Nigerians won’t be able to tell the difference between the economy in 2020 and 2021 unless bold decisions are made to rescue the economy, say economists polled by BusinessDay.
Last year was rough for the Nigerian economy which slipped into a second recession in five years. Average incomes contracted for a record sixth straight year and rising unemployment and inflation added to the pain of Nigerians, especially youths, whose protests against police brutality were also brutally quelled by the government.
The COVID-19 pandemic took a heavy toll on the economy as it did on economies around the world, but Nigeria didn’t help itself with unpredictable FX policies, credibility concerns around key reforms, heightened security concerns and a failure to sufficiently improve the ease of business.
For the economy to stand a fighting chance in 2021, economists polled by BusinessDay say quick implementation of structural reforms including a review of the foreign exchange management framework and significant investment in critical infrastructure projects are imperative.
Andrew Nevin, Advisory Partner and Chief Economist at PwC Nigeria, said the trajectory of Nigeria’s economy in 2021 depends on the policies or decisions taken by Nigeria’s economic actors.
Nevin noted that the contraction in average income was still a risk in the new year because of the rapid rate of population growth and weak economic growth.
“Nigeria’s 2021 GDP per capita may likely contract because major decisions taken by Nigeria’s economic managers may take time to impact the business environment which we may only experience in 2022,” Nevin told BusinessDay.
Nevin also expects Nigeria to record lower foreign direct investment in 2021, due to lower physical interactions as a result of the coronavirus pandemic most especially for deals between companies or deals that involve working with the government at various levels.
That’s a worrying prediction for a country that attracted less than
He said attracting more local investment in 2021 will depend highly on the kind of reforms put in place to encourage domestic investment.
“We need Nigerians to invest in the local economy however, the scene is still too difficult or too complex to invest because of the local challenges such as too many MDA’s or too much overlapping jurisdiction, all of which makes it difficult to do business in Nigeria,” Nevin said.
On economic reforms, Nevin said, “Nigeria needs deeper reforms such as the restructuring of Ministries Department and Agencies (MDA) at the federal level, perhaps some constitutional changes that will make it easier for the states to develop themselves which are still elusive.”
He also raised concerns about the timeliness of the reforms because of the federal government’s historic slow pattern in driving the subsidy and electricity tariff reforms.
For Muda Yusuf, an economist and Director General at the Lagos Chamber of Commerce and Industry, the outlook in 2021 is not very bright as there are no quick fixes for the structural issues and the desired regulatory and institutional reforms.
Without bold policy pronouncements in this regard, he expects constraints to the ease of doing business such as FX shortages, escalating production costs, high regulatory costs, infrastructure inadequacies, and delayed cargo clearance, to persist in 2021.
While the exit from recession is expected in Q2-2021 due to the base effect of Q2-2020 when output contracted steeply by 6.1 percent, the LCCI boss expects the pace of recovery to remain subdued within the region of one percent in the year 2021 in the absence of shocks.
“While most MSMEs will struggle to survive in 2021 amid unfavourable economic conditions, we expect most large corporates to demonstrate resilience in the coming year,” Yusuf said.
He expects headline inflation to remain elevated as the combination of food supply shocks, FX policies, higher energy costs, FX illiquidity, heightened insecurity in major food-producing states, will continue to mount pressure on domestic consumer prices.
“We believe a broad-based harmonization of fiscal and monetary policies towards addressing the identified structural constraints will significantly help to moderate inflationary pressure in the medium term,” Yusuf said.
Although the lingering effects of COVID-19 disruptions will likely persist into the first quarter of 2021 as the economy gradually recovers from the recession, Yusuf expects a resurgence of a covid-19 pandemic would cause a further set back to activities in the oil and non-oil sectors.
“We expect ICT, financial institutions, and agriculture to drive growth in the non-oil sector in the short-term while the country’s commitment to OPEC+ agreement is expected to dampen recovery prospects of the oil sector,” he said.
In 2021, the CBN is expected to maintain intervention sales in the FX market to support the naira. Nonetheless, Yusuf predicts FX illiquidity challenges may persist in 2021 depending on the performance of the global oil market and the policy environment around the foreign exchange market.
He envisages sustained FX pressure in the coming year in the light of weak dollar inflows from crude oil and foreign investment while continuously maturing OMO bills amid continued depletion in external reserves will cause FX issues to persist into the year 2021.
“We retain our position that monetary authorities need to liberalize the FX market by unifying the multiple FX rates and ensuring FX rates are market-driven. This is critical in the process of enhancing stability, liquidity, and transparency in the FX market,” He said.
On the outlook for oil prices, the LCCI boss predicts Brent crude, Nigeria’s benchmark grade, to hover slightly above $50 in the first quarter of the year 2021. However, he warned the persistent spread of the COVID-19 pandemic and imposition of national lockdown globally might push oil prices significantly lower.
“Additionally, the growing preference for renewable and clean energy in advanced economies might likely put downward pressure on global oil demand and oil prices in 2021,” he warned. “We are not optimistic of significant appreciation in oil prices in the near term.”
Considering the dim outlook for revenue, the government would most likely underperform its revenue projections yet again in 2021, with an attendant impact on fiscal deficit and debt portfolio.
The government is basing its 2021 benchmark at $40 per barrel, up from $30 from 2020, when the country had to revise the 2020 budget oil benchmark from $57 per barrel to $30. Its production output was also revised from approximately 2.1 million barrels to 1.7 million per day.
With revenues set to underperform, the budget deficit for 2021 is expected to surpass the projected N5.2 trillion and this poses a risk to Nigeria’s fiscal sustainability.
Before the pandemic, Nigeria’s economy was already in a bad shape with several challenges such as a drop in average income, nonstop rise in general prices, external vulnerabilities, a mountain of debt, high unemployment, and already weak investor confidence.
These challenges were amplified by covid-19 induced disruptions as the economy lacked adequate buffers to handle the shock.
As a result, the economy slipped into a recession in the third quarter of 2020 following two straight quarters of contraction in economic output.
Nigeria’s current economic reality needs every sector to perform optimally in order to drive the inclusive growth needed to help Nigeria solve its rising problem of unemployment.
The World Bank projects Nigeria’s GDP will contract by about 4 percent in 2020 and grow modestly by 1.1 percent in 2021.
The IMF, on the other hand, says real GDP is projected to contract by 3.25 percent in 2020 with recovery projected to start in 2021, with subdued growth of 1.5 percent and output recovering to its pre-pandemic level only in 2022.
Damilare Asimiyu, Head, Research & Strategy at GTI Capital, expects National debt to cross N38 trillion from the current size of N31 trillion by December 2021 given the government’s plan to borrow N6.17 trillion and the ambitious revenue projection of N8.77 billion to fund an expenditure plan of N13.08 trillion.
He envisages CBN policy focus to remain pro-growth, hence, MPR and broad interest rate environment will remain accommodative in 2021 although he also warned more tax policies may likely be rolled out as the government strives to shore-up non-oil revenue.
He predicts stocks of banking, telecoms, and industrial goods sectors may likely out-perform the consumer goods, insurance, and oil & gas sector mainly due to weak macro fundamentals while Nigeria may likely be stuck to taking cheaper bilateral & multilateral debt than floating Eurobond due to high-risk premium demanded.
He expects passage of the entire Petroleum Industry Bill may likely to suffer further delay due to some self-interest.
