The low-hanging fruit of the pandemic-induced economic recovery in Nigeria has been eaten in 2021. As a result, growth and expansion in 2022 is expected to transition into a new phase with new risks accompanying it.
In 2021, the Nigerian economy grew at an accelerated but torrid pace, as sectors that were shut down during the pandemic reopened. The country recorded some improvements in real GDP growth compared to the economic downturn of the previous year (2020), which was largely on account of the COVID-19 pandemic.
While the growth process is not nearly complete, numerous sectors operating within the Nigerian economic space are still functioning below their pre-pandemic levels. While healing appears to be more gradual in some parts, most parts witnessed more difficulty.
For example, while the GDP growth rate in the second and third quarters of 2021 came in at 5.01 percent and 4.03 percent, respectively, powered mostly by the non-oil sector, the stock market however in the last quarter of 2021 witnessed a significant decline of 4.52% (October), 2.88% (November) and -1.12% (December), respectively.
As the sun gradually rises in 2022, what looks visible and clear from the horizon is that the performance of the Nigerian economy in 2022 would definitely be shaped by these eight (endogenous/exogenous) factors.
Removal of fuel subsidy
The planned removal of fuel subsidy following implementation of the Petroleum Industry Act (PIA) by mid-2022 attracts mixed reactions as well as dual consequences. On one hand, if the removal of subsidy takes place, the inevitable consequence will be higher headline inflation in the near term lingering till the end of 2022.
There is also the risk of increased cost of production as well as an increase in electricity tariffs, which could arise from the removal of fuel subsidy.
Recent reports have revealed that the Nigerian Labour Congress (NLC) has announced a nation-wide protest on January 27 against the subsidy removal plan.
Uche Uwaleke, a professor of finance and capital market and president of the Association of Capital Market Academics of Nigeria, states that tight monetary policy that will subsequently follow to rein in the anticipated inflation will result in higher fixed-income yields and make equities investment less attractive.
“I foresee a situation where the removal of fuel subsidy would spiral inflationary pressures and as a result, the CBN would respond by tightening monetary policy,” Uwaleke says.
He also states that there could also be consequences to the country’s debt portfolio, if for some political reasons the government decides to retract their position on fuel subsidy removal.
“If on the other hand, the government does not remove the fuel subsidy, they would have to borrow more to support the fuel subsidy, as such borrowing was not allocated in the budget,” he added.
Intensified political activities in H2’ 2022
If history has taught us anything, it is that election years in Nigeria are characterised by feverish preparations, which tend to relegate the economy to the back seat. The resulting consequences on the economy usually emanate from the uncertainties and tensions often generated by the activities of some desperate politicians.
Political activities would most likely stimulate inflationary pressure and exchange rate challenge, which will likely manifest more in the second half of 2022.
FG’s 2022 budget fiscal imbalance
The growing fiscal imbalance in the Federal Government’s 2022 budget distinctively points towards caution. The current budget deficit of over N6 trillion coupled with the government’s borrowing plans will impact the economy in more ways than one.
From the capital market perspective, Uwaleke explains that the more the government borrows to finance the budget deficit, the more interest rates are driven up and as yields in the fixed income space go up, investors will naturally migrate from equities to government securities.
“I foresee the yield environment in 2022 returning to the pre-COVID level and having a huge toll on the equities market,” he says.
Also, the reduction in the period for the payment of the Tertiary Education Tax from 60 days to 30 days as indicated in the 2021 Finance Act could impact liquidity of companies.
Many public companies, when faced with liquidity constraints may not be in a position to maintain dividend payments at current levels or even pay at all.
Persistent FX challenge
Difficulty in accessing forex is most likely to linger for many businesses that depend on imported raw materials on the back of unmet forex demand, which the CBN still grapples with. Against this backdrop, capacity utilisation will likely be negatively impacted, which in turn would affect the ability of listed companies to pay dividends.
CBN’s monetary policy position
The CBN’s monetary policy stance will likely change in the second half (H2) of 2022 as the policy would become more hawkish induced by both endogenous and exogenous factors and as such the CBN might resort to further tightening the monetary policy rate (MPR).
The repercussions of this policy would be reflected in the country’s GDP position because with higher interest rates there will be a slowdown in the rate of economic growth.
Uwaleke states that tightening monetary policy through, for example, raising the MPR could lead to rising yields in the fixed income market and portfolio rebalancing away from equities to fixed-income securities.
He notes that access to credit will continue to pose a challenge for many businesses in a rising interest rate environment.
He also states that in response to capital flow reversal as a result of interest rate normalisation in the US, the CBN would most likely increase the MPR by 100 basis points from 11.5% to 12.5% on the back of this trend.
The CBN since September 2020 had maintained what could be described as an ‘accommodative monetary policy stance’ after the MPR was reduced by 100 basis points to 11.5% from 12.5% in the same period.
Interest rate normalisation in developed economies
Nigeria should expect further capital outflows as a consequence of the planned interest rate normalisation in developed economies. First, bond yields will rise leading to capital flow reversals in frontier and emerging markets.
Another implication would be the depletion of foreign reserves and a higher exchange rate of the naira as a result of the exit of foreign investors, which usually puts pressure on the forex market; thus providing further justification for the CBN to tighten monetary policy.
When this happens, banks are likely to reprise their assets which may worsen non-performing loans position in the Banking sector. This will increase the cost of borrowing and reduce access to credit by businesses.
Uwaleke states that a rise in US interest rates and bond yields would further exacerbate the government’s expense at servicing its huge public debt which is currently in excess of N38 trillion.
This development will further worsen the country’s current fiscal imbalance, jeopardise the 2022 budget as well as crowd out development funds.
Intensity and spread of the COVID-19 Omicron variant
How the Federal Government of Nigeria responds to the intensity/spread of the omicron COVID-19 variant would greatly influence the country’s economic performance in 2022.
Last year, Nigeria fell victim to the ripple effects of supply chain shocks from its major foreign import economies that went into the third phase of lockdown as a result of the omicron variant. It was one of the major contributors to the colossal spike in gas prices as a lot of ships were stranded at the shores of those economies that were experiencing lock-downs.
Any attempt at sanctioning lock-downs or movement restrictions in any of these major exporting countries will have indirect negative ripple effects on the Nigerian economy.
International crude oil prices
On the flip side, international crude oil price is likely to stay above the 2022 budget reference price of $62 per barrel on average. Crude oil output is also likely to shore up following implementation of the PIA. The combined effect of these is that the oil sector performance is likely to improve in 2022, which should rub off positively on listed oil companies in the country and the Nigerian economy as a whole.
