Is Nigeria’s GDP momentum sustainable?

Nigeria has now posted strong growth in the second and third quarters of 2021 after a turbulent 2020 when the economy slipped into a recession, but the question on the minds of several analysts is whether the growth momentum is sustainable.

The Nigerian economy grew by a modest annual rate of 4.03% in the third quarter of 2021 according to the National Bureau of Statistics (NBS).

Nigeria’s average growth rate currently stands at 3.18% thus placing us 0.58% above World Bank’s initial forecast of 2.7%. Similarly, the IMF made a 2.6% Nigerian growth projection for 2021. Nigeria appears to be living up to both the multilateral organization and the World Bank’s projections. However, economists predict an economic slow down in the fourth quarter (Q4) as base effects fade away coupled with rising inflation and the recent uptick in COVID cases.

It has been four consecutive quarters of positive growth since the economy last contracted in the third quarter of 2020 (-3.62%) in the wake of the adverse impact of the COVID pandemic. In line with expectations, the economy expanded in the third quarter of 2021 by 4.03%, even though it slowed marginally by 0.98% from 5.01% in the second quarter of 2021.

Outlook for the fourth quarter of 2021 (Q4 ’21)and the first quarter of 2022 (Q1 ’22) are estimated at 3% and 2.5% respectively. The large consumer spending which is customary with the festive season at the end of the year would probably see Trade and Services improve. At the same time, output from Agriculture will rise in the fourth quarter, as the country enters the December/January harvest season. Nigeria’s per capita GDP is estimated at $2,421.

The Managing Director of Cowry Asset Management Limited, Johnson Chukwu, stated that the country’s GDP trajectory of growth this year was primarily driven by base effect.

“This growth trajectory however, has been achieved as a result of the base effect of 2020’s COVID impact,” Chukwu said.

“A 4% growth should not be celebrated because the estimated growth rate for the Nigerian economy at single-digit inflation revolves around the 8%-9% threshold according to the country’s original blueprint,” he added.

Nigeria’s current growth rate is still significantly below the potential growth of 8.9%, suggesting that the economy is in need of massive investment to unlock its idle resources. However, the country’s current economic climate is very unattractive to both domestic and foreign investors’. Nigeria’s investment to GDP ratio is currently 29.4%- very low when compared with global standards.

The World Bank in their recent report titled “Business Unusual” stated that tighter monetary policy and enhanced exchange rate management are essential to reduce inflation and attract private investment.

Read also: IMF upgrades Nigeria’s GDP growth on oil price rally

The report read “With the headline inflation rate continuously declining since April 2021, and growth strengthening in Q2 2021, the CBN has kept the monetary-policy rate and other benchmark rates steady. However, with core inflation increasing and headline inflation still well above the upper limit of CBN’s target range of 6-9 percent, tighter monetary policy is warranted, as well as curbing monetary financing of the federal government’s fiscal deficits”.

While there is logic to the World Bank’s report, there is also logic to disagree. In terms of normal economics, we observe that there is a sticky nature of inflation around the double-digit territory. Inflation currently stands at 15.99% but the CBN’s Monetary Policy Rate (MPR) 11.5%. No investor globally would be stimulated to invest considering the negative interest nature of such investment (the difference between inflation and MPR).

Ayodeji Ebo, Head of Research at Afrinvest stated that another source of discouragement for investors are the current treasury rates.

“Treasury rates currently are even much lower. Nigeria’s treasury rate currently resides in the high-single digit territory (6%-8%) and that is not attractive to foreign investors’ when compared with the current inflation rate, and if it is not attractive to foreign investors, the country cannot get those billions of dollars that who have flowed into the country to invest in our government securities and beef-up our external reserves and boost economic growth subsequently,” Ebo said.

The Governor of the CBN, Godwin Emefiele, at the 56th Annual Bankers Dinner stated that the accommodative monetary policy of the CBN helped to position Nigeria’s economy on the path of growth.. However the country’s economic growth remains fragile as unemployment and inflation remain high.

The monetary policy committee held its last meeting for 2021 last week and maintained the status quo on all parameters. Even though the market anticipated this outcome, this time more than ever, the decision placed the CBN in a very tight spot.

The MPR being an anchor rate for banks by the CBN and also the rate which decides what rates are obtainable in the market has the power to curtail inflation but cannot be adjusted further by the CBN as recommended by the IMF because it would hamper the current growth spur experienced in the country.

So contrary to IMF’s suggestion, the movement does not necessarily need to come from MPR; however, what the CBN can do could be to manage the capital market in such a way that it allows the treasury bills and bond rates to rise above the inflation rate, the market would instantly become attractive again and sustained growth would be rest assured. Average T-bills yield fell to 6.23% in July 2021 compared to the 6.74% from the last auction date.

However, the CBN has a motive not to allow that to happen. The reason is because Nigeria is already in a fiscal debt crisis-where we are using almost all our revenue (94% revenue to service debt). So, managing the bond market means that the cost of debt becomes even higher for the government which in turn is ‘bad business’ for the economy.

The World Bank in its recent report indicated that the country’s double digit inflation has been the major strain on economic growth in the country.

“Nigeria’s GDP blueprint was originally benchmarked on single digit inflation rate. As long as inflation rate continues to reside in double-digit territory, GDP rate would continue to revolve around the threshold of 2-3%. This can be evidenced in Nigeria’s GDP in the last 6 years,” the report stated.

The World Bank has projected inflation to maintain its downward trend, closing the year at 14.3%. However, risks are elevated – increase in electricity tariffs (Dec 1), removal of fuel subsidy (early 2022), insecurity threats and exchange rate pass through effect.

As the harvest season effect wanes and we enter into the yuletide season, we expect commodity prices to rise further as people stock up for Christmas. Exchange rate volatility at the parallel market is likely to keep imported commodity prices high. This, along with money supply saturation on the back of increased electoral spending in 2022, will trigger a reversal in the inflation trend.

Nigeria is likely to experience exchange rate volatility as a result which would further fuel imported inflation. Other inflation risks remain elevated as Nigeria continues to grapple with separatist agitations, supply chain disruptions and higher energy costs.

Analysts are of the opinion that foreign-exchange controls on imported goods, for which domestic supply is inadequate, and conflict in the Middle Belt (Nigeria’s food-basket) will continue to keep inflation structurally high and subsequently continually constrain GDP within the 2-3% threshold in the medium to long term.

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