FESTUS OKOROMADU writes that the latest report of the National Bureau of Statistics indicating slight growth in the nation’s economy in the second quarter of the year has raised concerns for economic and financial experts and they have projected that managers of the nation’s economy have to do better
Many experts argued that economic indices may continue to decline beginning from the third quarter of the year inspite of the marginal growth recorded in gross domestic product in second quarter of 2023.
Worst still, the oil sector which hitherto was expected to drive the nation’s economic growth and development is now stunted as it has recorded contracted growth for 13 consecutive quarters.
According to the NBS report, the Nigerian economy grew by 2.5 percent (year-on-year) in the second quarter of 2023 (Q2’ 2023). This represents a slight improvement relative to the economic growth of 2.3 percent in the first quarter of 2023.
On a quarterly basis, the real Gross Domestic Product (GDP) fell by 0.1 percent in Q2’ 2023 relative to a 15.7 percent quarter-on-quarter decline in Q1’ 2023. This growth has been partly attributed to the waning effects of the Naira scarcity which accompanied the currency redesign policy implemented earlier in the year.
However, the cumulative GDP growth for the first half of 2023 stood lower at 2.4 percent compared with 3.3 percent in the corresponding period of 2022. In nominal terms, the size of the economy stood at N52.1 trillion (US$67.2 billion) and N103.3 trillion (US$133.3 billion) in Q2’ 2023 and H1’2023, respectively.
While the non-oil sector took the front seat, the contraction in the oil sector deepened sharply by 13.4 percent in Q2’ 2023 than in the previous quarter as well as recording the 13th consecutive quarter of negative growth.
This decline can be attributed partly due to a drop in the average domestic crude oil production to 1.2 million barrels per day (mbpd) in Q2’ 2023 from 1.6mbpd in Q2’ 2022. However, there are indications of recovery. Meanwhile, in H1’2023, the oil GDP fell by 8.8 percent compared with an 18.9 percent decline in H1’2022.
“Q2’ 2023 is, however, the quarter where the impact of subsidy removal, forex unification and other reforms of the new administration had its major impact on squeezing household consumption demand and firms’ costs of operations as well as reduced private investment as firms continued to adopt a wait and see approach”
Commenting on the implications of the continued negative growth in the sector, economic experts from Financial Derivatives Company (FDC) noted that while the Nigerian economy has reduced its dependence on oil, its revenue and export earnings still remain heavily reliant on the commodity.
FDC revealed that the oil sector, a major source of revenue and foreign exchange earnings, has been in recession since 2020.
Similarly, experts from Cordros Securities noted that with the current efforts to combat crude oil theft and vandalism in the Niger Delta region, frequent leaks from pipelines and intermittent oil terminal shutdowns for repairs pose a downside risk to crude oil production in the near term.
Researchers from Cowry Securities Limited are of the opinion that the country’s ability to grow its oil receipts in the past had been jeopardized, owing to high subsidy payments which constituted a major threat to government’s revenues.
Cowry argued that the decreased contribution to GDP can be attributed to low investment into the oil sector, pipeline vandalism and the menace of oil theft.
On their part, The Lagos Chamber of Commerce and Industry (LCCI) said the retarded growth recorded in the sector is due to lack of accountability, rising cost of production among others.
The Director General of the LCCI, Dr. Chinyere Almona, who made her view known in a public statement titled “LCCI Statement on Nigeria’s Q2’ 2023 GDP Growth Rate,” said, “The significant decline in the oil sector reflects suboptimal daily oil production due to a lack of accountability, oil theft, pipeline vandalism, underinvestment, and rising cost of production.”
The KPMG Professionals equally have concerns over the condition of the sector. The service firm while speaking to the sector performance painted a gloomy picture of the future.
KPMG noted that there has been muted government capital investment in the economy in Q2’ 2023 and the first half of Q3’ 2023 so far and warned that the contraction in the sector still persists.
“Crude oil production has started Q3’ 2023 with a further contraction in July 2023 and if this trend continues for the remaining two months of Q3’ 2023, we will have a situation where non-oil sector growth and oil sector growth underperform,” KPMG hinted.
Industrial sector returned to negative growth territory
Another key sector noted for economic expansion and real growth- the Industrial sector also suffered contraction as it returned to negative growth in Q2’ 2023. The NBS report showed that the sector contracted by 1.9 percent (year-on-year) in Q2’ 2023, recording a mild growth of 0.3 percent recorded in Q1’ 2023.
Again, experts attributed this mainly to the sharp contraction in the crude petroleum and natural gas sub-sector, which grew by 13.4 percent and contributed 29 percent to the total Industry GDP in the quarter.
However, in H1’2023, the industrial sector contracted by 0.8 percent, an improvement over an output.
However, in H1’2023, the Industrial sector contracted by 0.8 percent, an improvement over an output decline of 4.6 percent in H1’2022. Out of the 20 activities in the Industrial sector, 5 sub-sectors contracted, while 15 activities recorded positive growth in Q2’ 2023.
Speaking to the challenges facing the sector, President, Lagos Chamber of Commerce and Industry (LCCI), Dr. Michael Olawale-Cole, said the Nigerian economic environment continues to encounter multiple factor crises.
“Although the general elections held in March 2023 were considered relatively peaceful and the transition completed in May, business conditions and operating environment in the first half of the year were essentially difficult due to rising interest rates, inflationary pressures, foreign exchange volatility, and the liberalization of the downstream sector of the oil and gas industry.
“As a result, the cost of living has significantly gone up,” he said.
Sectorial performance versus employment
Examining the sectors performance and prospect of job creation, analysts at FDC noted that, “Of the 46 activities tracked by the NBS, 16 expanded in Q2’ 2023 compared to 12 in Q1’ 2023 and 15 in Q2’ 2022.
“But more worrisome is that most of the expanding sectors are not employment intensive and will have a limited impact on unemployment that reduced to 4.1 percent in Q1’ 2023 from 5.3 percent in Q4’ 2022. This trend is likely to reverse as aggregate demand falls and firms begin to rationalize headcount to reduce operational costs.”
A breakdown of the data showed that 22 of the 46 activities slowed while eight contracted. “Most of the activities in this category are employment intensive, primarily affected by currency weaknesses, low consumer purchasing power, and heightened insecurity.”
Reversal of predictions
Following the economic reality posed by the NBS GDP report, KPMG has adjusted it growth projection for the country from 2.85 percent to 2.65 percent. The firm based the revision on various considerations.
The listed the factors include: contraction in oil production, muted government investment in the economy, the impact of subsidy removal and foreign exchange (forex) rates unification on households, among others.
“Q2’ 2023 GDP results is broadly in line with our earlier downward revision of 2023 GDP to 2.85 percent. Nevertheless, we are adjusting our 2023 forecast further downwards to 2.65 percent,” KPMG said.
“Firstly, half-year 2023 GDP currently stands at 2.41 percent and will require an average growth in H2 2023 of 3.30 percent and 3.50 percent to end the year at 2.85 percent and 3.0 percent respectively for 2023 which we believe is challenging and unlikely.
“Q2’ 2023 is, however, the quarter where the impact of subsidy removal, forex unification and other reforms of the new administration had its major impact on squeezing household consumption demand and firms’ costs of operations as well as reduced private investment as firms continued to adopt a wait and see approach, tweak strategies to cope with rising costs and reduced demand for their goods and services and struggled to find forex to operate. These factors will likely constrain non-oil growth given that household consumption and private investment constitute the largest share of GDP.
“The impact of subsidy removal was evident in the biggest contraction in road transportation GDP since the new GDP series. Though, subsidy was only removed in June 2023 representing one month impact of the three months of the quarter, road transport GDP contracted by -55.14 percent in Q2’ 2023, representing the biggest contraction in road transport GDP in history.
“This contradicts the muted results recorded with respect to inflation for that same month which according to NBS was not expected to fully reflect on the CPI though methodologically, the Inflation rate in each sector is used to deflate nominal GDP for that sector.
“At the same time, there has been muted government capital investment in the economy in Q2’ 2023 and the first half of Q3’ 2023 so far, with new administrations at the Federal and State level settling down in Q3’ 2023.”
The firm also said it expected further increases in inflation for the rest of the year which would make the pressure on nominal to real gross domestic product (GDP) to be higher, thereby curtailing higher real GDP growth in Q3’ 2023.
Similarly, the Cowry Research team has cut her GDP projection for 2023 to 3 percent from 3,74 percent.
The firm said, “We maintain that the soaring inflation, particularly in view of commodity price shocks and imported food inflation due to the Russian -Ukraine conflict, fuel subsidy removal, floating of the naira by the CBN and tumbling daily oil production volumes may pose as a downside risk to growth this year. Thus, Cowry Research trims it 2023 GDP forecast to 3 percent from the earlier projection of 3.74 percent.
Government policy and GDP performance
On its part, the Nigeria Economic Summit Group (NESG) calls on the government to revamp the local refineries to reduce the economic crisis created by petroleum product importation. The NESG noted that the recent fuel subsidy removal and unification of the multiple exchange rates are a welcome development.
But, stressed that, “Nigeria largely meets its local demand for petrol through the importation of refined fuel products, which has complicated efforts towards stabilising the Naira amidst foreign exchange (forex) scarcity. Hence, there is an arduous task before the government to adopt a gradualist approach in revitalising the local refineries so as to reduce the country’s exposure to fuel imports, which would, in turn, moderate the pressures on the exchange rate.”
On the prospect of GDP growth in the next quarters, the NESG said, “Amidst the recent reforms, many businesses in Nigeria face high operations and production costs due to the petrol price hike and forex scarcity. This situation needs to be addressed urgently.
“More worrisome is that most of the expanding sectors are not employment intensive and will have a limited impact on unemployment that reduced to 4.1 percent in Q1’ 2023 from 5.3 percent in Q4’ 2022. This trend is likely to reverse as aggregate demand falls and firms begin to rationalize headcount to reduce operational costs”
“As part of the palliative measures, the government should be deliberate in ameliorating the operational setbacks facing businesses due to incessant power outages, logistic bottlenecks, and forex rationing.”
The group warned that, “Not addressing these issues could impact private sector activity negatively and contribute to an economic slowdown in the coming quarters.”
Commenting on the Q2’ 2023 GDP, the Executive Director/CEO, Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, noted that the economy slowed amid shocks from current economic reforms that impacted energy prices and the Naira’s exchange rate.
He, therefore, advised the Federal Government to strike “a delicate balancing act and strategic sequencing in the implementation of its economic reform programmes in order to engender inclusive economic transition.”
Yusuf, in a press remarked that the adverse impacts of the reforms are disproportionately higher than expected.
“The Nigerian economy is still going through corrective reforms to remove some fundamental distortions and restore the economy back to the path of recovery and growth. But implementing the reforms is an arduous task as the trade-offs are profound and the social impact has been devastating. Given the inevitability of the reforms, their implementations call for a delicate balancing act and strategic sequencing to ensure an inclusive economic transition.”
He added, that the Q2’ 2023 GDP growth fell short of the sub-Sahara Africa projected average of 3.1 per cent for 2023, but is better than projections for the Euro Zone of 1.0 per cent and the United States of 1.8 per cent.