encourage entrepreneurship and innovation, spur job growth, and ultimately reduce poverty.”
Mr. Bismarck Rewane, Managing Director/Chief Executive Officer, Financial Derivatives Company Limited was reported by a national newspaper as describing the World Bank report as a “wake up call.”
He was quoted as saying “the challenge is: how do we get the economic growth to exceed the population growth? The economy has been growing below the population for the past five years, and Nigerians have become poorer.
In a statement, Moody’s Investors Service, announced that due to increasing fragility of the country’s public finances and sluggish growth prospects, it had changed its outlook on Nigeria’s ratings to negative from stable.
According to the statement, “the negative outlook reflects Moody’s view of increasing risks to government’s fiscal strength and external position. Already weak government finances will likely weaken further given an extremely narrow revenue base and persistently sluggish growth that hinders fiscal consolidation.
“As pressures mount, there is a risk that government resorts to increasingly opaque and costly options to finance a moderate but rising debt burden. Moreover, vulnerability to an adverse change in capital flows is building in light of Nigeria’s increasing reliance on foreign investors to fund the country’s foreign exchange reserves.”
Moody’s also explained that “the increasing fragility of Nigeria’s public finances is evident in the greater reliance by the government on financing from the Central Bank of Nigeria (CBN) over the last three years to cover persistently large fiscal deficits, with CBN cash advances reaching 2.5 per cent of GDP on a net basis at the end of September 2019, in addition to government debt instruments held by the CBN worth 1.4 per cent of GDP.
“In particular, CBN advances are more expensive than debt funded on the domestic capital market as the CBN applies a penalty rate on top of its monetary policy rate currently at 13.5 per cent.”
It further noted that its negative outlook on Nigeria was also underpinned by rising vulnerability to an adverse change in external capital flows.
Although Moody’s noted the significant reduction in Nigerian banks’ non-performing loans (NPLs), a development, it said would help in reducing the risk of capital erosion from unexpected losses and lessen the need for loan loss provisions, the rating agency said that “an upgrade is unlikely in the short to medium term given the negative outlook.”
Generally, in the financial circles the believe is that 2020 would be a critical period for the Nigerian economy given that government is set to introduce a lot of its reforms, especially the increase in Value Added Tax (VAT), next year.
If the objectives of these reforms are realised, then the economy is headed in the right direction.