FOREIGN EXCHANGE OUTLOOK AND THE NIGERIAN ECONOMY – 2017

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According to the International Monetary Fund, Nigeria’s economy will expand 0.6 per cent in 2017. This is after due consideration of the major economic bottlenecks in 2016 which include disruptions to oil production, foreign currency shortages due to a decline in crude revenues, and weak investor confidence. The strength of the projected recovery will depend on the recovery of oil prices, improvements in liquidity conditions particularly in the foreign exchange market and the implementation of structural reforms.

Despite obvious challenges experienced by the Nigerian Federal Government in 2016, there remains widespread optimism that 2017 will be a better year for Nigerians. One way to look at it is that with the country currently experiencing its first official recession since the early 90s, what more can go wrong? As the Finance Minister put it, “Nigeria’s economic situation is in its worst possible time”. In 2016, we have seen the price of Brent crude fall to $27.67 a barrel at one point, its lowest since 2003 before bouncing back to current levels at $54.39/bbl. Consequently, the country’s foreign reserves fell to a 10-year low at $25.78billion whilst inflation spiked to a high of 18.48%, highest since February 2010. Also, during the year, the naira slid to its lowest at N497.00 to a dollar. In looking at these extreme levels of key economic indicators, an optimist would be wont to think “what could be worse”. As Lou Holtz aptly put it, “It’s not the load that breaks you down, it’s the way you carry it”.

Based on the foregoing, we attempt to analyse Nigeria’s economic outlook for 2017 under the following headers in no particular order:

Federal Budget 2017:

One of the major challenges the Nigerian economy faced in 2016 is the late presentation, approval and eventual implementation of the budget. This obviously had a crippling effect on the economy with contractors being owed and major developmental activities being stalled. According to the President, about 59% of the budget had been implemented as at September with N753.6bn (the highest capital disbursement in the nation’s recent history) having been released as at October ending as capital allocations. The N7.28trillion 2017 budget tagged “Budget of Recovery and Growth” has already been presented to the joint session of the National Assembly for approval. With a total of N2.24trillion being projected for Capital Expenditure and another N2.9trillion for Non-debt Recurrent Expenditure, one can rationalise that it is a budget that seeks to balance growth with sustenance.  However, with a projected deficit of N2.27trillion, one can expect continued bullish activity in the Fixed Income market as government continues to expand its balance sheet albeit at astronomically high costs. On the other hand, if fully implemented despite obvious challenges to revenue generation and foreign exchange earnings, Nigerians can expect significant economic activities with regard to job creation and investment.

Agriculture and local content production:

Sectors that will continue to receive strong government attention in 2017 are the agricultural and local manufacturing sectors particularly in the clothes and textiles and food and beverage industries. Given the low level of foreign reserves, it is expected that the government will strongly pursue policies that would reduce dependence on foreign (imported) products despite obvious resistance from some Nigerians who are still able to afford these products. Whilst on one hand, these sectors can help reduce demand for foreign currency excess production can also be exported thus helping the country to grow the non-oil portion of its foreign reserves. Considering the huge Nigerian population in the cities demanding basic staple foods and other agricultural produce farmers can rest assured that there lies a ready demand for their products in the coming year and beyond.

Policy stability:

From the monetary policy stance, the Central Bank of Nigeria (CBN) has been largely criticised for policy inconsistencies which in some cases have inadvertently contributed to the rapid and disjointed depreciation of the naira even in the wake of devaluation of the local currency. Over 2016, the Foreign Exchange market has remained largely illiquid, fragmented and volatile. Foreign investors have continued to shun the Nigerian financial markets despite impressive yields due to fear of their capital and profits being trapped in the illiquid FX market at the point of exit. This has deprived the Nigerian economy of much needed foreign direct and portfolio investments with their desirable impact on job creation and growth. It is expected that in 2017, the CBN will show a clear and steady path in steering the Nigerian economy out of troubled waters. Its activities will be based on principles of transparency, professionalism and integrity as the smooth functionality of financial markets is fundamental to reviving the Nigerian economy.  On the fiscal side, government policies to spur growth in the manufacturing and agricultural sectors are expected to contribute to improved economic performance in 2017. Although the proposed ban on car importation through land borders has been met by stiff resistance, it is expected that the government in its resilience will follow through on this policy. It is expected also that with further investment in information technology infrastructure, the efficiency of the sea ports at Apapa, Tin can and Onne will improve thus forestalling the need to attempt to smuggle cars through the land borders in a bid to resist government policy.

Brexit Vote Outcome:

In June 2016, Britons stunned the world by voting to leave the European Union. Although the full consequence of this dramatic decision is still subject to open debate, some negative implications may await the African continent with regard to trade as certain international trade agreements may need to be re-negotiated. Also the UK has been a substantial contributor to the EU aid programme, providing some €2billion, including 14.8% of the European Development Fund. If the UK goes ahead to trigger Brexit negotiations, this may have adverse effects on the African countries that have benefitted directly or indirectly from this Fund. Finally, with the rapid collapsing of the pound following the vote outcome, remittances to Africa have become more expensive.

US Presidential Election Outcome

The world received another stunner in November when contrary to popular expectations, the Republican candidate Businessman Donald Trump, defeated the Democratic Party candidate, former Secretary of State Hillary Clinton in the US Presidential Elections.  Although the consequences of a Trump presidency for Africa remain uncertain, it should be duly noted that some of his broad policy ideologies that have emerged include trade protectionism, fiscal austerity and anti-immigration, amongst others.

US Federal Reserve Rate Hike:

At its December meeting the US Federal Reserve hiked rates for a second time in the current tightening cycle, raising the interest rate by 25bps to 0.75%. The 25bps increase have been particularly influenced by strong labour market data, the ongoing buoyancy in financial markets and the recent increase in market-based inflation expectations partly fuelled by higher oil prices. From a financial markets perspective, this could have adverse impact on Nigerian financial markets as investors may choose to re-balance their portfolios to take advantage of the high US yields given the relatively secure environment over the much higher yields Nigerian and other African markets have to offer albeit without the corresponding security. Furthermore, Emerging markets like Nigeria do not stand to benefit from the current rate hike considering the potential impact on local currencies. The rate hike means a stronger dollar against most of the world’s currencies including the naira as investors sell their local currencies to buy the dollars needed to invest in the American economy. Also, rising US benchmark rates will have a direct impact on pricing of floating-rate-dollar-denominated loans. This will in effect adversely increase Non-performing loan ratios for Nigerian and other African banks.

OPEC and Crude Quotas:

Recent slump in commodity prices has taken its toll on African economies over the last two years although surprisingly Africa’s external financial flows have remained stable overall. In Vienna on December 10, eleven non-OPEC producers agreed to join eleven OPEC members to reduce production in 1H17. Based on the foregoing, it is expected that the observation of the OPEC-11 and Non-OPEC 11 production cuts is required to sustainably support spot oil prices in 2017. In 2017, it is expected that commodity prices will bounce back. Copper for Zambia has already seen significant surge since November whilst the recent decision in Vienna is likely to provide sustained support for Crude oil in Nigeria.

Security:

The impact of insecurity on growth and development cannot be overemphasized. From discouragement of foreign investment to loss of revenue attributable to the activities of militants in the Niger-Delta region, the Federal government needs to ensure that the country’s security challenges are effectively addressed in 2017. A secured environment is the baseline support required for all efforts towards revamping the economy to work. It is expected that having made some progress across these frontiers in 2016, the Government will consolidate on its 2016 successes to achieve a more secure Nigeria (from both foreign and domestic threats) in 2017. This will in turn help stabilize crude oil earnings both in production quota and price terms.

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Foreign Exchange (Monitoring and Miscellaneous Provisions) Act (Amendment) Bill 2016:

This proposed Bill has undergone more criticism than acceptance given the fear of the adverse impact it might have on freedom and time period for Nigerian citizens to hold foreign currency amongst other things. Given that even the most optimistic forecast for crude oil price does not come close to pre-crisis levels, it is expected that foreign exchange scarcity shall persist through 2017 unless the government and the CBN can structure a sizable amount of foreign currency denominated loans whilst the focus on non-oil export revenue also gains momentum. Otherwise, whilst the turmoil over how to stabilize the falling naira remains, it is not expected that the House will hastily approve the Bill which seeks amongst other things to:

• Empower the CBN with the ability to preclude the repatriation of foreign currency purchased from the autonomous foreign exchange market;
• Curtail the Finance Minister’s general supervisory powers under the Act;
• Curtail the Finance’s Minister’s appellate powers under section 6 of the Act (on the appointment of Authorised Dealers and Buyers) and replace the Finance Minister with the Central Bank of Nigeria (CBN);
• Criminalise acts such as “hoarding” and “monopoly” on the part of Authorised Dealers and Buyers.

Inflation:

Given the existing fundamentals, it is expected that balance of risks for the naira will remain tilted to the downside in 2017. Despite the strong drive for import replacement, Nigerians that can afford to pay the highly inflated prices of imported goods and services have continued to do so thus keeping the naira under pressure at the foreign exchange market. Furthermore, the poor infrastructural state of the country continues to pose a huge challenge for the manufacturing and agricultural sectors in their bid to generate enough output for domestic consumption. This will continue to put upward pressure on the Consumer Price Index (CPI) and inflation in 2017.

Internally Generated Revenue (IGR)

Given that Nigeria’s present state of recession is largely structural albeit triggered by reduced foreign earnings, the government has naturally realised that IGR in the form of taxes, levies, fines and duties will be one of the major sources to fund its growth and recovery budget in 2017. It is thus expected that we will see policies that will seek to impose stiff levies particularly on the importation of luxury items in the coming year.

Although the foregoing list is inconclusive, it is believed that these areas covered are highly significant to the activities that will shape the major events in the Nigerian economy in 2017.

By Olawale Hamed