The year 2016 was a tough year for the Nigerian economy. Oil price and production collapsed dragging the economy into recession for the first time since 1991. The price began a long decline from $104 a barrel (OPEC basket price) in July 2014 and continued unabated until it bottomed out at $26.5 a barrel in January 2016.
The Naira was also dragged down by the oil price. It started 2016 at N197 to $1 in the official market and ended it at N305. The unofficial market, on the other hand, began the year at about N270 and ended it at N485. The Central Bank of Nigeria (CBN) dithered on devaluation despite clear signs that the pegged rate at N197 was no longer tenable as foreign exchange inflows dried up and the foreign reserves continued to fall. It was only in June when it could no longer sustain the pretext that it devalued from N197 to N280 and introduced new foreign exchange guidelines. Nevertheless, the implementation of the new policy is still suspect as we now have five different rates with significant opportunities for round tripping from subsidized official sources to unofficial channels.
Inflation also worsened, from single digit in 2014 and 2015 to 18.5% in November 2016. Nigeria thus found itself battling the dreaded stagflation – that is falling output combined with rising prices.
The All Share Index of the Nigerian Stock Exchange fared somewhat better despite declining by 6.2% during the year. This is because it had lost 17.4% in 2015 and 16.1% in 2014.
From the foregoing, 2016 was indeed a turbulent year for the economy but I am optimistic 2017 will be calmer. Here are 4 reasons why I think so:
Increase in crude oil price and production
The price of crude oil per barrel bottomed out at $26.50 in January 2016. Thereafter, it began to go up hovering around an average of $42.3 a barrel from March 2016 to October. At the end of November, OPEC members agreed to a cut in output and that helped to push the price above $50 a barrel. Furthermore, Nigerian production has been recovering after the disruptions in the second and third quarters of the year that saw daily production volumes plummet from an average of 2.1 million barrels a day achieved in 2015 to 1.6 million barrels a day.
We have already begun to see the impact of this in the $ reserves. Based on data available on CBN website, the reserves have been steadily going up since 20th October. The reserves increased by $2.76 billion from 20th October 2016 to 10th January 2017. This should help to dampen expectations of further fall in the Naira.
Deceleration in rate of increase in inflation
The rate of increase in inflation has decelerated. For example, inflation increased from 9.6% in January 2016 to 11.4% in February – a month on month increase of 18.3%. Since then, the rate of increase has gradually declined, though not in a straight fashion as should be expected. In November 2016, inflation increased by 0.82% compared to October 2016 – the lowest increase in ten months.
Renewed drive to buy made in Nigeria
The scarcity of foreign exchange meant manufacturers began to look inward to source some of their inputs. This is especially true for agricultural products that are produced in Nigeria. With the price of foreign goods almost doubling during the year, made in Nigeria goods are now more competitive and therefore more appealing to cash-strapped Nigerians. These combined with the renewed drive by government to encourage patronage of made in Nigeria should help to ease pressure on the Naira in 2017.
Commencement of social spending
The much-awaited Federal government youth employment programs (NPower) and cash transfers to the vulnerable began at the end of the year. These programs put cash in the hands of those who badly need it and will run throughout 2017. This should help increase demand for relatively cheaper local goods and consequently reduce the pains of local businesses that have seen their sales volumes plunge.
The above four reasons make me think the worse is over. We are not there yet, but we have been given a lifeline by the slightly better oil price. Hopefully, the government has learned the right lessons and will seize this welcome relief and steer the economy towards the path of growth in 2017 and beyond.
Here is to a happy and more prosperous 2017.