Africa’s largest economy has displayed resilience over the past few months. From defending against the Covid-19 menace to battling untamed inflation and shouldering domestic risks. Initially, the economic outlook was bleak during 2020 after the economy sunk back into its second recession in less than five years. Lockdown restrictions caused significant disruptions in the value chain, halted most aspects of the economy while crippling the manufacturing sector. A growing sense of alarm and unease over surging coronavirus cases added to the uncertainty, ultimately fanning fears around Nigeria experiencing a prolonged economic recession.
However, the economic expansion
of 0.11% in Q4 2020 came as a breath of fresh air and offered some light at the
end of the tunnel. Although the economy contracted 1.92% for the full year, the
rebound during the final quarter raised hopes that Africa’s largest economy was
exiting from the Covid-19 induced recession.
World Bank projects Nigeria to expand 1.1% in 2021
According to World Bank, economic
growth is expected to expand by 1.1% this year while Bloomberg forecasts GDP to
contract by 1.5% in Q1 2021. Nigeria certainly has the potential to exceed
these growth estimates due to rising oil prices and improving global economic
conditions. It must be kept in mind that earnings from oil exports account for
over half of government revenues and about 90% of foreign-exchange earnings. As
oil prices appreciate, this provides the government with ammunition to attack
domestic risks threatening the country’s fragile economic outlook. In regards
to other key metrics, inflation is seen averaging around 14% while the Central
Bank of Nigeria (CBN) is forecast to hike interest rates at least once this
year as economic conditions improve.
No love for the Naira
The past few months have
certainly not been kind to the local currency. It has weakened considerably on
the black-market exchange, trading around 482N per Dollar compared to the 380N
official rate. An unappetizing combination of depressed oil prices, dollar
shortages, and rising inflationary pressures exposed the emerging market
currency to downside risks.
Devaluation third time lucky?
Unfavourable domestic conditions
forced the Central Bank of Nigeria (CBN) to devalue the Naira twice in 2020
with CBN governor Godwin Emefiele recently confirming another devaluation to
N410 against the dollar. Indeed, a weaker rate would boost government revenue
from oil exports – a welcome development for the energy producer. If the Naira
weakens, this could bolster revenues from crude, which is sold in Dollar but
converted to Naira.
It does not end here. Nigeria’s
economic prospects could brighten if the devaluation opens doors to fresh
discussions with the World Bank regarding a $1.5 billion loan. Confusion around
Nigeria’s multiple exchange rates has hindered investor attraction with major
institutions requesting currency reforms to rekindled investment.
Inflation remains a cause for concern
But a weaker Naira may lead to
untamed inflation. Inflationary pressures have punished consumers and
threatened the country’s fragile recovery. In January, consumer prices jumped
to 16.47% more than double the target of 7.5% thanks to supply disruptions,
dollar restrictions, and removal of oil subsidies.
Nigeria is dealing with a
cost-push inflation scenario where overall prices have increased due to the
rising cost of production and raw materials. The government could pursue
deflationary fiscal policy or monetary authorities could increase rates, but this
may do more damage than good.
Diversification & oil reliance
It is widely known that
diversification has the potential to cure Nigeria’s dependence on oil. However,
the country’s economic outlook remains heavily influenced by the commodity’s
performance. The good news is that oil prices have appreciated over 25% since
the start of 2021 thanks to OPEC+ cuts, optimism over US stimulus, and robust
demand from China. But the bad news is that West Africa’s biggest oil producer
has seen its shipments fall in recent months thanks to infrastructure issues
with production falling to 1.50 mbpd according to data from Bloomberg.
OPEC+ meeting in focus
The OPEC+ meeting in March may
indirectly impact Nigeria’s economic outlook. While Saudi is publicly urging
fellow members to be extremely cautious despite prices rebounding to
pre-pandemic levels, Moscow on the other hand is indicating that it still wants
to proceed with a supply increase. Another question is whether Saudi Arabia
will continue its voluntary production cuts of 1 million barrels per day.
Market expectations are rising over OPEC+ easing supply curbs after April
thanks to rising oil prices. But given the nature of OPEC+ and the outcome of
previous meetings – anything could be on the table.
Even if oil prices appreciate
following the OPEC meeting, gasoline prices will remain unchanged in March
indicating that the costly fuel subsidies are back. With inflation at a 12-year
high, rising fuel costs could pour fuel into the fire – leading to further
uncertainty.
CBN rate hike in 2021?
The million-dollar question is
not “if” but “when” the CBN will hike interest rates. Globally, fiscal policy
has been labelled as a more effective weapon against covid-19. However, a large
share of Nigeria’s revenues is spent on repaying debts. This has left little
room for critical social and infrastructure spending to shield the economy from
the negative impacts of Covid-19.
Monetary policymakers remain in a
tricky spot after the Covid-19 menace spread its poisonous tentacles across the
economy. The pandemic resulted in lockdowns, reduced activity, a weakened
Naira, and stagflation. While a rate hike will increase the cost of borrowing,
effectively reducing inflation - this may result in a bigger fall in GDP. However,
the options are limited within the monetary policy toolbox with unconventional
tools such as loan to deposit ratio, liquidity ratio, and cash reserve ratio in
focus.
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