How CBN monetarists miss GDP projections for Q2
By Oludare Mayowa
The National Bureau of Statistics (NBS) on Monday announced a 6.10 percent decline in the country’s Gross Domestic Product (GDP) in the second quarter of 2020, “ending the 3-year trend of low but positive real growth rates recorded since the 2016- 2017 recession.”
The NBS report was in sharp contrast with what the Central Bank of Nigeria (CBN) monetarists have projected for the second quarter and not too far from the projections of the International Monetary Fund (IMF) in June.
While the IMF projected that the economy will shrink by 5.4 percent at the close of 2020, the CBN staff projected a moderate decline of 1.03 percent in the second quarter of the year and closed the year at -0.16 percent.
The CBN had based its projection on the successful implementation of the Federal Government’s Economic Sustainability Plan, which has approved series of palliatives and forbearance for private sector and increase spending estimate to boost growth.
Sustainability Plan, real output growth is expected to range between -0.39 percent and -0.16 percent in 2020, and between 0.7 percent and 1.48 percent in Q1 2021 depending on the level of oil price,” Mike Obadan, a member of the Monetary Policy Committee (MPC) the CBN wrote in his personal note to the June rate-setting committee meeting.
Nigeria revised its 2020 budget up to N10.9 trillion from N10.58 trillion initially approved by the parliament in a bid to increase spending and help to reinflate the economy to enable it to withstand the shock from the impact of coronavirus pandemic and disruption in the global supply chain which cut demand for crude oil by the industrialized nations.
As usual with Nigeria, implementations of the budget has remained sluggish due to bureaucratic bottleneck and embedded corruption in the system.
On Monday, the NBS said the decline in the GDP was largely attributable to significantly lower levels of both domestic and international economic activity during the quarter, which resulted from nationwide shutdown efforts aimed at containing the COVID-19 pandemic.
The bureau said in the first half (H1) of 2020, real GDP declined by –2.18 percent year on year, compared with 2.11 percent recorded in the first half of 2019.
READ NBS REPORT: Nigerian Gross Domestic Product Report
“The domestic efforts ranged from initial restrictions of human and vehicular movement implemented in only a few states to a nationwide curfew, bans on domestic and international travel, closure of schools and markets etc., affecting both local and international trade. The efforts, led by both the Federal and State governments, evolved over the course of the quarter and persisted throughout,” the NBS wrote in its report.
Nigeria, which depends largely on earnings from crude oil exports for more than 50 percent of revenue and 90 percent of its foreign exchange inflow has been mostly affected by the sharp drop in global oil prices and decline in oil production output due to the impact of the covid-19 in the second quarter.
Oil production was 1.81 million barrels a day in the second quarter, compared with 1.98 in the same 2019 period while global prices of oil has traded around $42 per barrel in the period compared with $57 a barrel projection in the initial 2020 budget by the government.
As a result of the reduced demand from the pandemic, the oil sector declined by 6.63 percent in the second quarter while the non-oil sector fell by 6.05 percent, which the statistics said was the first decline in real non-oil GDP growth in nearly three years.
The inflation rate has been elevated since the start of the year, with the July figure put at 12.82 percent as the economy continues to face slow productivity due to dollar shortage and the effect of the lockdown which restricted international travel and border closure.
Analysts at the United Capital said Nigeria’s economic performance would remain contractionary through the second half of 2020 “as business activities continue to struggle to return to their pre-COVID-19 levels.”
In a note to clients on Monday, the analysts said this signals that recession will kick in fully by Q3-2020E, as key sectors such as Oil & Gas, Trade, Agric, Aviation, other Manufacturing & Services, accounting for over 50 percent of real GDP, may not rebound fully by end of September 2020.
“We expect Nigeria’s compliance to OPEC+ production cut agreement (capped at 1.50mbpd from August-2020 to Dec-2020) and compensation for prior months overproduction with deeper cut to limit production to below pre-COVID-19 levels of above 2.0mbpd. Hence, oil sector GDP is expected to remain pressured.
“Also, contrary to our initial optimistic position for the non-oil sector to recover by Q4-2020, we now assume the sector will remain contractionary through Q3 and Q4-2020E.
“This assumption is predicated on the negative impact of the current FX scarcity, pressure on consumer spending amid rising inflation and unemployment rates, would continue to have on volumes growth. Thus, offsetting the anticipated gains from easing economic restrictions and liquidity injections from both the monetary and fiscal sides.
“However, we believe sectors such as the ICT, Agriculture, and Financial Services, which contribute c. 45.0% to real GDP, will continue to stay resilient during the dark times in Q3 and Q4-2020,” the United Capital analysts said.
They adjusted their real GDP growth forecast for 2020 from -2.69 percent to between -2.95 percent and -3.14 percent.
According to them, the biggest downside risk to this projection remains the coronavirus related worries, especially if the virus continues to spread rapidly in the rest of the world as this may continue to hurt oil prices.
“Thus, this might delay the possibility of an early recovery or a V-shape recovery to a more strenuous U-shape or W-shape recovery.#GFD