Mr. Johnson Chukwu, Group Managing Director, Cowry Asset Management Limited, in this interview with Sam Nzeh, Editor, The Business Times, gives insight on the 2024 Economic outlook of Nigeria, why multinational companies are exiting Nigeria, and what to do to rescue the Naira. Excerpts:
From where you sit and from the findings of your company, what’s the outlook of Nigeria’s economy this year, 2024?
I believe the outlook is uncertain. What I mean by the economic outlook being uncertain is that the variables that should drive economic growth are not obvious. One of the factors to consider here is the capacity of the government to use the budget to stimulate the economy.
If you look at the budget provisions, there are two components that should ordinarily if implemented could lead to the stimulation of the economy. One of them is salary increase for government employees. Ordinarily if you increase the salary of government workers, it should give them the benefit to demand for more goods and services. An increase in salary should lead to productive activities in manufacturing which in turn will lead to demand for additional inputs.
And that cycle of economic growth or recovery could be stimulated from that. But then you have to consider the fact that most government workers are actually in difficult economic conditions. So any increase in salary as expected would at best restore them to their previous consumption level. So probably we should have some positive impacts from that.
The other component of the budget that should stimulate economic activities is the portion that relates to the Capital budget. There’s a provision of about N9.9 trillion in the 2024 budget for Capital expenditure. Ordinarily if that is implemented, we should expect a multiplier effect. But one thing we have to bear in mind is that the government had made provision for N19.5 trillion as revenue and at the same time made provision for N28.78 trillion as expenditure.
If you look at the history of government’s ability to meet revenue projection, in the immediate past year 2023, government revenue as at September was only N8.65 trillion. At the same time the government had spent N12.7 trillion, which means that the government had accumulated a budget deficit of N4 trillion as at the end of September.
If that government revenue performance of last year is anything to go by, it would be a tough call for anybody to imagine that Federal Government revenue for the year 2024 would be as high as N19.5 trillion. And the challenge you have is that if the revenue is not achieved, the Capital expenditure becomes the one that suffers most because the other expenditures must be met as they are not discretionary.
The government made a provision of about N8.27 trillion as budget for Debt service. It has to pay interest to the people the government had borrowed from. So the first thing the government would do is that whatever income it gets, it would pay interest. Assuming the government gets something close to or in the region of what it got last year, N8.65 trillion in the first nine months of the year, this simply means that the total amount we get in the first nine months would be used to pay interest on our debts.
There is a provision in the budget of N8.7 trillion as Non-Debt recurrent expenditure and that includes salaries and wages. So by the time the government incurs the cost of Debt service of N8.27 trillion plus the N8.7 trillion for non-debt recurrent expenditure, it would total to about N17 trillion. And that would certainly be above government revenue.
So if you have a N17 trillion non-discretionary expenditure, it simply means that the government has no leg room for capital projects as it happened in the immediate past 2023 budget. Of the N12.7 trillion the government spent in the first 9 months of the year, only N1.47 trillion was for Capital projects. What that means is that the expectation that the provision in the 2024 budget for Capital expenditure would help swing the economy may not be realized. That’s why I said that in terms of using the budget as a tool to stimulate the economy this may not be very certain.
The other thing we have to look at is that the expected increase in crude oil production has not happened. And if it doesn’t happen, the government only made provision for 1.78 million barrels per day of crude production. In the first nine months of last year, the average crude oil production was about 1.33 million barrels per day. So the government is making provision for an additional over 400 thousand barrels per day increase in the 2024 budget.
I think this is a tough call. So if we don’t achieve the volume target of crude oil production, then it simply means the revenue projection for 2024 will be in jeopardy. Even the price of crude oil which was pegged in the 2024 budget at $77.9 per barrel, which is around the range crude oil is trading currently. And the facts that kept crude oil prices high were largely the OPEC and OPEC+ ability to band together which seem to be threatened with Angola exiting OPEC.
And with this, other countries may also consider pulling out of OPEC. This will disrupt the crude oil market if it happens. So if we do not have an increase in crude oil production materially, we may not be able to earn enough foreign exchange to stabilize the exchange rate. And if you can’t stabilize the exchange rate, the implication is that you are going to see further devaluation of the Naira. The devaluation/depreciation of the currency will have effect on inflation, and we could have higher inflation.
Another factor that could actually propel inflation if the government is not able to meet its revenue projection is borrowing from the Central Bank. And borrowing from the Central Bank is printing money. If the government has to borrow additionally from the Central Bank in 2024 as it did in 2023 when it borrowed N7.3 trillion, then we are going to see liquidity injection into the economy that is not backed up by production activities. The implication of that is that we’re going to have liquidity surface that could lead to higher inflation.
That’s why I said that if you look at the outlook on inflation, outlook on exchange rate, outlook for interest rate and outlook for GDP growth, you can actually say that that Nigeria’s economic outlook for 2024 is uncertain. Of course these factors are what would drive employment.
There have been some interventions by the CBN to arrest the slide of the Naira, but despite these, the currency continues to nosedive. What more can be done to save the Naira?
The shortest or most assured way to improve the Naira is to improve crude oil production. The other sources/ways are not likely going to be very strong. And what are the other sources? There are actually three major sources of capital inflow to the country. One is from the export of our crude oil. I have mentioned earlier that we’re not likely going to see a material increase in crude oil production.
The other factor is Capital importation by foreign portfolio investors. We saw Capital importation to the country decline to the lowest in recent times when total Capital importation for the third quarter of 2023 was only $654.65 million, a further decline from the $1.03 billion we received in second quarter which was also a decline from the $1.130 billion we received in the first quarter last year. So we’ve seen a consistent declining pattern. Total foreign Capital importation received last year as at September was only $2.8 billion. In the preceding year, 2022, we got more than $5.3 billion. So we basically achieved less that 60 per cent of the previous year’s receipt.
You can only see an improvement in foreign capital importation if there is FX liquidity, and stable exchange rate. These factors are not likely to be achieved unless there is a major accretion in our reserve.
The third factor is home remittances from Nigerians in the Diaspora. I don’t see the situation materially changing because in as much as we see more Nigerians migrate to other countries, it will take time for them to settle before they begin to send money home to their families.
So in the next one year, unless we have a material increase in crude oil production, there will be no stability in the Naira. So the government should focus on how to reduce the risks/restiveness in the Niger Delta. This is something that should be under our control so we can increase crude oil production and export, and earn more foreign exchange to stabilize the exchange rate.
The Central Bank alone cannot fight/stabilize the exchange rate. It’s like going to fight with bare hands. Government has to equip the Central Bank. Being equipped means that the bank has to have sufficient foreign reserve that would help them stabilize the currency. Otherwise every other thing the bank may be doing is largely temporary and cosmetic.
What are things fuelling the exit of multinationals firms from Nigeria, knowing that the exit of some recently threw many into the unemployment market?
Two factors driving multinational companies out of Nigeria are bad politics and bad economy. The reality is that foreign investors expect to make profit from their investment in the country. The FX illiquidity which has been there for a long time is a major disincentive to foreign investors.
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Then we are witnessing a declining consumption level in the country. So you have a situation where foreign investors cannot repatriate dividends, can’t access FX even to meet import obligations. So a lot of them then resort to borrowing from their parent companies and they don’t have access to FX so as to be able to pay their parent companies. And the devaluation of the Naira has made it worse. When they announced their exit recently, P&G said that it had become near impossible to make Dollar profit in Nigeria.
With the devaluation we have seen in the recent past, the lack of liquidity in FX and added to the fact that government seem to be insensitive to the needs of these investors; including our reputation as a corrupt country have not helped matters. Even the politics of our last election that clearly fell short of the expectations of most of the electorate including foreign and local election observers, which I referred to earlier as bad politics, are things making foreign investors ask themselves questions as to whether it is worthwhile to invest in Nigeria. So it is bad politics and bad economy that is driving multinational companies away from Nigeria.
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