• Friday, March 29, 2024
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Unemployment, inflation and instability will define Nigeria’s economic outlook says EIU

Nigeria’s near-term economic outlook will be clouded by high inflation, mass unemployment and rampant instability with economic growth falling well behind potential, says the Economist Intelligence Unit, EIU.

The EIU which raised its forecast for average oil prices in 2022 from US$71/b to US$78.5/b, however, noted that policy choices in Africa’s most populous nation will continue to hinder economic performance in the near to medium term.

“Assuming the currency stabilises in the medium-term as oil exports continue to recover, the outlook is slightly brighter.

“However, policy choices by the central bank will continue to create macro-imbalances and the government will be unable to get a handle on multiple security crises bubbling-away across Nigeria. This creates a growth profile that falls well behind potential,” it said in a new report

EIU says its analysts do not anticipate any massive depreciation of the Naira despite comments made during the 2021 IMF/World Bank annual meetings in Washington, DC in mid-October by the governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, suggesting that the naira might be allowed greater exchange-rate flexibility after the completion of the Dangote crude oil refinery in July 2022.

Read Also: Nigeria’s economy to grow on oil boost but won’t outpace poverty

In Nigeria fuel imports take about 30% of the annual hard-currency spending through the CBN, according to Mr Emefiele while the outlay for fuel imports in the first half of 2021 was some N1.5trn (US$3.6bn), based on data published by the National Bureau of Statistics (NBS).

The fuel imports, mostly by the state-owned Nigerian National Petroleum Organisation, are typically about one-tenth of total annual imports.

According to the EIU, “the CBN should be able to keep at the very least US$8bn in hard-currency reserves that it would otherwise have used for importing fuel and petrochemicals, once the 650,000-barrels/day Dangote crude oil refinery begins operations in mid-2022, providing support to the naira.”

The Nigerian authorities tried to assuage the fears of foreign investors about hard currency at the meetings in Washington, DC, assuring them that their transactions would be prioritised by the central bank.

The EIU report said almost US$40bn (about nine months of import cover) in hard-currency reserves, the CBN certainly has the wherewithal to make good on this commitment.

According to the analysts, “nonetheless, Nigeria still faces short-term challenges—US$876m worth of foreign capital flowed into the Nigerian economy in the second quarter of 2021 (a fall of more than 50% compared with US$1.9bn in the preceding quarter, according to NBS data), and inward portfolio investment was also significantly lower in both quarter-on-quarter and year-on-year terms, highlighting ongoing caution from foreign investors.

“Part of the problem is the unpredictability and uncertainty surrounding the central bank’s policy and messaging. This, in addition to low real yields, owing partly to high inflation, will continue to weigh on investor sentiment in the coming months. As a result, a strengthening of the naira in mid-2022 as oil imports are rolled back still looks unlikely.”

The EIU said, “despite the central bank governor’s comments, we continue to expect gentle depreciation of the naira in 2022-24 as the CBN allows a moderate increase in exchange-rate flexibility.”