Speculation about the 2017 appropriation bill — how soon it will be enacted, and what its likely impact on domestic output would be — has been a staple of financial services sector types since the beginning of the year. Along with wagers on how easily the federal government will be able to raise the loans needed to fund the public sector’s borrowing requirement — remember that it’s taking far longer than was anticipated to put together the economic recovery plan, which the leading multilateral agencies are looking to before they may loosen their purse strings; and that in the intervening period, most rating agencies have revised their outlook for the country downwards. In the end, the consensus seems to be that we would be able to borrow, but at slightly higher coupons, and for far less than we are in the market for.
Weighty though these considerations may be, by far the most intense conversation in this corner of the echo chambers has been around the economy’s outlook for this year. It hasn’t helped that the numbers vary so much — what with the International Monetary Fund (IMF) estimating that the economy will grow by 0,8% this year, while the World Bank and federal government put this number at 1.0% and 3.02% respectively. Of more heft, though, is how hard it has been reaching agreement on potential growth drivers. There is a hard to ignore consensus around crude oil exports playing a big role in all of this. Partly, this is the result of the main outcome of the agreement late last year between members of the Organisation for Petroleum Exporting Countries (OPEC) and a clutch of non-members (led by Russia) to stitch up global crude oil production in support of global prices.
Higher crude oil prices should reverse the economy’s adverse balance of trade terms (especially by pushing net exports back into positive territory). Again, because the federal government climbed down on its previous hardline position on the restiveness in the oil-rich Niger Delta region, and may now be willing to pay stipends to militants there, we should pump more crude oil for export this year than we did last year, and earn enough to see government spending back up again this year. Add to these, the base effect from the economy having contracted deeply last year, and there are very few reasons why we shouldn’t be looking to growth in domestic output (however marginal) this year.
Except that the few reasons that there are, are difficult to walk past.
Last year, as jobs were lost in the private sector (not just due to businesses shutting down shop, but more so because many such businesses, although remaining open, pared the number of hours worked) household consumption fell by 1.06%, and 6% in the first two quarters. Similarly, as businesses cut down on investment (remember the market to which they would ordinarily have pushed their products was shrinking) gross capital formation (much of it investment by businesses) fell by 7.21%, and 2.58% respectively over the same period. Moreover, most commentators on the economy expect that when the National Bureau of Statistics (NBS) releases its expenditure and income measures of output growth in the third and final quarters of last year, this trend will hold up.
The argument for “oil as driver of domestic output growth” this year, thus rests on any (or a combination) of three thought lines: that the lag on the economy from the drops in consumption spending and business investment would not be significant; that both household spending and business investment will recover; and/or that were none of the preceding to happen, the oil sector’s recovery will be more than enough to compensate. To pursue this line of thought, of course, is to ignore how middling is the oil sector’s contribution to real domestic output growth (8.19% in the third quarter of next year).
Truth is, the oil sector is significant only because foreign currency receipts support elevated levels of government spending. Now, as the economy has grown bigger, government spending has proven not just inadequate to support its need, but because of huge levels of inefficiency may have become the biggest drag on it. Besides, a lot of the hopes for the economy this year ride on the reflationary attribute of the 2016 appropriation bill. But a N7tn budget will push a N95tn economy only if the spending shows up in new capital being formed, and in higher levels of household spend.
It is crucial that we understand that none of these is likely to happen this year.