Tuesday, 3 November 2020

A ROUGH AND ROCKY ROAD AHEAD FOR NIGERIA’S ECONOMY

hand holding naira notes

Lukman Otunuga,

Senior Research Analyst at FXTM

 

Africa’s largest economy commenced the final quarter by facing some of the biggest protests witnessed since military rule ended in 1999.

 

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The protests boiled over during an already turbulent and rocky time not in the local but global economy. The cumulative effects of the COVID-19 pandemic lockdowns and other restrictions triggered a downturn together with a sharp increase in public debt. Given the resulting uncertainty from the protests, financial markets were spooked once again with the strong knock-on effects hitting Nigeria’s stock market and international bond while further clouding its economic outlook.

 

Before this development, the International Monetary Fund (IMF) projected a 4.3 percent contraction in GDP because of COVID-19. Depressed Oil prices enduring a prolonged lapse in demand has not helped matters with the aftermath of the protests projected to cost over N700-billion Naira in output – something that may drag on real GDP.

 

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Inflation becoming a cause for concern

Nigeria has been scarred by three consecutive quarters of rising inflationary pressures, shaky economic fundamentals, Dollar scarcity and low Oil prices. A 24-hour curfew imposed on Lagos worsened the outlook for the already fragile economic landscape and local businesses which bore the marks of deep wounds from COVID-19.

 

Inflation rose for 13 months straight, hitting 13.71 percent in September. Price increases were seen mainly in medical treatment, electricity, food supplies and passenger air travel but so far have not impacted the Oil industry. This is a welcome development given that Oil accounts for over 90 percent of export earnings and 70 percent of government revenues.

 

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Banks clamp down on speculation

Focusing on the Naira, the banking system clamped down on speculation and limited foreign exchange transactions by individuals and corporations. The intention was to stabilise the currency which was at the centre of a perfect storm of low Oil prices, Dollar scarcity and a weaker economy. The results of the foreign currency restrictions in the banking sector remain to be seen.

 

External pressures likely to influence outlook

Presidential elections in the US added to the uncertainty prevailing around Nigeria’s economic outlook, especially when it comes to Oil prices. According to national polls, Democrat challenger Joe Biden is leading the incumbent Donald Trump but electoral polls are the kind of forecast that can change last minute. Whatever the political race’s outcome, the result is critical for the US and global economy and may heavily influence the financial markets.

 

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When it comes to Oil, Trump’s policy of backing the US Shale industry and ramping up US Oil production may fall by the wayside in the case that Biden wins the election. In turn, this could pressure global Oil prices and send them even lower. The downside scenario may weigh on Nigeria’s economy in spite of its efforts to diversify and reduce its reliance on the Oil industry.

 

A Trump win may increase confidence in the Oil markets in the short term but in the medium term, COVID-19 is still the main problem for Oil demand. OPEC forecasts lingering effects of COVID-19 on the Oil markets and in the long term, sees demand for the fossil fuel reduced by green and renewable energy sources like hydrogen.

 

Nonetheless, Oil will continue to have the largest share of the energy mix until 1945, according to OPEC.

 

In summary, Nigeria’s economy faces unprecedented headwinds in the fourth quarter and in the first quarter of 2021. The challenge is to get through the storm of a weakened economy facing internal and external threats and reach a place where there is smoother sailing. Now more than ever, it is important to keep diversifying the economy and make provisions for a calmer future where Nigeria can recover from its recent trials.

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