Macroeconomic Report & Economic Updates

Capital importation into Nigeria dropped significantly in first quarter of 2019 with more than 26 states unable to attract any form of foreign investment during the quarter. At $5.82 billion, total capital imported declined significantly by 31.4% relative to $8.49 billion capital imported in the previous quarter¹. By type of investment, while other investments (loans, and other claims) increased QOQ by 19% to $2.4 billion, both foreign direct and portfolio investments declined during the quarter. Foreign direct investment fell by 8.41% to $222.89 million, however, portfolio investment, Nigeria’s biggest source of capital importation, declined the most by about 40% from $7.15 billion in 2019Q1 to $4.29 billion in 2019Q2. The numbers suggest that investors seem weary of the weak economic and business environment and are taking a risk-averse stance. With the presence of internal push factors such as rising government debt, declining economic performance, and static business climate, we expect a continuous decline in foreign capital inflows. To attract capital inflows, there is need to boost investor protection by improving regulations on protecting minority investors, as well as managing conflict of interest between the government and investors in order to reduce the risk exposure to foreign investors.

Nigeria’s economy performed poorly and witnessed a second consecutive quarter of weakened growth as real GDP slowed to a year-on-year growth rate of 1.94% in the second quarter of 2019¹. The rate is lower than the revised 2.1% growth rate reported for the previous quarter (2019Q1) and particularly underlines slow paced growth in the non-oil sector. While the oil sector leveraged on oil price rebounds and expanded by 6.61 percentage points to record a growth rate of 5.15% (from -1.46%), the non-oil sector slowed to 1.64%, declining from 2.47% posted in the last quarter. The trend in the non-oil sector revealed the suboptimal growth state of two major sub-sectors – agriculture and manufacturing. Agriculture subsector fell significantly from 3.17% to 1.79% while the manufacturing sector entered the negative growth rate zone (-0.13%) and contributed less to GDP QOQ (9.1%). The performance of the non-oil sectors is likely to be continually undermined by systemic issues including the lack of large-scale mechanization, inadequate backward and forward integration with local industries, and poor standardization of products. It would be beneficial for the  government to create an environment that encourages  private sector partnerships and public-private partnership for upscaling production, particularly in agriculture and manufacturing sectors. Regulatory agencies such as  Standards Organization of Nigeria (SON) also need to deepen their efforts towards ensuring better quality and standardization of products to boost Nigeria’s domestic sales and exports.

The Federation Accounts Allocation Committee distributed a total of N769.5 billion to the three tiers of government as revenue earned in July 2019³. This amount is slightly higher than the N762.6 billion disbursed as revenue earned in June⁴, by N6.9 billion. For the review month, the Federal, state and local governments received N299.8 billion, N190.38 billion, and N143.57 billion respectively. As 13% derivation, the oil producing states received N42.92 billion and revenue generating agencies received N92.86 billion as cost of revenue collection. Such transparency in revenue disbursement across the three tiers of government should also be reflected in the actual distribution of funds for public services, especially at state and municipal levels. This would strengthen accountability, public financial management and traceable value for tax payers Naira.

Recent reports suggest that a forex restriction on food imports into Nigeria will be implemented in the coming months¹. The Apex bank had enlisted, in 2015, 41 items as invalid for foreign exchange at the Nigerian forex markets. This list is set to increase if the recent directive to ban forex for imported food items materializes. Although the key motivations behind the forex control measure include to boost local production, sustain forex stability, and conserve the foreign exchange, many underlying factors have been overlooked. Nigeria relies heavily on imported food items to meet demands of its over 180 million people, given the insufficient local food production capacity (the nation spends almost $4 billion annually to cover the food import bill²). Essentially, the current shortage in domestic food supply capacity cannot immediately replace the restricted imports. Also, the lack of structure and infrastructure for local food production sufficiency could create artificial supply gaps that are incentives to smuggling food into the country and shooting up prices and inflation. A rapid transition from smallholder farming to mechanised farming is required to stem the expected rise in food prices. While the Government promotes mechanisation through the private tractor-hiring enterprise, the programme has remained unprofitable to tractor owners as most clients are smallholder farmers. The tractor-hiring enterprise presents an entry point for international and local donor organizations active in the agriculture sector.

The importation of petroleum products into Nigeria continues to expand. In 2019Q2, imports totaled 5.61 billion litres of Premium Motor Spirit (PMS) or petrol, 1.38 billion litres of Automotive Gas Oil (AGO) or diesel, and 12.22 million litres of Household kerosene (HHK)¹. Although, there were moderations in the importation of kerosene, petrol and diesel imports for the review quarter represented 15.2% and 14% QOQ increases respectively, and reflected the rising need for fuel consumption in Nigeria. While the increase in fuel imports is imperative to satisfy growing domestic demands, the path towards fuel self-sufficiency in Nigeria is becoming far-fetched. The NNPC had marked 2019 as the year for fuel independence; however, with the increasing fuel importation exacerbated by insufficient refining capacity and the lack of political will, the year 2019 may end without considerable achievement. While the recent licensing of modular refineries is a step towards meeting local demand, the full removal of subsidy will lead to cost-reflective pricing of petroleum products, thus incentivizing private investors into the upstream petroleum sector.