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Nigeria economy yet to heal after highest GDP growth since 2014

Nigeria’s economy expanded at the fastest pace since 2014 in the second quarter of 2021, but does not count for much given the economy has only profited from the easing of COVID-19 restrictions that curbed economic activity last year.

Failure to implement long standing reforms that would open the economy to more private capital while boosting taxes and reducing the economy’s reliance on crude oil has stalled, much to the frustration of businesses and individuals, with unemployment and poverty rising to record levels.

The economy grew 5 percent in Q2’21 but had contracted by as much as 6.1 percent in the same period of 2020, which it is being compared with, as the COVID-19-induced lockdown forced businesses to close shop and rendered several Nigerians jobless.

Crude oil, which greases the wheels of the Nigerian economy, was priced at the lowest level in over three decades and prices even turned negative at some point.

Fast forward to the second quarter of 2021, the strict COVID restrictions from last year have been eased. Businesses that were running at zero capacity are now able to operate at higher capacity and that was evident in the Q2 financial results of listed Nigerian companies, which showed a recovery from the lows of last year.

Oil prices have also recovered and averaged $68 per barrel, even though lower oil output due to OPEC restrictions means the sector still punched below its weight in Q2’21.

These point to an economy that is only recovering losses made from the pandemic rather than one that is brimming with newly found energy from government reforms.

The government only recently passed the much-awaited oil industry bill that is meant to catalyse new investments in the sector after 20 years of foot-dragging. Several other reforms lie in wait from the contentious petrol subsidy regime to infrastructure reforms.

What COVID-19 did to the economy in 2020 was to make a bad situation worse. The economy had not grown in per capita terms since 2015, which means poverty has deepened, and the 5 percent growth in Q2’21 will not change that.

Nigeria has been repeatedly caught out by its continued over reliance on crude oil and that has led to two recessions in five years, a painful squeeze for Nigerians whose average incomes have shrank from $3,000 in 2014 to about $2,000 now.

The Nigerian economy will return to the size it was in 2010 by the end of 2021, according to the World Bank, even though the population has been growing at a robust 2.6 percent per annum and will be home to the world’s third largest number of people by 2050.

Mostly everything positive about Nigeria’s macroeconomic indicators this year has been driven by base effects, whether it is GDP or inflation.

Bismarck Rewane, CEO, Financial Derivatives Company, says though inflation rates have slowed consecutively in the last three months, it is due to base effects year-on-year, and inflationary pressures still reign supreme.

“Inflation rate still hovers around high-double digit threshold, while GDP still revolves and struggles to steady itself within single-digit territory,” he says, noting, “Policy makers in Nigeria have been navigating a treacherous path. This is as they align strategic reforms beneficial to the economy with reducing the short-term pain of citizens.”

One indicator that affects everybody but impacts more on the elites than the bottom of the pyramid is the value of the naira. The naira remains flat at N503/$ at the parallel market and N411/$ at the I&E window, but is likely to appreciate marginally in the near term. This depends on an increase in forex supply by the CBN. Corporates in particular are saddled with the burden of exchange rate misalignment and its attendant volatility.

Read Also: Nigeria’s Q2 GDP growth masks obstacles ahead

The ripples effect of this volatility is reflected in the country’s inflation rate. Nigeria is expected to have the fifth-highest inflation rate on the continent by the end of 2021, behind only Zimbabwe, Zambia, South Sudan, and Angola. The high inflation has compounded the financial pressure on households already faced with a shrinking labour market, stagnant incomes and weak purchasing power.

Adenikinju Adeola Festus, a member of the Monetary Policy Committee (MPC), states, “The economic recovery rate is still very weak and fragile. Poverty and unemployment rates are still quite high. The security situation in the country is hurting economic recovery, while at the same time, poverty and unemployment also contribute to the worsening security challenge we have.

“As we enter another planting season, the effect of climate change may have negative impacts on food prices in the later part of the year. The current efforts of the CBN to promote dry season agriculture would be quite helpful.”

Nigeria’s investment climate remains tough, compounded by insecurity in different parts of the country. As a result, investment inflows into the real sector will remain subdued until there are improvements in the security situation.

For trade, imports will continue to trend upwards mainly due to challenges associated with local production as well as a huge and growing appetite for imported products. This will have negative implications on foreign exchange and add pressures on the reserves.

Analysts expect marginal improvements in exports following improved demand conditions across the globe and reopening of land borders. We believe that the trade deficit will begin to narrow in the third quarter as oil production and export improve.

Nigeria’s investment climate remains tough, compounded by insecurity in different parts of the country. As a result, investment inflows into the real sector will remain subdued until there are improvements in the security situation.

The fiscal condition of the economy remains distraught. The fiscal conditions of the economy in the first half were not impressive from debt, revenue, and budget performance standpoints.

Public debt stock grew to N33.1 trillion as of end-May 2021, equivalent to around 22 percent of nominal GDP. The debt stock has more than tripled since 2015, yet has had little impact on economic growth, which hinges at the government’s inefficient spending.

While debt-to-GDP ratio is below the 55 percent threshold recommended by the World Bank and International Monetary Fund for emerging markets, the country’s high debt cost to revenue portends significant risks to fiscal sustainability.

Debt costs accounted for over 90 percent of Federal Government’s retained revenue between January and May 2021, and policymakers have continued to depend on debt and unconventional measures (CBN ways and means facility) to fund the national budget.

The economy started the second half on a good note with the recent passage of the Petroleum Industry Bill by the National Assembly after years of neglect. Although the bill is coming at a time the global energy landscape is placing greater attention on renewable energy, nonetheless, the law is expected by some to reposition the oil and gas sector for healthy competition, efficiency, and governance transparency.

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