Why 2020 economic growth forecast again falls below population growth rate

…remains a far cry from ERGP’s 7% target

Nigeria’s economic expansion in year 2020 has been forecast to reach 2.10 percent. This forecast, which is roughly in line with the average consensus, was made by a team of economic expert at the Financial Derivatives Company (FDC) led by Bismark Rewane, a member of President Muhammadu Buhari’s Economic Advisory Council (EAC).

The projected economic growth rate is however not cheery news, as population growth according to these experts is higher at 2.6 percent.

At best, the International Monetary Fund (IMF) and the Economist-a global intelligence unit, seesNigeria’s economic expansion in 2020 hovering around 2.3 to 2.6 percent; but considering the government’s initial plan to increase economic growth rate to 7 percent this year, this generous projection, if achieved, will barely hit the average target in the Economic Recovery Growth Plan (ERGP) set in 2017.

Why plans are failing

The Buhari-led administration, following the exit of the country from a recent economic recession, developed a plan to restore economic growth to the country. The plan, coined ERGP is to fast-track the achievement of a more diversified and inclusive economy. According to experts, the reasons for failing to achieve the set tasks within the time frame stipulated are not far-fetched.

1.      Un-coordinated and incoherent policy framework

While acknowledging that Nigeria’s economic outlook rests on the implementation of a well-intended economic framework, United Capital, a Nigeria-based investment outfit noted in its January 2020 report that the policy outlined needs to be better coordinated.

Citing recent policies set to engender growth, the investment firm advised on how the amendment of the Deep Offshore and Inland Basin Production Sharing Contract (DOIBPSC) and the on-going reviews of the tax acts via the finance bill will support the implementation of the 2020 budget in the face of a rising debt profile.

Also, the Central Bank of Nigeria’s (CBN) recent mix of heterodox policy actions, although been hailed by United capital experts as one that will not only ease the cost of rolling over government borrowings, but should also stimulate domestic private sector investments, some experts at FDC argue in their 2020 output outlook that, there are still constraints to growth, one of which is low credit to the private sector. Other growth constraints named in the FDC’s outlook are low investments and a huge infrastructural deficit.

2.    Unintended consequences

Olusegun Zaccheaus, an associate director at KPMG, recently presented 10 macro trends that will shape 2020 and implications for Nigeria. In his report, Olusegun affirmed that the adoption of multiple exchange rate practised in Nigeria comes with negative impacts on the country’s gross domestic product (GDP), a common measure for economic growth.

According to him, the impact of multiple exchange regimes is multifaceted and occur on the medium to long term. The practice, he said, creates an opportunity for arbitrage activities, reduction in investor confidence and clarity, as well as leads to distortionary economic effects.

In his words, Olusegun explained that “multiple exchange rates practice inhibits economic growth and the continued application of the multiple exchange rates practice may have unintended consequences in the long run.

Continuing he said, “notably, our findings indicate a negative and significant effect of the multiple exchange rates practice on GDP growth rate and the negative effect is more pronounced in the long run relative to the short run.”

He further explained that following IMF’s allowable spread of up to 2 percent between rates, we (KPMG) proffer that the harmful effect is greater when the deviation of the Bureau De Change rate from the Interbank rate exceeds 2 percent. Reviewing statistics, the KPMG director noted the available data shows that, with an increase in the deviation from 13.95 percent in 2015 to 47.09 percent in 2016, economic growth respectively dropped from 2.65 percent to –1.62 percent.

Olusegun equally agrees that the country has been credit starved with declining supply to the private sector (a sector known for its rapid contribution to economic growth). Nevertheless, he expressed optimism that the new loans to deposit ratio (LDR) is likely to improve credit to the private sector.

Navigating the tides

In view of the still difficult times ahead, Olusegun’s advise to organisations is to adopt a proactive strategic posture. Adoption of this posture, he said will provide greater chances of surviving the turbulent times and taking opportunity on the upside of recovery while minimising the risks in downturn.”

To the consumer, the challenges according to the FDC are enormous. With continuing shrinking of disposable income as inflation surges. The palliative payment of new minimum wage is ripped as consumer is still to battle with VAT increase, resurgence of toll gates, cost reflective electricity tariff among others.

Predicted to aid growth in 2020 are the Agric and Telco sectors. The FDC says the telecommunication sector will outperform economic growth this year, signalling a viable avenue for investors. Their prediction, among other things is spurred by the government’s commitment to drive financial inclusion, collaborations with banks and benefits from payment service banks. As for agriculture, a sector the FDC says is key to diversifying the economy, positive growth in the sector is expected to continue to medium term.