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Economic Policies of the Government in 2014: Issues, Challenges & Prospects

Economic Policies of the Government in 2014: Issues, Challenges & Prospects. ‘Biodun Adedipe, Ph.D. Outline. Introduction Background Budget 2014 Implications and Outlook Summary. Introduction. A big thanks to CIIN for inviting me to be a part of this.

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Economic Policies of the Government in 2014: Issues, Challenges & Prospects

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  1. Economic Policies of the Government in 2014:Issues, Challenges & Prospects ‘Biodun Adedipe, Ph.D.

  2. Outline • Introduction • Background • Budget 2014 • Implications and Outlook • Summary 'Biodun Adedipe, Ph.D.

  3. Introduction • A big thanks to CIINfor inviting me to be a part of this. • Its always an enriching moment to analyze and interpret government policies in order to gain an understanding of its implications for the business environment, and thus arrive at the likely opportunities and threats to business entities, especially the profit-seeking ones. • We therefore, will attempt to make sense out of the past developments, understand why some economic policies were introduced, why economic agents behave the way they do, and then see how to position our businesses strategically. • We will begin with the expectations we formed for end-2013 relative to how it actually turned out. 'Biodun Adedipe, Ph.D.

  4. Introduction (contd.) 'Biodun Adedipe, Ph.D.

  5. Background

  6. Where We Are: The Macroeconomy • The Nigerian economy has been growing strongly in the last one decade, recording an average real GDP growth rate of 6.49% during 2003 to end-2012, persistently above 6% annually. See Chart 1. • This outperformed the African average of 5% over the same period, which itself is one of the strongest regional growth rates in the period. • In October 2013, Fitch rated it BB-, meaning it is stable but stagnant – the same rating received in 2012. • In the 3rd quarter (Q3) of 2013, the Nigerian economy grew by 6.81%, recovering from 6.18% in Q2 and 6.56% in Q1 of 2013, chasing 6.99% in Q4 of 2012. • The growth drivers were agriculture, hotels & restaurants, building & construction, and telecommunications sectors. 'Biodun Adedipe, Ph.D.

  7. Chart 1 'Biodun Adedipe, Ph.D.

  8. The Macroeconomy (contd.) • The economy continued in its aberrations of: • Growth without development, as most major development indices remained weak. • Petroleum oil dominated foreign earnings and government revenue, but the oil economy is weakening and really endangered • Still carrying its burden of weak linkage to the non-oil economy. • In the contribution to the GDP, low-productivity activity sector of agriculture was the dominant sector – accounting for 41.9% of total output during Q3 2013 – up from 40.06% in Q2, 33.69% in Q1 2013 and 38.2% in Q4 2012. • Chart 2 shows the relative contributions of the activity sectors, showing a serious weakening of manufacturing (a deep cause for concern). 'Biodun Adedipe, Ph.D.

  9. Chart 2 'Biodun Adedipe, Ph.D.

  10. The Macroeconomy (contd.) • The relative contribution and importance of the activity sectors changed in a worrisome manner. • Petroleum Oil and Natural Gas dipped from quarterly average of 14.75% in Q1, 12.9% in Q2 and 12.5% in Q3 2013 -- 13.78% in Q4/2012. • Rising incidence of local oil theft (between 400 and 600,000 b/d), as well as oil production in other African countries, especially Angola and Ghana; and the big SHALE OIL. • Manufacturing dampened significantly from 4.2% in 2012 to 1.14% in Q1 2013, but picked up to 3.98% in Q2 2013 and then 3.58% in Q3! • Wholesale & Retail Trade rose from 19.92% in Q4 2012 to 23.75% in Q1 2013 and then dropped to 17.32% in Q2 and 19.2% in Q3 2013. • There were also mixed bag of news in the growth and job drivers. • Building & Construction rose from 2.19% Q4/2012 to 3.27% Q1/2013 and now 2.39% in Q2/2013 and 1.8% in Q3. • Real Estate also went from 1.85% in Q4/2012 to 2.1% in Q1/2013, and then 2.12% in Q2/2013 and 1.79% in Q3. 'Biodun Adedipe, Ph.D.

  11. The Macroeconomy (contd.) • Unemployment has remained a huge concern, whose ‘bad news’ are normally understated in official statistics. • Recently, the Minister of Finance and Coordinating Minister for the Economy has claimed that 1.6 million jobs were created in 2013! • This is obviously a straight line extrapolation of the outcome of quarterly surveys on job creation, which indicated formal sector at 174,326 and informal232,327 in Q1 2013! • To extrapolate these numbers for the entire year is indeed, a dubious projection! • There surely is no doubt, that the high level of unemployment is a major factor in the social problems and security challenges in Nigeria. 'Biodun Adedipe, Ph.D.

  12. The Macroeconomy (contd.) • Crude oil pricesfell steadily in the beginning of 2013, but rebounded between July and September 2013. Nigeria’s Bonny Light still ended the year above $100/bbl. • Prices however, dampened as Iran returned to the market, at the easing of sanctions for its dubious nuclear programme, while the US stepped up production and supply. 'Biodun Adedipe, Ph.D.

  13. The Macroeconomy (contd.) • Capital Market • The market had a remarkable performance in 2013, growing 47.19% to 41,329.19 points from 28,078.21 in December 2012. • The strong start to 2013 was maintained throughout most of the year, and the December was especially strong. See Chart 3. • As at 29/01/2014, the index had dropped 1.3% to 40,792.07! See Chart 4. • There is profit taking in the midst of strategic portfolio shifts by institutional investors. 'Biodun Adedipe, Ph.D.

  14. Chart 3: Stock Index Comparatives Jan-Dec 2012 Feb 2013 - Jan 2014 'Biodun Adedipe, Ph.D.

  15. Chart 4: Stock Index, Jan 2014 'Biodun Adedipe, Ph.D.

  16. The Macroeconomy (contd.) • Capital Market (contd.): • The market capitalization also had similar trend, rising 47.44% to N13.24 trillion (or $85.01 billion), from N8.98 trillion (or $57.77 billion) in 2012 (37.31%). See Chart 5. • As at 29/01/2014, the market cap had dropped to N13.08 trillion or 1.2% dip. See Chart 6. 'Biodun Adedipe, Ph.D.

  17. Chart 5: Market Capitalization Comparatives Jan-Dec 2012 Feb 2013 – Jan 2014 'Biodun Adedipe, Ph.D.

  18. Chart 6: Market Capitalization, Jan 2014 'Biodun Adedipe, Ph.D.

  19. The Macroeconomy (contd.) • The long standing battle with inflation seemed to have been won in 2013, but the ghost is not yet buried, as the official rate of inflation dropped to single digit and remained so till end-2013. • From 12.0% at December 2012, the rate went a downward movement to 9.0% in January 2013 and remained single digit, dipping below 8% in October and November (7.8% and 7.9% respectively), and rose marginally to 8% in December and the same 8% in January 2014. • The cost of doing business remains a major challenge, majorly because of poor power supply and deficient infrastructure. 'Biodun Adedipe, Ph.D.

  20. The Macroeconomy (contd.) 'Biodun Adedipe, Ph.D.

  21. The Macroeconomy (contd.) • Interest Rates • The benchmark rate (Monetary Policy Rate, MPR) remained 12.0% p.a. throughout 2012 and 2013, with the corridor of +/-2%! • Will continue till end-Q1 2014! • The most volatile variant of interest rates (inter-bank rate) still responds to Federal allocations and the CBN is working hard to change that – CRR on public sector deposits now 75%! 'Biodun Adedipe, Ph.D.

  22. The Macroeconomy (contd.) • Interest Rates (contd.): • The deposit and prime lending rates are still widely divergent, rising marginally in the last quarter of 2013. • Management of the signal rate (MPR) has yielded more to expected inflation than the cost of funds (and the price of credit) to the real sector and growth limiting implications of that. • No doubt, a prolonged fear of inflation and obsession with stable exchange rate that have kept MPR at 12% have made tracking of the MPR lack the excitement it should elicit among investors. 'Biodun Adedipe, Ph.D.

  23. The Macroeconomy (contd.) • External Reserves • The critical measure of external reserves is the number of months of import bill that it can sustain, preferably anything from 10 months and above. • From $44.18 billion (or 8.65 months) on 28th December 2012, the reserves came to $45.13 billion as at 22nd October 2013 and closed the year at $43.61 billion! • Since the figures reported by the CBN now are moving averages, analysts are unable to calculate months of import bill, thus losing out on one critical element of the exchange rate and reserve management. • The figure has dropped to $43.05 billion as at 28/01/2014 and $41.91 billion as at 13/02/2014. 'Biodun Adedipe, Ph.D.

  24. The Macroeconomy (contd.) • External Reserves (contd.): 'Biodun Adedipe, Ph.D.

  25. The Macroeconomy (contd.) • The persistent external pressure occasioned by the import-dependence of the Nigerian economy has resulted in Naira devaluation year after year, but in smaller margins since the current Governor of the CBN assumed office. • Official rates have remained fairly stable since 2011, closing December 2011 at N156.7/$, N242.33/£ and N202.72/€; 2012 at N155.77/$, N251.86/£ and N205.43/€ and 2013 at N155.75/$, N 257.48/£ and N214.41/€. • As at 13th February 2014, it was N155.75/$, N259.06/£ and N212.77/€. 'Biodun Adedipe, Ph.D.

  26. The Macroeconomy (contd.) • Sovereign Debt • Official statistics by the DMO puts Federal and State Governments of Nigeria’s external debt at US$8.26 billion as at end-September 2013 – a persistent increase from $6.296 billion in September 2012 and US$6.67 billion in March 2013. • 71.23% is concessionary (down from 80.19% in March 2013), being multilateral at ultra low interest rates, 9.87% is bilateral (China EXIM Bank, 11.3% in March), 0.42% bilateral (French Development Agency, 0.3% in March) and balance of 18.47% commercial (Alcatel and Eurobond, 8.21% in March)! 'Biodun Adedipe, Ph.D.

  27. The Macroeconomy (contd.) • Sovereign Debt (contd.): • This continues to be worrisome, but the Economic management Team claims there is no cause for alarm, as Nigeria is still well within its debt sustainability limits. See slides 23 and 24. • This argument might soon become really hollow, as we argued here three months ago, if the oil-driven foreign earnings dip with the vagaries of the international oil market and its attendant risks! • The concern has always been what the money is used for, but this seems to be changing with the recent deployment of the funds to infrastructure. 'Biodun Adedipe, Ph.D.

  28. The Macroeconomy (contd.) 'Biodun Adedipe, Ph.D.

  29. The Macroeconomy (contd.) 'Biodun Adedipe, Ph.D.

  30. Federal Budget 2014

  31. Budget 2014 Focus and Assumptions • The focus of the budget of the Federal Government of Nigeria for 2014 is on create jobs, improve the standard of living of Nigerian in a sustainable manner and inclusive growth. • The underlying assumptions are: • Oil price assumption: US$77.5/bbl • Oil production target: 2.3883 mbd • Joint venture cash calls of N858.588 billion • Exchange rate policy: +/- 3% of N160/$. • Monetary policy: tight – MPR remained at 12% in 2012 up until March 2014. • GDP growth rate of 6.75%.

  32. Revenue-Expenditure Nexus • Proposed expenditure: • Regular budget of N4.643 trillion. • Recurrent: N2.431 trillion (53.25%, up from 48.98% in 2013 and 49.72% in 2012) • Capital: N1.10 trillion (23.7%, down from 31.3% in 2013 and 31.15% in 2012) • Statutory transfers: N399.69 billion (8.61%, up from 7.72% in 2013) • Debt servicing: N712 billion (15.34%, up from 12.03% in 2013) • SURE-P budget of N268.37 billion.

  33. Revenue-Expenditure Nexus (contd.) • The nexus between recurrent and capital expenditure proposals worsened. • In 2014 the ratio is 3.22:1, compared to 1.56:1 in 2013, 2.47:1 in 2012, 1.12:1 in 2010 and 10-year historical average of 1.86:1. • The hope for direct government funding of critical infrastructure not only darkened, it portends business opportunities for discerning private partners to fill those gaps. • The breakdown of proposed recurrent expenditure into personnel and overhead also shows a worrisome pattern of dominance by the former. • Personnel accounts for 48.23% of the total expenditure proposed, while overhead accounts for 28.06%.

  34. Revenue-Expenditure Nexus (contd.) • The big question is “which personnel?” • Are these the regular civil servants or this is inclusive of political appointees? • That in my opinion is part of the problem of this government. It has several political offices created that amount only to duplication of functions and under-utilization of resources. • Moreover, the recommendations on rationalization of the bureaucracy has not been implemented, ostensibly for political calculations – 2015 is now the major decision factor! • Rather than address this, the Finance Minister adduced this to the increase in pay in 2010.

  35. Revenue-Expenditure Nexus (contd.) • The major MDAs on personnel, having above N10 billion personnel bill per month, are: • Education • Police • Defence • Health • Interior • Finance • These are obviously MDAs that by the nature of their mandate and their composition, should have many personnel. This notwithstanding, there could considerable duplications!

  36. Revenue-Expenditure Nexus (contd.) • Besides the first five of these listed MDAs, 26 others (i.e. 31 in all) had personnel representing more than 50% of their allocations in the proposed budget. • There were a few instances of only personnel allocations (no overhead and no capital allocations), which means 100% of the provision for such MDAs is for personnel! • There are a couple of allocations that are difficult to rationalize for outsiders of government like ourselves.

  37. Revenue-Expenditure Nexus (contd.) • A few examples are as follows: • N888.24 million for renovation/repairs of residential building in the Ministry of Finance, N1.04 billion for the same in the Directorate of State Security Service (which also provided N610.43 million for purchase of residential building)! • The Presidential Fleet has purchase of hanger sweeper that will cost N31.87 million and initial deposit of N1.52 billion for the purchase of an aircraft. • There is a plethora of office equipment to be purchase across all the MDAs that gives the impression that all such offices are just being set up, or the units purchased in 2102/2013 were all expensed!

  38. Revenue-Expenditure Nexus (contd.) • The summary of the allocations is as tabulated below:

  39. Revenue-Expenditure Nexus (contd.) • The key sectors that received most allocations: • Education – N493.46 billion (10.63% of total); • Defence – N340.33 billion (7.33%); • Police – N292.35 billion (6.3%); • Health – N262.74 billion (5.66%); • Interior – N151.02 billion (3.25%); • National Assembly – N150 billion (3.23%); • Works - N128.65 billion (2.77%); • Niger Delta - N111.13 billion (2.39%); • National Security Adviser – N110.73 billion (2.38%). • Towards more inclusive growth and attention to job creation.

  40. Revenue-Expenditure Nexus (contd.) • The expected revenue is N3.731 trillion summarized as below:

  41. Revenue-Expenditure Nexus (contd.) • This brings the budget deficit to N911.96 billion (1.9% of GDP, compared to 2.17% in 2013 and 2.58% in 2012). • The deficit is actually more, by the amount of the SURE-P budget of N268.37 billion – so, N1,180.33 billion or 2.46% of GDP! • Beyond the ratio of GDP, the other worry in deficit budget is what the money will go into. • There is no point blaming fall in revenue; what we should be talking about is why we will still spend so much at a time of revenue shortfall when logic should recommend a courageous and significant reduction in expenditure and the elimination of unnecessary ones. • Again, the political equations will throw such thoughts and arguments out of the window.

  42. Revenue-Expenditure Nexus (contd.) • The major worry has always been poor budget implementation. • Capital expenditure proposals are hardly implemented to reasonable levels as in other advancing countries (especially emerging economies). • Worse still is the high project cost in Nigeria and low value-for-money!

  43. Implications and Outlook

  44. Our Expectations for Nigeria 'Biodun Adedipe, Ph.D.

  45. Global Economic Outlook 2014Conference Board • Global growth of Gross Domestic Product (GDP), adjusted for inflation, will rebound from 2.9% in 2013 to 3.5% in 2014. • Across mature economies, the 2014 growth outlook is significantly improved to 2.2% growth in 2014, compared to 1.3% in 2013. • United States is expected to increase its growth from 1.9% in 2013 to 3% in 2014. • The Eurozone will recover from its negative growth of -0.3% in 2013 to 1% in 2014. 'Biodun Adedipe, Ph.D.

  46. Global Economic Outlook 2014 (contd.)Conference Board • GDP growth in emerging and developing economies as a whole is projected to improve by 0.3 percentage point to 4.8% in 2014. • China will drive the slower increase, slowing down from 7.5% in 2013 to 7% in 2014. • India, Latin America and other developing Asia are to witness a slight growth improvement in 2014, up from a weaker growth performance over 2013. • The world’s major economies still face many structural flaws and policy constraints that hinder more investment and faster productivity growth, making the medium-term outlook for a significantly faster path of global growth more uncertain. 'Biodun Adedipe, Ph.D.

  47. Summary • Nigeria’s high prospects for investment is gaining world attention, and everyone that matters in the world of business is now strategically positioning for Nigeria. • The forecast of Goldman Sachs on the Next-11 appears to be bringing the MINT out into reality in Nigeria, i.e. the ranking of Nigeria with Mexico, Indonesia and Turkey in investment opportunities. Now referred to as the ‘frontier economies’, the attention of every investor is now on the MINT – especially since the inventor of ‘BRICs’ (Jim O’Reilly, formerly of Goldman Sachs) lent his voice to this in January 2014! • This is evident in the 24th World Economic Forum on Africa (WEFA) that is to be hosted by Nigeria in May 2014. 'Biodun Adedipe, Ph.D.

  48. Summary (contd.) • Weak governance, poor policy design and sequencing and poor execution, and a desperate pursuit to look good to investors, all coupled with the unhealthy positioning for the political ‘battle’ of 2015 might blind side the economy. • The capital market still holds very good prospects for investors, but Nigerian banking and finance might begin to struggle again. • Persistent CBN policy shifts is stressing the banks and may not relent until a new Central Bank Governor assumes office. • There is further evidence of the tough times facing financial institutions in the discount market, with the exit of two discount houses and conversion of another to merchant banking! • All together, Nigeria remains an investor’s haven! 'Biodun Adedipe, Ph.D.

  49. Summary (contd.) • In all of these, the question is “what should underwriters and stakeholders of the insurance industry be doing now?” • The first important step has been taken (I believe) with the position paper drawn up and forwarded to necessary government agencies – the National Assembly, the Presidency, the Budget Office, Ministry of Finance, Chief Economic Adviser, National Insurance Commission and National Planning Commission. • Next is to follow through and ensure that the National Assembly especially, buys into the ‘insurance vision’. • Through press releases, reporting and advertorials, the CIIN should maintain and keep the discourse in the public domain. • The practitioners also must look inwards – what can we change in the things we and how we do them? 'Biodun Adedipe, Ph.D.

  50. Thank you & God bless 'Biodun Adedipe, Ph.D.

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