World Bank delivers mixed verdict on Nigeria’s economy, projects fiscal deficit to widen

The World Bank, in its latest report on Nigeria’s economy, has said that fiscal deficits in the country will likely widen further in 2018.

According to the report titled ‘Investing in Human Capital for Nigeria’s Future’, the increase in fiscal deficit will be due to increased pre-election spending and sustained revenue shortfalls.

The report also noted that Nigeria’s 2018 budget implementation was expected to be assertive as the federal government intensifies efforts to complete projects before elections.

It also stressed that the Nigerian economy remains dependent on “the small oil sector (under 10 percent of GDP) for the bulk of its fiscal revenues and foreign exchange earnings”, adding that this makes Nigeria’s balance of payments and government budgets vulnerable to volatilities in oil prices, which plunged to a one-year low of $58.41 a barrel at the weekend, down more than 22 percent, following global oversupply.

“Indeed, growth and investment in Nigeria have been negatively impacted by repeated oil-price driven boom-bust cycles. The oil price shock of late 2014 and its aftermath pushed the economy into recession and precipitated a major budgetary crisis at the national and state levels, which brought to light the longer-term trend of weak domestic revenue mobilisation.

“Nigeria’s weak revenue mobilisation has major implications for growth and development, including for improving its dire social service delivery outcomes. Thus, the country needs to take concrete steps to break its oil dependency to improve its economic and social outcomes,” the report added.

Though Nigeria’s Economic Recovery and Growth Plan (ERGP) 2017-2020 aims to achieve macroeconomic stability and economic diversification, the report however noted that Nigeria’s emergence from recession remains very slow as sectoral growth patterns have remained unstable.

This is just as the Real Gross Domestic Product (GDP) growth strengthened from 0.8 per cent (year-on-year) in 2017, to two per cent in the first quarter (Q1) 2018, but slowed to 1.5 per cent in Q2.

The World Bank further noted that a relatively tight monetary stance has kept the exchange rates stable and helped control inflation, which reached a two-year low of 12.5 per cent (year-on-year) in April, while the headline inflation declined further to 11.1 per cent in July 2018.

“However, with declining inflation, the CBN began to cut back on its liquidity draining operations from March 2018. In August, inflation increased slightly to 11.2 percent, on account of increasing food inflation.

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“The recent ease in liquidity and partially-improving health of the banking sector did not however stimulate private sector lending, due to persistent risk aversion, stagnating consumer demand, and still high government security yields.

“The central bank maintained key exchange rates (particularly, the official and IEFX) stable through direct intervention and greater convergence was achieved between the interbank wholesale and retail rates on the one hand and the IEFX rate on the other hand.”

The report however argued that the divergence in exchange rates remains and continues to create “a complex scheme of implicit subsidies and distorting national accounting.”

“Oil revenues are recovering with increasing oil prices, but distributions to the tiers of government are constrained by the unbudgeted fuel subsidy and other deductions.

“The fuel subsidy, no longer an explicit first line deduction from oil revenues, mostly benefits the affluent and it is also widely-known that a portion of Nigeria’s imported petrol is smuggled out to neighbouring countries where petrol is more expensive.

“The constrained net oil revenues, combined with non-oil revenues that are constrained by limited tax policy reforms and are thus stagnated (relative to GDP), limit overall revenue realisation, thus constraining budget execution and the build-up of fiscal buffers.

“The growth in the public debt stock between the first half of 2017 and the first half of 2018 was mainly attributable to the increased Eurobond issuances, some of which were used to liquidate costlier domestic short-term debt.

“Nigeria is in a pre-election period, and fiscal and inflationary pressures are increasing. The agriculture sector outlook remains weakened due to ongoing conflicts, despite targeted government support (import restrictions and subsidised financing schemes).

“Oil production is projected to remain relatively stable, but below the government’s ambitious targets. The growth in non-oil non-agriculture sector – the biggest share of the economy – will remain limited by a slow recovery in private demand, but with its momentum likely strengthening by the election-related public and private spending in the second half of 2018 and early 2019.

“Overall annual growth is expected to be around 1.9 per cent in 2018, undermined by the slowdown in agriculture and oil sector growth, gradually rising in the medium-term with reduced political uncertainty and returning consumer confidence. The central bank is expected to closely control the level of liquidity.”

The report which also has a special focus in the report on human capital development in Nigeria, revealed that “the economic burden of malaria alone in Nigeria, accounting for direct and indirect costs, excluding mortality, is estimated at 13.5 percent of GDP.”

“However, in the quest for sustainable growth, Nigeria, like many other countries, has underinvested in human capital. While physical capital remains critical, it does not fully account for improvements in growth,” it added.

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