Nigeria may already be in recession as growth in Africa’s largest economy contracted in the first quarter of the year, the first time since 2004.
Gross Domestic Product (GDP) declined by 0.36 percent from a year earlier, the Abuja-based National Bureau of Statistics (NBS) revealed Friday, compared with growth of 2.11 percent in the previous three months.
Analysts had warned that the capital controls imposed by regulators, as well as the lack of policy direction by the new government which inhibited the flow of foreign investment, will inevitably lead the country on the path of an economic recession.
A recession is defined as two consecutive quarters of negative growth.
“One more quarter of negative growth, we’ll officially be in recession,” said Oluwatosin Ojo, equity research analyst at Cardinal Stone Partners, in an emailed note to BusinessDay.
“This negative GDP growth figure may substantiate the rumor of a currency adjustment at next week’s MPC meeting, especially as the sector largely responsible for the decline is manufacturing (down by 7%) – remember that the Manufacturers Association of Nigeria has been lamenting on the impact of FX restriction on their sector,” said Ojo.
Nigerian President Muhammadu Buhari, placed foreign exchange restriction on 41 items, a policy that resulted in capital flight, crimped production output and led to the naira dropping to a record low on the alternative market.
Foreign-exchange trading restrictions and import curbs have also led to shortages of goods from gasoline to milk and contributed to the contraction in factory output in the quarter.
“We have one more month to evade a recession, and that’s just not going to happen. Let’s not fool ourselves,” Bismarck Rewane, chief executive officer of Lagos-based consultancy Financial Derivatives Co., said. “We’ve had strikes, petrol queues, and disruption of oil production, all showing we’re headed to another negative quarter.”
Buhari has resisted calls from investors to devalue the naira, which has been pegged at 197-199 per dollar for more than a year after oil price dropped significantly by more than 60 percent from over $100 per barrel in mid-2014.
“This is effectively the price we have to pay for delayed actions on budget passage and subsidy removal,” said Taiwo Oyedele, a partner and head of tax & regulatory services, PriceWaterHouseCoopers (PWC).
Fuel shortages intensified in the first quarter, exacerbating the already anaemic position of Africa’s most populous nation, as premium motor spirit (pms) importers were starved of dollars to import.
“A lot of man hours were lost during the fuel scarcity. This is the time people would have spent on production rather than stay on the queue,” said Tajudeen Ibrahim, team head, Chapel Hill Denham, by phone.
Nigeria’s economy contracted as inflation rose to 13.7 percent in April the highest pace since 2010 on the back of an increase in fuel and electricity prices.
BusinessDay had reported last week that Central Bank policy makers were in a dilemma on whether to focus on inflation or growth at their next meeting beginning today.
“The CBN must shift focus away from managing inflation and elevate the position of real growth in the next MPC meeting,” Ayo Teriba, chief executive officer of Economic Associates Ltd., an advisory firm, said in an phone interview with Businessday.
The GDP report showed that the oil Sector real GDP contracted by 1.89 percent year on year (YoY) (Q4’15: -8.28% YoY and Q1’15: -8.15% YoY).
Non-oil Sector real GDP also contracted by 0.18 percent YoY (Q4’15: 3.14% YoY and Q1’15: 5.59% YoY) with major sub-sectors including Agriculture growing by 3.09 percent YoY (Q4’15: 3.48% YoY and Q1’15: 4.70% YoY) and Manufacturing contracting by -7.0 percent YoY (Q4’15: 0.38% YoY and Q1’15: -0.70% YoY).
“Technically there is no recession unless we see two consecutive quarters of negative q/q growth. This is not yet the case, and with some momentum from passage of the budget hopefully Nigeria can avert a recession,” said Razia Khan, Regional Head of Economics, and Africa at Standard Chartered Bank said, in an emailed note.
President Buhari last month signed Nigeria’s N6.1 trillion ($30.6 billion) 2016 budget , the biggest ever and up 20 percent from the 2015 budget, as the nation looks to spend its way out of an economic slowdown.
Government intends to spend more than N200 billion on road construction, this represents 1001 percent increase from last year’s N18 billion.
Nigeria’s unemployment rose to 12.1 percent in the first quarter from 10.4 percent in the previous three months, the statistics office said in a separate report on Friday.
The oil sector is in crisis and there has been negative growth in the manufacturing sector in the last 3 quarters.
The financial sector has also been hard hit.
Analyst say these have started playing out in other sectors of the economy and policy makers must take urgent steps in resuscitating business activities.
“It’s an indication that if we are not careful, we are heading for a recession. We need to look at the factors impeding domestic and foreign investment. We also need to devise means of putting money in the hands of people to drive purchasing power,” said Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry.
Analysts at Afrinvest Limited in a Flash note to investors listed five areas government must reform to reignite growth including removal of fuel subsidies and adjustment to the naira.
The five signals should include: a well-articulated plan to reflate the economy, removal of Petroleum Subsidy, investment in infrastructure spending, foreign exchange rate adjustments and improved economic viability of States.