Challenges Ahead of Nigerian Economy

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Jim Yong Kim

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World Bank warns that Nigeria and other oil exporting nations in the Sub-Sahara Africa should brace up for daunting economic challenges

By Anayo Ezugwu  |  Jun 29, 2015 @ 01:00 GMT  |

AS the price of crude oil remains low in the international market, World Bank has warned that Nigeria and other developing countries would face a lot of tough challenges this current year. The challenges, according to World Bank, include the looming prospect of higher borrowing costs just as the nations adapt to a new era of low prices for oil and other key commodities.

According to the World Bank Group’s latest Global Economic Prospects, GEP, report released on the bank’s website, developing countries are now projected to grow by 4.4 percent this year, with a likely rise to 5.2 percent in 2016, and 5.4 percent in 2017.

The report stated that in Sub-Saharan Africa, low oil prices had considerably reduced growth in commodity-exporting countries such as Angola and Nigeria and that it would also slow activity in non-oil sectors.

Although the Bank noted that South Africa was expected to be one of the main beneficiaries of low oil prices, growth in the country was being held back by energy shortages, weak investor confidence amid policy uncertainty, and by the anticipated gradual tightening of monetary and fiscal policy.

Jim Yong Kim, president, World Bank Group, said that growth in Africa was expected to slow to 4.2 percent, slower than previously expected. “This mainly reflects a reassessment of prospects in Nigeria and Angola following the sharp drop in oil prices, and in South Africa, because of ongoing difficulties in electricity supply. For 2016-2017, growth is expected to be only marginally higher as these challenges partially offset stronger trading partner growth and the continued expansion in the region’s low-income countries. Developing countries were an engine of global growth following the financial crisis, but now they face a more difficult economic environment.

“We’ll do all we can to help low- and middle-income countries become more resilient so that they can manage this transition as securely as possible. We believe that countries that invest in people’s education and health, improve the business environment, and create jobs through upgrades in infrastructure will emerge much stronger in the years ahead. These kinds of investments will help hundreds of millions of people lift themselves out of poverty,” Kim said.

With an expected lift-off in United States interest rates, borrowing would become more expensive for emerging and developing economies over the coming months. The process is expected to unfold relatively smoothly since the US economic recovery is continuing and interest rates remain low in other major global economies. However, the multilateral institution pointed out that there were considerable risks around this expectation.

The report said just as the initial announcement of the US policy normalisation caused turmoil in financial markets in 2013, now referred to as the “taper tantrum” the US federal reserve’s first interest rate increase, or lift-off, since the global financial crisis could ignite market volatility and reduce capital flows to emerging markets by up to 1.8 percentage points of the Gross Domestic Product, GDP.

“Slowly but surely the ground beneath the global economy is shifting. China has avoided the potholes skilfully for now and is easing to a growth rate of 7.1 percent; Brazil, with its corruption scandal making news, has been less lucky, dipping into negative growth. With an expected growth of 7.5 percent this year, India is, for the first time, leading the World Bank’s growth chart of major economies. The main shadow over this moving landscape is of the eventual U.S. lift-off. This could dampen capital flows and raise borrowing costs. This GEP provides a comprehensive analysis of what the liftoff may mean for the developing world,” the report said.

This would especially hurt emerging markets with greater vulnerabilities and weakening growth prospects. For commodity-exporting emerging markets that are already struggling to adjust to persistently low commodity prices or for countries experiencing policy uncertainty, a slowdown in capital flows would add to their policy challenges.

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