The International Monetary Fund (IMF) yesterday upgraded the economic growth forecast for Nigeria from 0.7% to a jaw dropping 1.9%.
The IMF change their forecast’s for most economies as often as most of us change our underwear, to point that constant changes has lead to a loss of credibility in the last few years.
The last announcement will mean that Kemi “the village bean counter” Adeosun and other Federal Government (FG) jokers will congratulate themselves on a job well done.
However, the truth is more troublesome.
The Nigerian economy is entirely dependent on crude oil price and crude oil production and anyone who questions this by citing diversification is being tricky or delusional and needs their head checked.
The outlook for the crude oil market through the rest of 2017 and 2018 looks appears to suggest sustained lower prices.
There is already a glut in the market and Libya, Nigeria and US shale are expected to dump more into the market over the coming months.
In Nigeria’s case this comes as a result of the reopening of Forcados bringing an extra 200,000 barrels per day (bpd) into the market.
In addition, Libya is currently pumping 250,000 bpd more that it’s April average.
The shaky OPEC production cut deal looks even more rickety against this backdrop and as for Russia, well they are not cutting as hard or fast as they said they would.
All this adds up to depressed oil prices throughout 2017 and 2018.
In fact, many analysts are citing a price per barrel of around $40 during this period and forward contracts certainly indicate this is likely.
With a lower oil price comes lower FG revenue and less money for them to pump into the real economy and artificially support the Naira.
The FG has indicated a willingness to borrow to sustain spending, something that the IMF and other international bank institutions actively encourage to keep themselves in business.
But the FG does not appear to wish to meet the conditions required to access this cheap money (mainly a floating Naira) and have chosen instead to gorge on Chinese debt and issuing Eurobonds.
The issue with these approaches is the cost attached.
It is relatively easy money now but they are loans like any other and would need to be repaid with steep interest.
If the FG does not use the funds to stimulate the economy through smart investments, diversification and cutting out corruption, there will be no money available to pay back.
In addition, as the oil price falls, buyers of government debt will require a higher interest rates to compensate them for the additional risk.
Readers of Naira Insider will already know of how Chinese debt is Neo-colonialist alchemy on behalf of the Chinese and should be avoided.
One other factor to note – the new Central Bank of Nigeria (CBN) Forex window is trading dollars at ABOVE the black market rate.
Meaning that in that controlled window, the CBN can not even manage demand effectively.
International investors are prepared to take a huge hit just in order to repatriate their naira investments into dollars which is extremely worrisome.
Think about it – these investors would rather loose money than leave it in the country showing the amount of confidence they have in the Nigerian Economy.
In addition, the information from these investors is that they are only getting access to a small fraction of the dollars they are trying to buy.
The pent up demand of investors trying to unravel their Naira positions is significant potentially leading to further devaluation of the local currency at the expense of Nigeria as a whole.
So we must be skeptical of this growth forecast and instead nervously watch oil prices which have always been a better predictor of Nigerian economic growth.
There are many tools at the FG’s disposal and failure to diversify the economy has left recovery still looking a long way off and as the Americans say, this may just be a dead horse bounce.