The Nigeria’s manufacturing sector which accounts for 10 per cent of Gross Domestic Product (GDP) contracted for a second consecutive quarter, by 3.8 per cent year-on-year in the second quarter of 2015, just against 14.0 per cent a year earlier. This is an indication, according to the latest report by Renaissance Capital Limited released on Monday, that the sector is in recession.
The report blamed the sharp slowdown in growth largely on a deceleration in the non-oil sector rather than a continued contraction in the oil sector.
Reacting to the report also on Monday, Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, told Daily Independent that the recession in the manufacturing sector is a manifestation of the shocks currently being experienced in the economy.
“The way forward therefore is for the administration to clarify its policy direction to enable investors make strategic investment decisions. The CBN needs to review its current foreign exchange policy by putting an end to administrative controls and allocation of forex.
“This is necessary to minimise disruptions of economic activities caused by current foreign exchange regime. Recent efforts at improving fiscal viability of government should be sustained to boost government revenue and reduce fiscal leakages,” he said.
To put things in context, according to the report entitled, “Nigeria: 2Q15 GDP – Manufacturing is in recession,” RenCap said the nation’s oil sector’s contraction in (the review period) was equivalent to that in 2014 first quarter, except that at the time, GDP growth was still higher than 6 per cent.
“This underscores the fact that the (2015 second quarter), slowdown was mainly owing to the non-oil sector, which grew at 3.5 per cent YoY, (down from) 6.7 per cent in (second quarter of 2014). A decline in manufacturing and a slowdown in services explain the non-oil sector’s lacklustre performance,” the analysts noted.
According to the analysts, because the services sector makes up half of Nigeria’s GDP, the performance in this sector has significant implications for overall growth.
Growth in the services sector slowed to 4.7 per cent, from 6.5 per cent a year earlier, while trade (the biggest services sector) remained relatively resilient, with growth at 5.1 per cent in the second quarter, slightly less than 5.2 per cent in the previous second quarter.
“The slowdown in services was largely owing to weaker growth in telecoms and real estate. Public administration, a good indicator of government activity, contracted for a second consecutive quarter, by 10.6 per cent year-on-year in the second quarter, compared with a growth of 1.2 per cent in 2014.
However, RenCap expressed belief that the political transition and the slump in fiscal revenue explain the fall in government activity in the second quarter, just as it revised down its 2015 growth forecast to 2.8 per cent since the 2015 first half growth of 3.1 per cent came in below the forecast of 3.4 per cent; with expectation of supply constraints, related to foreign exchange restrictions and the de facto import ban, to undermine growth in the second half of the year.
“As population growth is about 3 per cent per annum, this implies negative per-capita income growth, which acts as a drag on the consumer sector. Slower growth and a sliding oil price lead us to revise our 2015 current account deficit forecast to 3.3 per cent of GDP (vs 3.0 per cent previously), and our budget deficit forecast to 2.5 per cent of GDP (vs 2.2 per cent),” RenCap stated.
“There are three key dimensions to this – the disruptive effects of the CBN foreign exchange policy; the weak fiscal conditions of the governments at all levels and the resultant failure to meet financial obligations to workers and contractors; and the uncertainty in the economic policy space.
“The tight exchange controls has made access to foreign exchange difficult for investors across all sectors. The situation is much worse for sectors whose inputs are on the list of the 41 items not valid for foreign exchange. Even for firms whose inputs are valid for forex, access is still an issue. Many production processes have been crippled as a result.
“The fiscal condition of government at all levels which deteriorated as a result of the sliding oil prices has also taken its toll on all sectors, including manufacturing. Salaries are not being paid which has implications for the purchasing power. Mounting contractor arrears has consequences for cash flow within the economy,” he said.
Yusuf added that “investors’ confidence is affected by extant uncertainty in economic policy direction leading to a cautious disposition of investors. Major investment decisions have been put on hold pending a clear articulation of the economic policy thrust of the Buhari administration.”
