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Nigeria’s economy improves as reserves add $13.6bn in 1 year

…GDP expanded by 1.9% – Economists

Despite the International Monetary Fund (IMF) belief that the Nigeria’s economy remained vulnerable after exited from its worst recession in 25 years, economists are confident that Africa’s largest economic recovery can take momentum into stronger economic growth in 2018, just as the external reserves appreciated by $13.603 billion in one year.

Nigeria fell into recession in 2016 largely due to low crude oil prices, but emerged from recession in the second quarter of last year as crude prices recovered and militant attacks against Niger Delta oil production facilities ended.

But the economy consolidated its ongoing recovery in fourth Quarter (Q4) 2017, as real Gross Domestic Growth (GDP) expanded by a strong 1.9 per cent year- on- year (y/y), the highest quarterly growth since (Q4) 2015.

Partner & Chief Economist, PwC Nigeria, Andrew Nevin, in Nigeria Economic Alert: “Q4’17 GDP: seasonal rebound in the non-oil sector strengthens economic recovery”, said that the real GDP growth of 1.9 per cent year- on- year (y/y) in Q4 2017, was driven by the non-oil sector which rose 1.3 per cent y/y, the highest in eight quarters, reflecting strong improvements in the agriculture, manufacturing and services sectors (92.6% of GDP).

The report noted that the oil sector received a boost from a 150,000 barrels per day increase in oil production to 1.9mbpd, expanding 8.3 per cent y/y. In full year terms, real GDP increased 0.8 per cent y/y in FY’17, largely in line with our estimate of 0.7per cent y/y.

It is however, worthy of note that Agriculture GDP increased by 4.2 per cent y/y in Q4’17 (Q3’17: 3.0% y/y), as a result of improvements in crop production (89.8% of agriculture output).

The group of economists at PwC also noted that agriculture output generally peaks in Q4, a reflection of the crop harvest season, specifically for tubers and grains. Also, this would partly provide an explanation for the sharp moderation in the monthly increase in food inflation in Q4’17 agriculture’s contribution to real GDP growth at 1.1per cent was the highest in five quarters.

They said that manufacturing sector advanced by a marginal 0.1per cent y/y (Q3’17: -2.9% y/y), due to stronger output in the food and beverage (2.1% y/y), and textile, apparel and footwear (1.6% y/y) sectors, a reflection of modest demand from the yearend festive season. Similarly, manufacturing output improved at -0.2per cent y/y in FY’17 (FY’16: -4.3% y/y), the best performance in 3 years. This is however weaker than the 4- year annual average growth of 16.7% y/y, recorded prior to the 2015 currency crisis.

Commenting on increased in trade activities boost services output, the economists said: “The services sector recorded some improvement, despite declining -0.5 per cent y/y in Q4’17 (Q3’17: -2.9% y/y).

“This was driven by a 2.0 per cent y/y growth in trade (Q3’17: -1.74 per cent y/y), and an improvement in information and communication which contracted -1.4 per cent y/y (Q3’17: -4.4 per cent y/y). Overall, there is still some weakness in the services sector with real GDP growth at -0.6 per cent y/y in FY’17 (FY’16: -1.1% y/y)”.

The report said: “We maintain our forecast of real GDP growth at 2.0 per cent y/y for FY’18, due to our expectation of stability in oil production, in particular, we expect significantly higher oil sector growth in Q1’18 due to base effects.

“Similarly, we expect increased government and pre-election spending to boost the weak consumer spending. However, we note that growth may be offset by a slowdown in investments due to the uncertainty usually associated with elections in Nigeria.”

“However, despite our expectation of stronger growth in 2018, we believe the prolonged delay in implementing overdue reforms in the economy will continue to drag growth.

“These include slow progress with the power sector reforms, absence of full deregulation of the downstream petroleum sector and the multiplicity of exchange rates which constrains investments and makes the economy vulnerable to shocks in the oil sector.

“Hence, growth will remain considerably below the long-term economic and population growth rates of 6.7 per cent and 2.7 per cent, respectively.”

Meanwhile, despite continuous injections of US Dollar into the official foreign exchange market to support the local currency, the Nigerian external reserves between March 8, 2017 and March 8, 2018, rose by $13.6 bn and $4.7 bn this year.

The nation’s external reserves hit $43.618 bn, higher than $43.2bn stood on March 6, 2018, data obtained from the Central Bank of Nigeria showed over the weekend.

The foreign exchange reserves had recorded a four-year high at $42.76bn on March 2, after commencing this year at $38.77bn.

The reserves had moved from $38.77bn in December 2017 to $40.69bn in January, 2018.

The foreign exchange buffer of the CBN has continued to increase recently over steady increase in global oil prices and federal government Eurobond borrowing, among others.

The CBN Governor, Mr. Godwin Emefiele, had projected that the reserves might hit $60bn in 2019, if the trend persisted.

He said increases in the price and shipment of oil, Nigeria’s biggest foreign-currency earner, and improved investor confidence meant the CBN could build its reserves to $60bn over the next 12 to 18 months.

“Things are looking up. No one ever thought the price of crude would hit $70 in such a short period of time,” he said during an interview with Bloomberg.

The foreign exchange buffer added $12.9bn or nearly 50 per cent in 2017 despite the CBN weekly intervention.

Although, this development means that the apex bank has till end of next year to achieve its projected $60 bn external reserves, even as it currently standing at over $43.6 bn.

The Daily Times recalls that the Executive Board of Directors of the IMF said this on Wednesday in a report of its concluded the Article IV consultation with Nigeria.

The Fund said it welcomed Nigeria’s exit from recession and the strong recovery in foreign exchange reserves, driven by rising oil prices and new foreign exchange measures.

“Nigeria’s Gross Domestic Growth (GDP) would pick up to 2.1 per cent in 2018, helped by the full year impact of greater foreign exchange availability and recovering oil production”, the Fund said.

According to the IMF, renewed import growth would reduce gross reserves despite continued access to international markets.

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