Nigeria’s cure remains diversification

A sense of anxiety has gripped the Nigerian economy with concerns elevated over slowing growth as the combination of depressed oil prices and Naira vulnerability weighed heavily on investor sentiment.

This has been a rough year for not only Nigeria, but for many commodity dependent economies that have collectively surrendered $40 billion in capital outflows due to the persistent global uncertainties. The second largest economy in Africa continues to battle its own woes following the slump in oil revenues which eroded public finances while raising further pressure on the Naira as scarce foreign exchange skyrocketed.

With slowing domestic growth, weakening global growth, inflated debt levels all enforcing downside risks on a nation that is already entangled in a fierce battle with falling oil prices, the current quest for economic recovery could be the greatest challenge presented to Nigeria.

Nigeria’s sickness may be diagnosed as the prolonged periods of low oil prices that have not only heavily eroded government earning but also diminished confidence towards the health of its domestic economy. The nation’s oil sector provides 70% of government revenues and a mammoth 95% of export revenues, which is a big chunk of overall GDP.

With the renewed militancy in the south of Nigeria expected to Keep Nigeria’s crude oil production depressed through 2017, the nation must act swiftly to finding the cure which is non-other than diversification. Even without the drop in Nigeria’s oil production, the ongoing concerns over the excessive oversupply of oil in the global markets could ensure oil remains depressed for an extended period consequently punishing oil dependent nations further. The shock of falling oil may be the wake-up call Nigeria needed to start steering away from being heavy oil-reliant.

Speaking of reserves, the nation’s external reserves have entered a slippery decline falling a painful $25.78 billion as of August 2016 following the Central Bank of Nigeria’s (CBN) decision to set up Dollar sales in an effort to boost interbank liquidity. Oil’s sharp decline has caused reserves to deplete in an unnatural fashion consequently causing the CBN to introduce questionable foreign exchange controls which were abandoned in July. Nigeria’s foreign reserves have already lost over $2 billion this year with fears of further declines as the central bank attempts to support the vulnerable Naira. There may still be some hope for the nation to reclaim back lost reserves in the future but this revolves around diversification and reinforcing infrastructure.

Naira vulnerability has been a recurrent theme following the official floatation in June which saw the local currency depreciate almost 40% against the Dollar. The toxic mixture of weak oil prices and persistent concerns over lacklustre economic growth has created a platform for bearish investors to continually attack the Naira on both the official and black market exchange.

Sentiment remains bearish towards the local currency with further declines expected as the natural forces of supply and demand determine an equilibrium price level. With the forex scarcity persistently enforcing downside pressures on the Naira, bears may have been offered an opportunity to install repeated rounds of selling on the currency. From a technical standpoint, the USDNGN remains bullish on the daily timeframe and a breakout above the psychological 350 could open a path towards 400 on the official exchange.

It has become common knowledge that the extended periods of depressed oil prices have eroded Nigeria’s GDP growth for 2016 with the current yearly forecast standing around 1.8%. With first quarter GDP growth painting an undesirable picture, investors may direct their attention towards second quarter GDP which could provide some clarity on how the nation is faring in a period of global instability.

If the second quarter GDP figure released on the 31st of August fails to meet expectations then concerns may heighten over the nation entering a recession. Reports have already circulated over Nigeria relinquishing its positions as the largest nation in Africa to South Africa which dented sentiment further. Although both countries have had a record drop in GDP, Nigeria’s painful Naira decline could have been the main factor which forced it to surrender its title as the largest economy in Africa. While this is indeed a heavy blow in the short term, it should be kept in mind that steps have already been taken to jumpstart economic growth with optimism still present over the country grasping back its lost title.

Naira’s persistent decline which caused the prices of food and non-food products to sharply rise may spark inflation to spiral towards 17.35% in July. In June the nation’s inflation level already spiked to an eleven year high as the mixture of Naira weakness and persistent concerns over the health economy eroded purchasing power. Although inflation in Nigeria continues to venture to worrying levels, the long-term perspective such as an increase in foreign investments from a weak Naira could elevate Nigeria’s growth while also improving sentiment. The CBN has already shocked the global markets by raising interest rates to the 14% all-time highs in an effort to curb inflation and could take further action in the future to attain economic stability.

Nigeria’s current woes remain oil reliance and the cure is diversification which could not only steer the nation from being heavily impacted by external shocks but also spur economic growth. Diversification is a topic that continues to reverberate across the corners of the nation with effort heavily taken to reinvigorating agriculture, reinforcing infrastructure and expanding taxation to bolster government revenues which in turn could uplift economic growth.

It is better late than never and the CBN has already received a wake-up call with the Naira floatation and removal of restrictive foreign exchange policies potentially attracting foreign investors back into the nation. Finance minister Kemi Adeosun has already stated that Nigeria is to allocate 60 billion Naira’s more spending on capital projects as part of the 2016 budget while deals are already in place in China which will be of great benefit to both nations.

For diversification to be truly successful in Nigeria, much focus must be placed on core areas such as infrastructure, manufacturing, technology, and healthcare to break away from the curse of heavy oil reliance. The nation is already blessed with a youthful population while the land is fertile for agriculture.

Once internal food security is achieved through an improvement in agriculture development, the surplus produce could be exported which may not only save costs on Forex but create government revenue. In the manufacturing sector most factories are currently running below capacity but once the infrastructure is reinforced then manufacturing could create additional income for the nation. Sell sufficiency in power generation is another key area which will be critical in bolstering technology and even healthcare.

2016 onwards may present a monumental challenge for Nigeria as it embattles not only falling oil prices but global instabilities which may expose its nations to major downside risks. The post-Brexit threats and persistent uncertainty may sour investor risk sentiment while fluctuating expectations over the Fed raising US rates this year could ripple back to Nigeria consequently impacting the Naira.

Everything revolves around maintaining economic growth and currency stability which may ultimately entice foreign investors ultimately elevating the nation further. Diversification is paramount and although this will be a long-term transition, the key steps have already been put in place. Although there is the risk of prolonged periods of slow growth as Nigeria steers away from being oil export nation, the successful outcome could be one which defies all expectations.