The International Monetary Fund, has said that increased focus on campaigns towards 2015 elections is one of the factors likely to divert the world’s attention from issues that would promote the growth of Nigeria’s economy in 2015. Following the economic performance in 2014, the Nigerian economy is expected to continue to grow weakly in 2014 with the growth to be driven by robust domestic demand and agriculture while low oil prices is expected to impact negatively on the economy. When people talk about Nigeria in 2015, the doomsday picture is the most discussed, for the understandable reason that it is the year of the elections. These factors are expected to impact the Nigerian economy:
Financial Market and Foreign Exchange
The devaluation of the Naira is expected to begin to take its toll on the economy this year. Nigerian consumers have not really felt the impact of the devaluation because all the goods being sold in November and December had already been paid for at the old value but come 2015, the impact would be felt and price of goods and services would rise.
Also, there is expected to be increased lending to the agriculture sector as the economy shifts in that direction. Many banks last year had raised funds internationally to increase lending as the recent CBN polices have put a lot of restrictions on the banking industry. However, this is not guaranteed as the banks would also be conservative in their lending as they work on reducing risks. The tight monetary policy may continue into the 2015 and this will keep the interest rate high in the economy
The Central Bank of Nigeria (CBN) devaluation of the national currency, the naira (N168 to $1) became unavoidable because of the reduction in federal government revenue from oil production and sales. Nigeria’s foreign reserves lost more than $3 billion in one and a half months to efforts to defend the naira. The depreciation at both the interbank and the BDC segments largely reflected recent demand pressures arising from falling oil prices and dwindling external reserves.
A natural outcome of the depreciating exchange rate in an import-dependent economy is inflation. Cost-push inflation will begin to manifest in the next few weeks of 2015. This will be driven by high cost of production and high cost of imported finished goods.
With inflation expected to rise this year, the apex bank is more likely to continue its tight monetary stance to rein the pressures on the local currency and reduce the liquidity in the market.
Nigeria is still heavily dependent on refined products when we are supposed to manufacture and sell to West African countries and this has affected this sector too. If the Federal Government continues to emphasise on food production in 2015, that will have some cushioning effect on imported inflation because 60 per cent of household expenditure in Nigeria is on food.
The dwindling oil revenue set against the backdrop of the recent budget proposal presented to the National Assembly (NASS) by the finance minister, Ngozi Okonjo-Iweala, paints a gloomy picture for the oil sector in 2015. The country is known to lean heavily on oil earnings and borrowed funds even when the oil price stood above the $79 per barrel benchmark that was used to estimate the 2013 budget. There are concerns as the current oil price dwindles and currently stands at $54 per barrel (which experts foresee may drop further). This is actually below the $65 per barrel benchmark used for the 2015 budget and oil is inevitably tied to Nigeria’s finances. Would Nigerians need to live an austere life come 2015? Okonjo-Iweala announced to the world that Nigeria would be running a capital budget of N634 billion. Further reports showed that the federal government intends to draw N80billion from the excess crude account (ECA). This is only possible only if the oil price rises above $65 per barrel oil benchmark proposed in the budget.
Slow economic growth is expected in the first quarter of 2015 as a result of falling oil price and distractions all over the states in preparation for the forthcoming general elections in February. 2015 is going to be a bleak year for the economy as government attention has shifted to the general elections.
If oil prices continue to stay as low or goes lower than it has this year, Nigerians will have to depend on import substitution and increase export drive to be able to scale through 2015. If we embark on export drive, we will be more competitive, not only that, if we do import substitution we will depend less on importation.
Also there is need for Nigeria to look inward at other sectors asides oil and gas that could generate more foreign exchange for the country. Particularly, the agriculture and creative industries should receive more focus this year.
Should oil prices remain below $65 per barrel, the country would borrow more. Nigeria has recurrent receipts which must be paid, not to mention unrelenting capital expenditure commitments to its citizens. Logically, by 2015, Nigerians will be left reminiscing about the oil sector. However, Nigeria’s economic response through fiscal policies would go a long way in mitigating the negative effects of crashing oil prices.
Lower revenue generation from oil exports would mean that Nigeria would have to look elsewhere for income to support our bogus government spending. This therefore means that we might be looking at total removal of fuel subsidy next year as well as tightening of tax laws.
As a result of the import-dependent character of the economy, the sharp declines in exchange rate will naturally push up the operating costs of enterprises in the economy.
What appears to be dominating the agenda of the political leadership now is politics rather than growing the economy. Yet, we need a strong economy to support our political process under the present democratic dispensation.
This sector is believed by many people as capable of taking over from oil in 2015 as the mainstay of the economy. The backward integration project is proving a success, as investors like Aliko Dangote, Honeywell, etc are investing heavily in agriculture. Farmers lose a lot of crops during the rainy season. ‘Off-takers’ who buy farm produce directly from farmers include Dangote and this process aids the farmers in securing loans.
With focus on the upcoming election, FDI is expected to decline sharply and high fund outflows are expected as investors wait for the outcome of the election and subsequent reaction of the outcome of this election.
The equities market is expect to react negatively to these decisions by investors as earning are expected to trend southwards as investors take out their capital.
The recovery of the equities market would be dependent largely on the outcome of the election and stability of the country’s currency.
The insurgency currently destabilizing some parts of Nigeria cannot only be fought with military force brute attack but by attacking the ideology of the terrorists. To cub extremist activities in Nigeria, we have to track down and bring to an end the source of funding and arming of terrorists.
Cyber attack and invasion (including attack on organizations’, cloud-based data) and the use of crime ware toolkits will be on the increase this year.
The Army is not fully trained and equipped for this sort of unconventional war and that needs to change. Post security measures should also be put in place for the 2015 elections.
Insecurity will remain a limiting factor given deeply embedded socio-economic, ethnic and religious frictions. Tensions will be magnified by the approaching February 2015 elections. This instability will mar economic prospects, as well as slow policy implementation and support weak infrastructure, compounding the economic challenges will be falling prices for the key export commodity, oil, something that saw to a devaluation of the official exchange rate on November 25th, with the devaluation of the currency, exchange rate risk is currently at an all time high which impedes investors from holding the Naira. Country’s inflation rate may cross the double-digit mark in the first half of 2015 as the combined austerity measures introduced by the government and tighter monetary policy of the Central Bank of Nigeria (CBN) will put additional pressure on consumer prices.
Agriculture and creative industries should receive more focus in the year to come. The dwindling oil price will be a major challenge for the economy, lower capital expenditure in 2015 and a higher recurrent spending would not be helpful as there would not be any real developmental spending.
Let me conclude by stating that while the overall economic outlook for 2015 appears pitiable, there is a need to intensify our efforts to address the persistent challenges of insecurity, implementing a spending cuts, infrastructural deficits as well as the threats to oil production such as pipeline vandalism, crude oil theft, etc and looking inwards to find things with which to grow the economy. There is also the need to give greater attention to the diversification of the Nigerian economy away from the current over-dependence on Oil export in order to avoid the current vagaries in the international oil market and their attendant adverse effects on the domestic economy.
While I check for accuracy and invest time in research, I am not liable for any misinformation. The details here should be construed as my investment view and any use of same is at owners risk.