Nigeria’s sluggish recovery reflects weak macroeconomic fundamentals

Despite the re-opening of Nigeria’s land borders, statistics still reveal weak and slowing growth in the economy. Of the 46 activities tracked by the NBS, 23, which were mostly job inelastic sectors, recorded positive growth rates compared to 29 activities in the corresponding period of 2020. The two key sectors of the economy (Agriculture and Telecommunications), which together account for 31.24 percent of GDP, have also recorded tepid growth. The trade sector, accounting for 15.61 percent of GDP, also contracted by 2.43 percent.

Agricultural output across the country was hampered by insecurity especially in the food producing zones of the country, which affected the planting, harvesting and distribution of crops. This has also been a major factor driving the rise in food inflation (22.72 percent) until it was tapered by the re-opening of the borders. The sector grew by 2.28 percent in Q1’21, slower than the 3.42 percent in Q4’20 but slightly higher than the 2.2 percent growth recorded in Q1’20. The government’s policy to ban the registration of new SIM cards negatively affected the growth of new telco subscribers. Sector growth, which had been crucial in driving the economic recovery in 2020, slowed significantly to 7.69 percent from 15.9 percent in Q4’20 and 9.71 percent in Q1’20.

Fears of a double-dip recession have been allayed following the marginal positive GDP numbers released by National Bureau of Statistics (NBS). The Nigerian economy expanded by a tepid 0.51 percent in Q1’21 after growing by 0.11 percent in Q4’20 and 1.87 percent in the corresponding period in 2020. The numbers reflect the negative impact of increased insecurity and stringent government policies on major sectors of the economy. They can also be partly attributed to base year effects as the negative effects of COVID still lingered. In Q1’20, the country then was not in a lockdown and the economy enjoyed a modest growth of 1.87 percent.

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While some analysts had envisaged negative growth for the period, the positive outcome, in addition to the slight moderation in inflation numbers for April, is most likely the major reason why MPC maintained status quo in its last meeting. The IMF expects the country to grow by 2.5 percent in 2021 while potential GDP is estimated at 8.0 percent, resulting in a recessionary gap of 5.5 percent. With 0.51 percent growth in Q1’20, the Nigerian economy will now need to expand by an average of 3.15 percent over the next three quarters to achieve the IMF’s forecast. However, this feat will be somewhat helped by base year effects of the GDP contractions of 6.1 percent and 3.62 percent achieved in Q2’20 and Q3’20, respectively. Output growth in Q4’21 will however present the real test.

Outlook

While oil sector contraction has been due to Nigeria having to comply with OPEC-mandated cuts to its output, the recent increase in the country’s production quota to 1.54mbpd from 1.48mbpd will be positive for the sector’s growth. This is in addition to the likely passage of the PIB, which will bring clarity to fiscal incentives and boost investment in the sector. This will also strengthen Nigeria’s fiscal and external picture, which will support growth in other exchange rate-sensitive sectors of the economy.