The gross domestic product (GDP) figures that the National Bureau of Statistics released Thursday show Nigeria’s economy is regaining health as coronavirus restrictions ease.
This regain in health some say hides obstacles that could prevent Africa’s largest economy from staying on the path of sustained recovery and economic development.
The economy has posted modest GDP expansion for three quarters. This growth rate would not reverse the steady decline in incomes and the rise in poverty.
Adenikinju, Adeola Festus, a member of the Monetary Policy Committee (MPC) has said that “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 contributes 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 later part of the year. The current efforts of the CBN to promote dry season agriculture would be quite helpful”, he added.
Nigeria’s GDP grew 5.01 percent (year-on-year) in real terms in the second quarter of 2021, as the economy bounced back from COVID-19-induced restrictions of last year (2020).
Nevertheless, quarter on quarter, real GDP grew at -0.79 percent in Q2 2021 compared to Q1 2021, reflecting slightly slower economic activity than the preceding quarter due largely to seasonality and inflationary pressures.
In the quarter under review, aggregate GDP stood at N39,123,713.32 million in nominal terms, higher than the second quarter of 2020 with aggregate GDP of N34,023,197.60 million, indicating a year on year nominal growth rate of 14.99 percent.
Read also: Nigeria GDP Grows 5% in Q2 as COVID-19 restrictions ease
The nominal GDP growth rate in Q2 2021 was higher than -2.80 percent growth recorded in the second quarter of 2020 when economic activities slowed sharply at the outset of the pandemic. The Q2 2021 nominal growth rate was also higher than the 12.25 percent growth recorded in Q1 2021.
Despite this significant rebound, COVID-19’s global impact has exposed the weaknesses of the macro story, namely the continuing dependence on oil, the huge untaxed informal economy and the stuttering efforts at reform. The saga of fuel subsidies is a case in point.
Bismarck Rewane, managing director and CEO of Financial Derivatives stated that though inflation rates have slowed consecutively in the last three months due to base effect year on year, 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 said.
“Policymakers 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,” Rewane added.
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.
The ripple effects of this volatility are reflected in the country’s inflation rate. Inflation hit a four-year peak in March.
Driven by the effects of COVID-19, it rose to 18.17 percent, up 4.85 percent from February. As of July 2021, Nigeria’s headline inflation stood at 17.38 percent.
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 economic growth, and increasing levels of insecurity.
“Nigeria is experiencing cost-push inflation, where prices of goods and services are driven up by the high price of inputs, wages and production resources, most specifically, imports,” Rewane stated.
“Although Nigeria has experienced a downturn in its inflation in the past four months, the inflation rate could increase again due to the likely increase in energy costs (PMS Price)”, Rewane added.
The recovery in the oil price and revenue will give a small boost to government and household spending, and ease pressure on the current account and fx markets.
A combination of OPEC+’s discipline, steps toward a return to ‘normality’ in advanced economies and the struggles of the US shale oil industry has come to the rescue of non-diversified oil producers such as Nigeria. The FGN’s adoption of a conservative oil price assumption creates a little headroom within the 2021 budget.
Earlier in the year, the non-oil sector remained the driver of growth with an expansion of 0.8 percent while the oil sector contracted by 2.2 percent. The Nigerian non-oil sector followed the global pattern of recovery. It is pertinent to note, however, that those sectors in which the CBN had intervened the most since the COVID-19 pandemic struck – Agriculture, Manufacturing, as well as Human Health and Social Services, grew by 0.5, 0.33 and 0.03 per cent respectively, and were largely responsible for the 0.51 per cent overall growth in Q1 2021.
However, 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 pressure on the reserves.
Analysts expect marginal improvements in exports following improved demand conditions across the globe and the reopening of land borders. We believe that the trade deficit will begin to narrow in the third quarter as oil production and export improves.
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 pressure on the reserves.
Analysts expect marginal improvements in exports following improved demand conditions across the globe and the reopening of land borders. We believe that the trade deficit will begin to narrow in the third quarter as oil production and export improves.
From the fiscal and trade perspective, Nigeria will need to leverage on the African Continental Free Trade Area (AfCFTA) Agreement to boost non-oil exports and increase forex inflows. Providing direct incentives for businesses to produce for exports, implementing port reforms as well as developing comprehensive industrial and trade strategies are important steps that the government must take.
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 marginally to N33.1 trillion as at end-May 2021, equivalent to around 22 per cent of nominal GDP.
While the debt-to-GDP ratio is below the 55 per cent 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.
Nasir Aminu, of Cardiff Metropolitan University, said “Nigeria’s fiscal deficits widened further in March 2021 and in the absence of clear fiscal consolidation plans or an expenditure austerity strategy, hopes of an imminent debt decline may be out of the way”.
“Important macroeconomic gains would be surely realized by achieving a stable public debt level and will definitely enhance the effectiveness of monetary policy”, he added.
The economy started the second half on a good note with the recent passage of the Petroleum Industry Bill by the Ninth 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 bill [when signed into law] will reposition the oil and gas sector for healthy competition, efficiency, and governance transparency.
Also, the National Assembly has passed 2021 supplementary budget. The budget makes provision for vaccine procurement and security-related expenditures. Lawmakers have endorsed the move to raise $6.1 billion via the issuance of Eurobonds.
Improvement in the current vaccination rate is expected to improve economic and business activities in the country, which is positive for the sustenance of growth recovery. Inflation is expected to decelerate in the second half of the year on account of base effects and expectations of modest harvest, barring further exchange rate adjustment.
With the deceleration in the inflation rate, monetary policymakers would be further encouraged to keep policy parameters at current levels. Relative stability is anticipated in the foreign exchange market as CBN sustains its intervention efforts.
Non-oil revenue should improve as economic activities gain more traction while oil revenue will be constrained by Nigeria’s commitment to OPEC+ supply policy amid a high oil price environment.
The stock market performance will likely be weak as interest rates on government securities inch higher. As a country, Nigeria’s excessive dependence on oil for revenue and foreign exchange sustenance is no longer tenable in the medium and long term.
“We need to diversify the economic and revenue base of the economy to reduce our exposure to external shocks as well as prepare the economy for the global shift from fossil fuel to a green economy. It should not be business as usual for our economic managers. The economy also needs a strong buffer to mitigate external volatility”, Adenikinju stated at the last MPC meeting.
