After a year defined by the economic fallout of the global pandemic, green shoots are finally appearing in the Nigerian growth story, with multilateral agencies predicting a positive trajectory for the country this year on the back of rising oil prices.
Nigeria’s economy entered a recession in 2020 on the back of Covid-19 containment measures, reversing three years of recovery since the country’s 2016-17 recession.
This was driven by a dramatic fall in crude oil prices – at one point to less than $20 a barrel – as the global economy ground to a halt. Nigeria’s balance of payment gap hit $14bn in 2020 as a result of a wider budget deficit triggered by the crash in crude oil prices that slashed revenues, weakened the naira and caused dollar shortages. Growth in financial services and ICT during this period was not sufficient to offset the significant slump in economic activity.
But with an oil price recovery to around $63/barrel at time of writing and the commencement of Nigeria’s Covid-19 vaccine rollout in March, there are expectations that a gradual recovery will help to drive growth, despite embedded structural problems.
In its African Economic Outlook for 2021, the African Development Bank says Nigeria’s real GDP is estimated to have shrunk by 3% in 2020. Federal government revenues dropped by around 20% last year but the government was only able to provide fiscal support equal to around 1.5% of GDP, according to Capital Economics.
But the IMF predicts “a weak and gradual” recovery of 1.5% this year. In a generally bearish report, the fund predicts that real GDP is only expected to recover to its pre-pandemic levels in 2022.
“The near-term outlook is subject to downside risks from pandemic-related developments with Nigeria experiencing a second wave. Over the medium term, a subdued global recovery and decarbonisation trends are expected to keep oil prices low and Organization of the Petroleum Exporting Countries quotas in place, restricting oil-related activities, fiscal revenues, and export proceeds. Non-oil growth is also expected to remain sluggish, reflecting inward-looking policies and regulatory uncertainties,” it says.
The government is more optimistic, projecting 3% growth, while the Nigerian Economic Summit Group, a local private sector think-tank, suggests a 2.9% recovery this year will spur higher growth up to 2025 in line with the expected global recovery.
Signs of resilience?
A 0.1% rebound in Nigeria’s growth in the fourth quarter of 2020 surprised analysts, revealing the first signs of a recovery after three quarters of negative growth. The non-oil sector was a driver of this growth, with a rebound in ICT, agriculture, real estate and manufacturing.
PwC’s chief economist in Nigeria, Andrew Nevin, praises the resilience of the Nigerian economy. “The fact that we can grow the Nigerian economy in these very challenging health and economic times shows you the resilience of the economy. It shows why people like me are optimistic in the medium term about the Nigerian economy,” he says.
One of the immediate priorities for the government, in addition to stimulating the economy in the post-Covid-19 era, is tackling inflation, which hit a four-year peak in February. The main driver of the increase is food prices, which have spiked over the past year, adding to the economic misery of citizens.
Food inflation in February was nearly 22%. The price of basic foods such as yam, garri, beans and peppers increased by between 40% and 90%, and a bag of peppers by more than 130% between January 2020 and January 2021, according to Bismarck Rewane, managing director of Lagos-based Financial Derivatives.
Nigeria’s 16-month closure of its land borders to goods has contributed to high food prices. The move was aimed at ending the threat posed by smuggling to local agricultural production of basic foodstuffs, but after the borders were closed Nigerian farmers were unable to keep up with domestic demand. The borders were reopened in December 2020 but trade flows have not yet returned to normal.
Rewane says the country is experiencing stagflation, a crisis that will not be easy to resolve with inflation eating up economic gains to the point where any government stimulus might be too weak to generate jobs.
The local press is growing impatient. Online financial newswire Nairametrics said in a recent editorial that while some factors are out of the government’s control, such as the oil price, Buhari’s administration has scored many own goals on issues such as import substitution, defending the local currency and social spending. It calls for a national state of emergency to be declared at the nation’s dysfunctional ports, decisive measures to tackle rising insecurity and improvements to the business climate.
Several bodies and initiatives have been created to kick-start the government’s growth agenda and the government is also preparing to ramp up capital spending.
“On the face of it, policymakers have grand plans for this year, says Virág Fórizs, Africa Economist at Capital Economics. “The 2021 budget blueprint, which was approved by President Muhammadu Buhari in late December, envisages a chunky 26% rise in budgeted spending, including a huge 63% jump in capital expenditure. The authorities are counting on a windfall from oil receipts to keep the budget deficit broadly unchanged at 3.9% of GDP this year.”
With power deficits a major handbrake on growth – the grid is only able to distribute about a third of the installed capacity of just over 13,000 MW – much is riding on the ambitious Presidential Power Initiative, and the engagement of German multinational company Siemens, to rehabilitate and expand the derelict national grid.
The Finance Act, signed into law in December 2020, is a new measure that promises to improve the ease of doing business in Nigeria. It introduced several long-overdue and far-reaching changes to Nigeria’s financial landscape, which include improving the tax laws.
The Presidential Enabling Business Environment Council, set up in 2016, also has a mandate to improve the operating climate. It appears to be having some success, with the country rising 15 places in the World Bank’s 2020 Doing Business Index.
However, reform has historically been patchy and the government has a very poor track record in delivering on capital spending plans, only meeting 50-75% of its targets in recent years.
These projects come at a price – without further revenue collection, government will be dependent on generous oil prices and direct financing by the central bank, say experts. The African Development Bank has joined the IMF in calling for Nigeria to improve its tax collection to strengthen the country’s fiscal buffers.
Currently, the country has one of the lowest revenue levels as a share of GDP globally and one of Africa’s lowest tax-to-GDP ratios, at 5.7% – well below the regional average of 17.2%. To increase revenues, the Nigeria Customs Service has proposed new taxes on petroleum products, telecoms and non-alcoholic beverages. While this will boost government revenues, it poses a significant threat to business growth and undermines tax incentives offered to help companies and consumers manage the fallout of Covid-19.
African Development Bank president Akinwumi Adesina says digitalisation of tax collection and tax administration is critical to ensure greater transparency of the system, and tax experts call for the automation of tax collection by the Federal Inland Revenue Service (FIRS).
The IMF believes that once economic recovery takes root, Nigeria will need to increase VAT to at least 10% by 2022 and 15% by 2025, the average in countries belonging to the Economic Community of West African States. The rate was increased from 5% to 7.5% in 2020 but the benefits have yet to be felt because of the lockdown-driven dive in economic activity.
Forex policy in need of reform
Managing the currency and exchange rates continues to be a headache as demand for foreign exchange continues to exceed supply. Economists have long called for the central bank to float the naira, without success.
The IMF says restricting access to dollars for certain imports to boost local production and the use of multiple currency rates has affected business confidence because of the uncertainties of multiple exchange rates and non-transparent rules for foreign exchange allocation.
“Unifying the various rates into one market-clearing rate would establish policy credibility. An appropriately valued exchange rate and a clear exchange rate policy would also help instill confidence and private sector-led recovery,” it says.
The new head of the World Trade Organisation, Nigeria’s Ngozi Okonjo-Iweala, said on her March visit to Nigeria, her first since assuming the role, that the WTO is concerned about Nigeria’s foreign exchange management and the way it is being used to support exports, imports and manufacturing. So far, the central bank has stood firm against allowing a more flexible exchange rate policy although the naira has steadily weakened. That could hit borrowing.
“When it comes to taking on additional external debt, officials have expressed a preference for concessional borrowing but securing multilateral funding is likely to prove difficult. Negotiations over a $1.5bn World Bank loan appear to be held up by insufficient reforms, especially in relation to Nigeria’s exchange rate regime. Nigeria may tap international bond markets, but unfavourable borrowing conditions could derail such plans,” says Fórizs.
Oil sector stutters
Although the increased oil price will improve revenues and foreign exchange availability, the benefits are being undermined by low oil production. Nigeria produced an average of over 2m barrels per day (b/d) in the first quarter of 2020, but this dropped to 1.56m b/d in the fourth quarter as demand slumped. The sector’s revival is being compromised by slow progress on the implementation of the Petroleum Industry Bill, legislation that seeks to provide a legal, governance, regulatory and fiscal framework for the industry.
The International Energy Agency has warned that the perception of an unfavourable fiscal regime by investors, coupled with production cutbacks led by the OPEC+ producers to stabilise prices and an increasing shift to clean energy, could lead to oil production cuts of at least 200,000 b/d before 2026.
For Nigeria, oil prices at about $63/barrel are about 57% above the 2021 budget benchmark price of $40/barrel but well below the country’s breakeven point of just over $130/barrel, highlighting another problem in the sector – the high cost of producing oil in Nigeria. Output may continue to lag.
“Admittedly, oil production volumes will probably disappoint. The budget assumes that oil output will rise from 1.79m b/d in 2020 to 1.86m b/d this year. That would be far above the latest OPEC+ quota schedule, which currently allows Nigeria to produce 1.46m b/d. With a gradual increase in quotas and some non-compliance, we think that oil output will average closer to 1.6m b/d,” says Fórizs.
Remittances from the diaspora continue to be a lucrative source of revenues for Nigeria, although much of this money is moved informally, often through unlicensed operators who bypass the tax authorities.
The amounts are significant. In 2018, migrant remittances of $25bn represented 6.1% of GDP and more than 80% of the federal government’s budget and were well above foreign direct investment flows that year. Although these inflows plunged during 2020, they are expected to recover in the next two years. Nigerians at home and abroad will have to step up to the plate to see a successful recovery.