The year 2016 will go down in history in three days as the period when recession hit the country, pushing many Nigerians down the poverty ladder. Several economic decisions taken or not taken by government had a direct impact on the lives of Nigerians within the period.
Delay in the passage of the 2016 budget
The 2016 budget was not signed into law until May 2 leading to a significant slowdown in business activities for most of the first half of 2016, at a time the economy was already showing signs that it was heading into a recession.
“Nigeria virtually shot itself in the foot,” said Rafiq Raji, an economist and managing director of Macroafricaintel, an Africa-focused macro-investment consultancy firm.
“This year’s budget was not passed until the second quarter of the year. With government as the dominant player in the economy, almost everything ground to a halt as a result of the delay,” Raji added.
The delay in implementing the expansionary N6.06 trillion 2016 budget, fashioned to boost economic growth, compounded the economic lull in the country.
Electricity tariff hike
A plan to increase electricity tariff that has been on the drawing board even before President Buhari was sworn-in, came into effect in February, with electricity tariffs going up by an average of 45% across board. This had a significant impact on Nigerian households and businesses, especially since the increase did not lead to any significant increase in power supply across the country. In effect, households and businesses found themselves paying higher electricity bills, while still generating most of the power they use. A Federal High Court in Lagos eventually quashed the tariff hike in July, but the National Electricity Regulation Commission (NERC) has appealed the ruling. Economists note that the increase in electricity tariff largely fed into the fast pace rise in prices of goods and services in the country.
Fuel price hike
President Buhari was forced to take one of its most difficult policy decisions on May 16, when the government adjusted fuel prices to conserve scarce dollars in the face of a decline in oil revenue- the largest source of foreign exchange earnings and government financing.
The Minister of State for Petroleum Resources, Ibe Kachikwu, said that the Federal Government would have had to cough up N16.4 billion every month to offset the subsidy claims of oil marketers had it not taken the decision.
The price adjustment saw the retail price of fuel jump 68 percent to N145 per litre from N86.50.
“At root, the difficulty for Nigeria is that it exports too little oil per person, to offer a significant fuel subsidy,” according to Charles Robertson, chief economist at investment firm, Renaissance Capital.
“Gulf countries export 25 times more oil per person and even they have removed the fuel subsidy,” Robertson added.
But oil industry players have criticised the decision to hike fuel prices instead of removing subsidy, as fuel price hikes are always not enough incentive to drive investment into the downstream sector.
Naira devaluation
Faced with a sharp drop in crude oil revenues, the exit of foreign investors and the dry up of new dollar inflows into the country, which led to declining external reserves, Nigeria’s Central Bank was soon faced with a decision to draw down remaining reserves to defend the exchange rate, impose capital controls or accept a weaker exchange rate with the possibility of losing control of inflation.
So on May 16 Godwin Emefiele, the Central Bank Governor, announced a policy shift from a hard peg to a currency float, effective June 20.
June 20’s naira float saw the naira shed over 62 percent of its value, exchanging for N320 per US dollar from N197 pre-devaluation.
In a clear signal that June 20’s big devaluation proved decisive in attracting foreign capital, the capital imported in June rose markedly and made up for record low inflows in April and May, to boost total capital importation in the second quarter of 2016 to $1.04 billion.
The level of capital imported in June was $610.77 million, double the amount recorded in the months of April ($305 million) and May ($125 million).
In its most recent report, the NBS noted that total value of dollar inflow into Nigeria in the third quarter (July to September 2016) rose to a year high of $1.8 billion, an increase of 74.84 percent, compared to the second quarter, but a 33.7 percent decline compared to the same period of 2015.
Tajudeen Ibrahim, head of research at Chapel Hill Denham said the decision to float the naira was good but the results are yet to be seen, due to the lack of transparency in the foreign exchange market.
“We were unable to keep our nerves to allow the naira float complete its cycle,” Ibrahim said. “Until there is a proper price formation, the positive results from the float will never come.”
Interest rate hike
Nigeria increased interest rates by 300 basis points in 2016.
The Central Bank first raised rates in March by 100 basis points to 12 percent from 11 percent, before it raised rates again in July by 200 basis points to 14 percent from 12 percent.
Across sub-Saharan Africa’s top ten economies, Nigeria was second only to Angola, as the country with the biggest hike in interest rates in 2016.
Angola raised its rates by 500 basis points, while South Africa in third place- increased rates by 25 basis points.
CBN governor, Emefiele said rates were raised so as to curb rising inflation and offer investors positive yields, all in a bid to attract dollar inflow into the severely battered economy.
Slowing month-on-month inflation on the back of monetary tightening can give the CBN some belief in its stance; and while foreign inflows have outpaced outflows since July, the rate hike has been somewhat rewarding. Though the CBN’s decision to hike interest rates has been controversial. Kemi Adeosun, minister of finance, had preferred that the CBN lower interest rates to drive economic growth.
Razia Khan, chief economist at Standard Chartered Bank, however thinks lower interest rates will do nothing for growth, as the country needs dollars and confidence in the naira.
“Amid weak growth and a foreign exchange constrained environment, banks will be cautious about lending. Lower interest rates will achieve little,” Khan said. “The CBN had no choice but to tighten, in order to safeguard foreign exchange stability and send a clear and consistent message on policy direction to boost investor confidence.”
The year 2016 is closing with inflation at an 11 year high of 18.5%, rising unemployment at 13.8% and the economy expected to contract by a minimum of 1.7%. This makes it easy to conclude that the major policy decisions made in the year have not delivered the expected positive outcomes in terms of reviving economic growth.
