Economic Analysis
Nigeria

Nigeria

Population 202 million
GDP per capita 2,216 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 0.8 1.9 2.3 -5.0
Inflation (yearly average, %) 16.5 12.1 11.4 13.4
Budget balance (% GDP) -5.8 -4.5 -5.1 -6.7
Current account balance (% GDP) 2.8 1.3 -3.6 -3.9
Public debt (% GDP) 22.4 17.8 18.8 19.8

(e): estimate. (f): forecast.

STRENGTHS

  • Leading African power in GDP terms and most populous country in Africa
  • Significant hydrocarbon resources and considerable agricultural and mining potential
  • Relatively low public and external debt
  • At the crossroads of West and Central Africa: access to the sea

WEAKNESSES

  • High unemployment and underemployment
  • Highly dependent on oil revenues (90% of exports, two-thirds of tax revenues)
  • Low tax revenues (6.1% of GDP in 2020)
  • Weak economic diversification, insufficient agricultural production due to lack of infrastructure
  • Pollution related to oil development
  • Insufficient production and refining capacity / electricity distribution
  • Ethnic and religious tensions
  • Insecurity and corruption putting pressure on the business environment

RISK ASSESSMENT

Growth dives down

In 2020, GDP is expected to decline by 5% due to oil dependency and social distancing measures brought by the COVID-19 crisis. As of 18 August, there were 49,485 cases and 977 deaths. This is equivalent to 2 deaths per 100 confirmed cases and 0.49 deaths per 100,000 inhabitants. The measures taken in end-March have been eased since the beginning of May, but some are still in place (night curfew, obligation to wear a mask). The measures vary from one region to another, with "lighter containment" until early September, notably in Lagos. The return of international flights is scheduled for 29 August 2020. Despite the removal of travel restrictions within the country and the easing of containment measures, household consumption (79% of GDP) is struggling to return to pre-Covid levels and is expected to decrease by 5% in 2020. Unemployment (27.1%) and poverty weigh heavily, as nearly 10 million people could fall below the poverty line. Moreover, inflation is expected to reach 13.4%, driven by the 15.4% year-on-year rise in food prices, especially imported food. Furthermore, the drop in oil prices and production generated by the OPEC+ agreement are strongly impacting the Nigerian economy, for which black gold accounts for 90% of export revenues (albeit exports account for only 14% of GDP) and about 60% of tax revenues. Thus, oil production is expected to decline by 4.5% and oil revenues by 90% in 2020. The decline in FDI observed as early as 2019 (by half, to 0.67% of GDP) because of the slowdown in hydrocarbons investments  should continue in 2020. In order to stimulate the economy and move closer to its objective of unifying multiple exchange rates, the central bank made two devaluations, from 306.5NGN/1USD to 360NGN/1USD in March and then to 380NGN/1USD in July, against 475NGN/1USD on the parallel market, reducing the gap with the retail exchange rate. It also lowered its interest rate by 100 basis points to 12.5% in May, introduced a credit facility mechanism (0.03 percent of GDP) for households and small and medium enterprises, and injected Naira 3.6 trillion (2.4 percent of GDP) into the banking system.

 

Debt burdens the budget

In 2020, the budget deficit will widen due to lower oil revenues and higher expenditure. In response to the crisis, the federal government adopted a revised budget for 2020 in July (an increase of 2.7% over the initial budget). It includes a credit facility (0.3% of GDP) to support health care institutions, ease the burden on taxpayers and support employment, as well as an increase in the number of households receiving conditional cash transfers from 2.6 to 3.6 million. A recovery plan of N 2,300 billion (1.2% of GDP) was announced. While the level of debt is low, its service, which accounts for about 50% of federal revenues (8.5% of GDP), is weighing on its sustainability. Despite the increase in VAT to 7.5% in 2019, revenues from non-oil sectors remain limited.

 

The current account balance will remain in deficit. The trade balance slips into deficit due to lower oil exports, but which is partly offset by lower imports of goods because of weak domestic demand and restrictions on imports of 45 categories of goods. The country's dependence on foreign services (particularly oil freight) and the repatriation of profits from foreign companies will sustain the deficits in the services and income accounts, even though these deficits should decline on the back of the drop in trade and corporate profits. The unfavourable global economic situation is reflected in remittances (5% of GDP in 2018), which maintain the surplus in the balance of transfers. The financing of the current account deficit is expected to rely partly on assistance from multilateral agencies (e.g. USD 3.4 billion in IMF emergency funds, or 0.6 percent of GDP). Foreign exchange reserves fell by 5.8 percent between January 2020 and July 2020, and cover 5.3 months of imports. The shortage of dollars linked to low oil prices creates a risk for foreign portfolio investors who cannot repatriate their income, as access to the dollar is restricted, while importers experience difficulties to pay their bills, since they have to obtain foreign currency at a high rate.

 

Muhammadu Buhari: new mandate, persistent challenges

President Muhammadu Buhari was re-elected in the February 2019 election. The president, who has been criticized for the slow pace of reforms during his first term, still faces a myriad security challenges that destabilize the country, such as the activity of the Islamist terrorist group Boko Haram in the northeast of the country, forcing many people to flee (nearly 2 million internally displaced since 2015). The deadly conflict between pastoralists and farmers continues to bruise the center of the country, threatening its food security. The closure of the borders with Cameroon, Niger and Benin in the summer of 2019, to reduce food smuggling and promote national production, is causing tensions between these countries and Nigeria. Furthermore, the threat of renewed attacks on oil infrastructures in the Gulf of Guinea, which led to a drop in black gold production in 2016 as well as theft and sabotage of facilities in the Niger Delta region, is still present. The president will have to face the expectations of the population in order to halt the decline in living standards initiated by the oil counter-shock of 2014-2016 and amplified by the Covid crisis. The prevalence of poverty, mass unemployment and persistent double-digit inflation should to continue to fuel a tense social climate.

 

Last updated: August 2020

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