Global credit ratings agency, Fitch, has overlooked the rally in oil prices and lowered its economic growth forecast for Nigeria in 2021, at a time when most would have increased their growth projections for Africa’s largest oil producer.
Fitch cut its 2021 growth forecast for Nigeria to 1.6 percent, from its previous expectation of 2.3 per cent.
That’s about half of the 3 percent growth rate the government is expecting this year.
What is striking about Fitch’s decision to cut Nigeria’s economic growth is the timing. The downgrade is coming at a time when Brent crude is at a near two-year high of $66 per barrel.
Oil is crucial for Nigeria and the movement in prices has big implications for the economy.
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For one, Africa’s largest oil producer relies on revenues from oil exports to implement about 50 percent of its annual budget. Income from oil also constitutes a dominant source of dollar inflows into the country.
Although oil only contributes less than 10 percent to GDP, the sector is a key driver of economic growth in the country.
When oil prices rise, Nigeria’s economic fortunes improve and vice versa.
With oil prices at a near two-year high after collapsing in the heat of the pandemic in 2020, one would have expected upward reviews to Nigeria’s economic growth forecast but that wasn’t the case with Fitch.
Fitch’s concern has to do with persistently high inflation and the slow rollout of a COVID-19 vaccine.
The ratings agency expects both factors to lead to subdued consumer spending and business investment, ultimately overshadowing the rise in oil prices.
Nigeria has been battling stubborn inflation for more than a year now, with the rate quickening to a three-year high in January.
The rise in oil prices adds to inflationary pressure as it translates to higher petrol prices in Nigeria which imports its petrol.
Higher petrol prices feed into transport costs and food prices, paving the way for inflation to continue galloping.
The risk of rising inflation to consumer spending and economic growth is perhaps well known to monetary authorities who are widely tipped to hike interest rates this year to deal with the inflationary threat.
The economic risk of a slow roll-out of COVID-19 vaccines is however the one that looms large on the country.
It’s quite instructive that Fitch is downgrading its growth forecast for Nigeria for this reason especially given that the International Monetary Fund (IMF) has also warned that a slow roll-out of Covid-19 vaccines could threaten the economy’s full recovery.
While smaller African countries have started taking delivery of Covid-19 vaccines, Nigeria- Africa’s most populous and largest economy is not yet sure of when it will receive and even commence vaccination.
The date for the delivery of vaccines into Nigeria has continued to shift since January.
The country was expected to receive 100,000 doses of Pfizer vaccines, which did not come.
Though Faisal Shuaib, Executive Director, NPHCDA, on 22nd February, said Nigeria will get 4 million Oxford/AstraZeneca vaccines from COVAX in one week, the minister of health said the delivery of the vaccines remains the decision of those delivering it and not Nigeria’s.
Another major concern is that the registration for COVID-19 vaccination which authorities said will be set up is yet to kick off.
“Nigeria’s handling of the vaccine rollout plan looks poorly coordinated and government officials sound contradictory and clueless, that’s never going to boost confidence in your economy and could have dire consequences for investment,” a Lagos-based economist said.
Africa’s largest oil producer relies on revenues from oil exports to implement about 50 percent of its annual budget. Income from oil also constitutes a dominant source of dollar inflows into the country.
Although oil only contributes less than 10 percent to GDP, the sector is a key driver of economic growth in the country.
When oil prices rise, Nigeria’s economic fortunes improve and vice versa.
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