Economy, Featured
THE Economist Intelligence Unit says that instability in Nigeria is chronic in some areas, and inflation and unemployment accentuate the problem. The government will halt its pro-market reform agenda to avoid aggravating the situation, with long-term implications for critical inputs such as electricity supply.
The Economist Intelligence Unit, which is a specialist publisher serving companies establishing and managing operations across national borders, noted in its report on Nigeria generated on July 20, 2021, that Nigeria is the joint-largest economy in Sub-Saharan Africa, a global oil exporter and OPEC member. Hydrocarbons make up about 50% of government revenue and more than 80% of export receipts, but agriculture and services dwarf industry in their contribution to GDP.
On Nigeria’s Political and economic outlook, the report observed that the government aims to roll out coronavirus vaccines to 70% of the population by end-2022, but tight global supply, widespread anti-vaccine sentiment, instability and a lack of pharmaceutical storage facilities mean that mass inoculation will take far longer. Protectionist economic policy will be used in an attempt to support local industry. The methods employed, in particular by the Central Bank of Nigeria, will contribute to macroeconomic imbalances, notably high inflation and periodic hard-currency shortages.
Near-term economic growth will be muted by high inflation and unemployment, and low nominal wage growth and consumption. Monetary policy will tighten from 2022.
A current account deficit in 2021 and low short-term interest rates will cause the naira to be devalued. The Economist Intelligence Unit expects the balance to turn to a surplus in 2022, and the naira will remain fairly stable until 2025, when we expect another devaluation.
A policy of diversifying the economy away from oil and reducing imports through protectionism will be pursued. An Africa-wide free-trade agreement (to which Nigeria is a signatory) means that this strategy will have to be accelerated.
Key indicators
2020a 2021b 2022b 2023b 2024b 2025b
Real GDP growth (%) -1.8 1.5 3.0 3.9 3.8 1.7 Consumer price inflation (av; %) 13.2 17.3 12.4 11.2 10.0 12.5 Government balance (% of GDP) -3.7 -3.3 -3.1 -2.6 -2.6 -3.0 Current-account balance (% of GDP) -3.9 -1.3 0.7 0.7 0.5 0.0 Money market rate (av; %) 1.6c 2.1 4.5 7.2 7.1 7.0 Exchange rate N:US$ (av) 356.3 406.5 422.4 424.1 431.7 458.1 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.
Key changes since June 2nd
We have upgraded our economic growth projection for 2021, from 1.2% to 1.5%, to reflect the probability of stronger investment and an improving global economic picture.
Expected Eurobond issuances (totalling up to US$3bn) in 2021 will bolster foreign reserves, and we have therefore moderated our forecast for depreciation of the naira. We now expect the currency to end 2021 at N419:US$1, instead of N422:US$1 previously.
Reflecting recent data, our current account deficit projection for 2021 has been increased marginally from 1.1% of GDP to 1.3% of GDP. The surplus in 2022-24 has been lessened to 0.6% of GDP, with a balanced account in 2025.
The month ahead
July 17th—Inflation data for June: Annual inflation fell again in May, marking the second consecutive month of disinflation. We expect another drop in June as a high base for comparison and crops from the latest harvest cause a slowdown in growth of food prices, the weightiest (more than 50%) category of the consumer price index.
Major risks to our forecast
Scenarios, Q2 2021 Probability Impact Intensity Social unrest forces government to make new populist concessions High High 16 The government adopts a permanently restrictive attitude towards regional trade Moderate Very high 15
Boko Haram activity spreads from north-eastern to central Nigeria Moderate High 12 Recession continues into 2021 amid high inflation Moderate High 12 The banking sector undergoes another crisis Moderate High 12 Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale.
Outlook for 2021-25
Political stability
The Economist Intelligence Unit expects the president, Muhammadu Buhari, to remain in power until his second (and final) term expires in 2023, but the security situation in many parts of Nigeria is in a state of continuous deterioration. The president will be under immense pressure to stabilize Nigeria, but myriad security threats will prove unmanageable, with the military and police overstretched and unable to tackle simultaneous security crises.
Emergencies will be triaged, with military resources deployed to whichever is considered the most pressing. There will be unceasing conflict in the northeast, particularly in Borno state, between the military and two Islamist terrorist groups, Boko Haram and the Islamic State of West Africa Province, which will consolidate forces to some extent after the death of Boko Haram’s leader in mid-2021. The government will be unable to regain full dominion over the northeast, and more recently Boko Haram has expanded into central Nigeria, not far from the capital, Abuja. Although central Nigeria—an agricultural heartland has for several years been affected by violent conflict between farmers and herdsmen over land and water resources, it is a newer territory for Boko Haram. Our belief is that Nigeria’s federal government will nonetheless be able to assert control over “core” regions, such as Abuja, and other areas of economic or political importance, at the expense of “periphery” regions that have been mired in conflict for many years. This system is resilient enough to keep the government in power but will leave many parts of Nigeria highly dysfunctional. Security challenges will be pronounced in numerous areas of the country, with unrest in the southeast attributed to Biafran secessionist groups and a broader surge in kidnappings by organized criminal networks. Banditry and violent crime will remain pervasive, and other areas of Nigeria could begin to resemble the northeast as, in essence, “no-go” zones.
Neglect of the periphery could eventually reach an implosion point for overall stability, but we do not expect this within the 2021-25 forecast period.
The near- to medium-term outlook is made more uncertain by the scars of recession in 2020 and by rising unemployment (at about 33% one of the highest levels in the world) and poverty.
Declining living standards arguably prolonged protests over police brutality that broke out in cities across southern Nigeria in October 2020. The risk of fresh bouts of protest will be elevated in the near term by a ban on Twitter, a social media platform, which was enforced in June and can be viewed as an attempt by the government to gag public opinion at a time of mounting censure over governance failings, notably deepening instability. The risk of internet regulation being a precursor to wider authoritarianism is low—the state is too frail to depart extensively from the democratic social contract. As restoration of petrol and electricity subsidies in 2021 (temporarily reduced in 2020) has demonstrated, the Buhari administration is inclined towards concession making and is expected to capitulate on any issue that leads to major protests.
Election watch
The next national elections are due in 2023. In the most recent presidential election, in 2019, the candidates of both main parties were from the north, and custom dictates that the candidates in 2023 will be from the south. This should lead to an improvement on the abysmally low turnout in 2019 in the south, which is a stronghold of the main opposition party, the People’s Democratic Party (PDP). Frustration with high prices, declining living standards and perpetual instability will be directed at the ruling party, the All Progressives Congress, giving the PDP a winning edge.
International relations
Nigeria will remain a major player in Africa, given its size, but its economic policy choices will skew towards protectionism and, for reasons of incompatibility, will lean away from internationalism. Land borders that were closed to goods since late 2019 have reopened, but Nigeria’s approach to encouraging regional trade will be minimalist, beyond its obligations under the African Continental Free Trade Agreement (AfCTFA). The trade pact compels Nigeria to eliminate 97% of tariff lines over the next five to ten years. This deadline will not be met zealously, given high prices in Nigeria and declining external competitiveness for industries that could otherwise benefit from regional market access.
Policy trends
Nigeria’s government and the Central Bank of Nigeria (CBN) will aggressively promote local industry, but some elements of the policy are contradictory and will contribute to macroeconomic imbalances. A notable example will be the management of the naira. Bans on foreign-exchange access for imports of certain manufactures and agricultural goods (covering some 50 items) are being enforced to protect local industry and support the currency, but have some important flaws. Most notably, restrictions are elevating inflation and undermining the managed currency regime through sustained real effective exchange rate (REER) appreciation.
Despite this, currency restrictions are expected to last throughout the forecast period, with import substitution (and compression) being central to the CBN’s exchange-rate strategy, as opposed to balancing the external account by encouraging non-oil exports.
Faced with hard-currency shortages in 2020, the CBN allowed a backlog of foreign exchange orders from investors and importers to accumulate. Because of currency controls and these de facto capital controls, there is a widespread between the official (NAFEX) and parallel-market exchange rates. As currency restrictions are expected to remain for the long term, the shift towards a market-clearing official exchange rate is not expected in 2021-25, and the CBN is adamant that a fully flexible naira would lead to overshoot and an inflationary spiral. A pattern of rigidity by the CBN when encountering hard-currency shortages (as in 2020) will have a long-term impact on confidence, and partly explains our projection that foreign direct investment (FDI) will equal 1% of GDP or less throughout 2021-25.
Over time, the contradiction between protectionism and the AfCFTA’s principles will grow increasingly conspicuous, but we do not expect an immediate change in strategy given that non-tariff barriers will be phased out over several years. Developing local manufacturing and agriculture is likely to be viewed as a means of preparing for the eventual elimination of tariffs, with currency controls expected to play a role in hastening the process.
However, an infrastructure deficit, REER appreciation and instability in agricultural heartlands mean that Nigeria will struggle to acquire new comparative advantages in 2021-25, leaving the fiscal and external accounts and the naira exposed to oil price swings.
Price controls will be another important area of economic policy. Astonishing strides towards the deregulation of petrol and electricity pricing were made in 2020, but backsliding on the goal of reaching market prices has already begun following public opposition. We do not expect the sustained electricity price increases needed for the power sector to become financially sound: tariffs remain regulated de jure, and the political willpower for permanent cost-reflexivity is lacking. Undersupply of electricity is consequently expected to be an impediment to industrialization. A lasting reinstatement of petrol price subsidies is made unlikely by the new Petroleum Industry Bill (PIB) expected to pass in late 2021. The legislation is intended to streamline sector-wide regulation and in the process create a new, profit-oriented national oil company, NNPC Limited, which by definition cannot subsidise the retail market. The downstream industry should become commercially viable from this reorganisation of the sector, allowing Nigeria to wean itself off petrol imports, with a new 650,000-barrel/day refinery near Lagos expected to come on-stream in 2022.
The PIB will also make fiscal terms clearer for multinationals and is being revised to protect investment—particularly offshore by lowering proposed royalty rates and taxes. However, as oil majors reassess their operations in an industry push towards decarbonization, Nigeria is a prime candidate for divestment being uncompetitive for onshore production as a result of theft, vandalism and sabotage. As neither domestic oil companies nor NNPC Limited would match the investing power of outgoing multinationals, Nigeria is not expected to reach the level of oil output registered during the 2011-14 commodity super-cycle over 2021-25.
Fiscal policy
We expect the public finances to stay in deficit in 2021-25. Crude oil receipts make up more than 50% of the federal government’s retained income, and an average global oil price of US$63.8/barrel in 2021-25 will be insufficient to balance the budget.
The federal government’s tax take is among the world’s lowest, undermined by widespread evasion and a large informal sector. The PIB is likely to be balanced between the interests of the Treasury and investors, and so not deliver a considerable increase in revenue. Consequently, value-added tax (VAT, currently at 7.5%) is likely to be used as a means of repairing the public finances. We expect three equal VAT rate increases, taking the rate to 15% by 2025. The first is expected in 2022, prior to the next elections but seemingly inevitable given a rising debt burden, with further rises in 2024 and 2025. Even then we expect fiscal revenue to peak at just 5% of GDP in 2024, which also assumes no fuel subsidies (costs for which are deducted from revenue) beyond 2022.
Set against this, high debt-servicing costs, a large public wage bill and the purchase of coronavirus vaccines will elevate expenditure. Capital investment will be emphasized to compensate for the disappearance of petrol subsidies once the PIB is enacted (which is expected in late 2021). The government justified price deregulation by promising to invest the savings in infrastructure and will face pressure to match rhetoric with action.
Overall, we expect the fiscal deficit to narrow to 3.3% of GDP in 2021 (from 3.7% of GDP in 2020) as international oil prices rise. VAT rate increases and rising oil prices will push down the deficit to 2.6% of GDP in 2023-24, but a decline in average global oil prices in 2025 will cause the shortfall to widen to 3% of GDP in that year. The government has raised its public debt limit to 40% of GDP to incorporate higher budget shortfalls over the medium term and to accommodate securitization of CBN deficit-financing as long-term debt. We expect public debt to reach only 35.4% of GDP in 2025.
Monetary policy
The CBN will fail to keep inflation below a target ceiling of 9%, and its policy decisions are likely to remain erratic. Since a 100-basis-point cut to 11.5% in 2020 the policy rate has been kept steady. Inflation is high year on year, at 17.9% in May, but the rate has edged down from a decadal high in March. The current strategy is to boost the supply side of the economy and thereby control inflation. We believe that this is misguided; high inflation will frustrate an economic recovery, and issues such as inadequate public infrastructure, hard-currency shortages and rampant instability need to be addressed before the supply side can substantially contribute to moderating the price level. Enduring high inflation is expected to compel the CBN to raise interest rates in 2022 as the economy becomes more resilient. Monetary easing will resume only in 2024, when inflation has fallen appreciably.
International assumptions
2020 2021 2022 2023 2024 2025
Economic growth (%)
US GDP -3.5 6.0 3.7 2.2 1.8 2.0 OECD GDP -4.8 4.7 3.8 2.3 2.0 2.0 World GDP -3.8 5.3 4.0 3.1 2.8 2.7 World trade -8.1 8.0 5.6 4.7 4.2 4.3 Inflation indicators (% unless otherwise indicated)
US CPI 1.2 2.7 2.1 2.2 1.9 2.0 OECD CPI 1.2 2.3 2.0 2.0 2.0 2.1 Manufactures (measured in US$) 0.2 6.0 1.3 1.9 2.7 2.5 Oil (Brent; US$/b) 42.3 66.0 71.0 65.5 61.0 55.5 Non-oil commodities (measured in US$) 2.9 29.0 -1.6 0.4 -8.2 0.0 Financial variables
US$ 3-month commercial paper rate (av; %) 0.6 0.1 0.1 0.3 1.1 1.6 N:US$ (av) 356.3 406.5 422.4 424.1 431.7 458.1
Economic growth
The rollout of vaccines: global and regional
assumptions
The Economist Intelligence Unit forecasts that global GDP will rebound by 5.3% in 2021 (up from a previous forecast of 5.2%). This revision stems from small upward adjustments to our forecasts for France, Italy, Spain, the UK, Brazil, Mexico and South Africa. The sharp rebound will boost global GDP back to its pre-coronavirus level in late 2021. However, the pace of recovery will vary greatly across regions. Asia and North America will recover the fastest, with real GDP back to pre coronavirus levels as early as this year. The recovery will take longer in Europe, Latin America, and the Middle East and Africa region, stretching into 2022. The rollout of coronavirus vaccines will influence economic prospects this year and beyond. However, production constraints mean that global immunization timelines will stretch beyond 2023 in many developing countries. The slow pace of vaccine distribution will weigh on the global recovery and create opportunities for variants to emerge that may prove resistant to current vaccines.
Governments’ unprecedented fiscal responses to the coronavirus pandemic have led to a sharp increase in public debt in developed and developing economies. Rising debt/GDP ratios have alarmed fiscal hawks, but debt servicing remains modest in advanced economies, suggesting that the debt outlook is sustainable. However, a prolonged spike in inflation (not our core forecast) represents a risk to the global recovery. In such a scenario, central banks would probably tighten monetary policy prematurely, prompting a dangerous increase in debt-servicing costs.
The pace of the rollout of coronavirus vaccines will be particularly slow in many Sub-Saharan African countries, which face daunting production, distribution, storage and other challenges. Nigeria will ultimately rely on low-cost and easy-to-store vaccines, and the first to arrive was almost 4m doses of the Oxford University-AstraZeneca (UK/Sweden) vaccine in early March. Some 2.7m inoculations had been administered by late June. The strategy is to fully vaccinate 2m frontline workers first, and the milestone of over 2m doses given indicates that enough of this cohort were willing to take the first dose, and so are highly likely to receive a second and complete the inoculation process in line with the program’s goals.
The vaccines were procured via the COVAX Facility for developing countries, which is led by the World Health Organisation, WHO, and Gavi, a global vaccine alliance. Another batch of 4m doses is scheduled to arrive by August 2021. The government claims to have arranged orders for 84m doses of the AstraZeneca and Johnson & Johnson (US) vaccines, which could provide coverage for up to 20% of Nigerians. Tight global production and high demand has left only a fraction of this actually available so far. A G7 pledge to donate up to 1bn doses to the developing world by 2022 could free up supply to a limited extent for Nigeria, but the government hopes to procure enough doses to cover 40% of the population in 2021, rising to 70%—the estimated threshold for herd immunity—by end2022. Insecurity, healthcare infrastructure gaps, global supply issues (notwithstanding the G7 pledge), financing constraints and widespread anti-vaccine sentiment make the 40% target over-optimistic, even in the medium to long term. Slow delivery, distribution and uptake of vaccines have advantages regarding mutations; edits to vaccine formulae are likely to be finalised by late 2021, and by the time Nigeria is able to procure doses, the vaccine could be better able to counter mutations in the virus. However, herd immunity is likely to be highly difficult to attain, especially without supplementary lockdowns that Nigeria cannot afford for any prolonged period. It could be several years before the Nigerian population is fully inoculated.
Economic growth
The economy is expected to grow by 1.5% in 2021 as the impact of lockdown in 2020 fades, but high inflation will impede improvements in business sentiment and dampen real purchasing power amid high unemployment (at more than one-third of the labour force) and low wage growth. A deep trade imbalance and low local interest rates will meanwhile contribute to foreign exchange scarcity and further undermine macroeconomic stability. Oil export volumes will rise slightly, however, as quotas agreed by OPEC+ (comprising OPEC and a group of non-OPEC countries) are relaxed.
The CBN is expected to tighten monetary policy from 2022, circumscribing the nascent economic Country Report July 2021 www.eiu.com © Economist Intelligence Unit Limited 2021
Nigeria9 recovery, but the exchange rate should stabilise and cause inflation to ease, firming up household buying power. As non-business financial penetration is low, private consumption will recover in the second half of 2021-25 alongside disinflation even as interest rates rise. New refining capacity is expected to come on stream in earnest, boosting net exports (with some output for the regional market and Nigeria’s import dependency for fuel falling). Crude oil exports are also expected to grow as prices rise, again supporting the naira. As refinery output continues to ramp up, inflation falls and real spending power recovers, growth will pick up to an annual average of 3.8% in 2023- 24. However, these rates of growth are well below potential. High-interest rates, low FDI, high unemployment, pervasive instability in agricultural regions and infrastructure deficiencies, particularly regarding stable power supply, will restrict dynamism. A more challenging year is forecast for 2025 as international oil prices fall, the naira is devalued and inflation rises, with growth slipping to 1.7%.
Economic growth
% 2020a 2021b 2022b 2023b 2024b 2025b GDP -1.8 1.5 3.0 3.9 3.8 1.7 Private consumption 2.2 -0.7 0.8 1.3 2.4 1.5 Government consumption 61.6 2.2 4.9 4.4 3.3 3.3 Gross fixed investment -7.6 4.9 2.1 1.9 2.0 2.8 Exports of goods & services -27.0 9.1 9.1 11.4 7.7 1.3 Imports of goods & services -23.3 10.8 5.2 5.5 4.1 2.3 Domestic demand 4.5 0.6 1.5 1.8 2.4 1.9 Agriculture 2.2 1.2 2.0 1.0 2.5 2.4 Industry -5.8 0.9 5.0 13.9 6.8 -1.1 Services -2.2 2.3 2.7 1.2 2.9 2.8 a Actual. b Economist Intelligence Unit forecasts.
Inflation
We expect inflation to have peaked in the first quarter and to average 17.3% in 2021, with increases in both core and non-core levels over 2020. Foreign-exchange restrictions on various imported goods, including staple foods, and currency movements are cost-push factors, but base effects will reduce domestic food prices in the latter half of the year. Assuming that the exchange rate stabilises and the CBN tightens monetary policy, we expect annual inflation to begin to fall from 2022 to an average of 10% in 2024. Foreign-exchange controls on imported goods, conflict in the Middle Belt—Nigeria’s breadbasket—and an eventual return to marketpricing for fuel will prevent faster disinflation. Currency devaluation in 2025 will cause the average rate to increase again, to 12.5%.
Exchange rates
Nigeria now uses the NAFEX as an official rate, ending the use of the CBN window. The NAFEX rate, which was established in 2017, is more flexible than the defunct CBN rate but is nonetheless tightly managed, as demonstrated by a late-June parallel rate of about N500:US$1 versus
N410:US$1 for the NAFEX—a spread that has been widening since midMay. Foreign reserves have been in decline since a brief rise in early April, indicating a net outflow on current transactions despite firmer oil prices, while capital inflows have not recovered from the legacy of de facto capital controls in 2020. REER appreciation is engendering the external imbalance and, in the CBN’s defence of reserves, we expect the naira to end 2021 at N419:US$1. Following this we expect the current account to return to surplus in 2022-25, allowing the CBN to keep the exchange rate broadly stable. Increasing currency misalignment means that REER appreciation will continue and, with oil prices expected to slide again in 2025, another devaluation is expected in that year, to N485:US$1 (a level required to stabilise the REER).
Forecasting the naira
The Economist Intelligence Unit began forecasting the Nigerian autonomous foreign exchange fixing (NAFEX) rate from March 2021, following the government’s adoption of that rate for official transactions. In the interests of continuity, data in previous periods will be for the official exchange rate before its merger with the NAFEX rate.
External sector
World oil prices are expected to stay relatively high up to 2023, at an average of US$67.5/b. In the near term, however, REER appreciation will create deep trade and service deficits by promoting imports, and we expect a third consecutive year of currentaccount shortfall—equal to 1.1% of GDP in 2021. This will turn to a surplus averaging 0.6% in 2022-24 as new refining capacity becomes available (lowering petrol import volumes and increasing exports), OPEC+ quotas are relaxed and world oil prices continue rising. A trade surplus resulting from these factors will more than offset a large ongoing shortfall on the services account (driven by continued REER appreciation) and a primary income deficit caused by profit repatriation by multinationals in the oil sector as world crude prices rise. Remittances from the large Nigerian diaspora should also recover to pre-pandemic levels, encouraged by exchange-rate incentives introduced by the CBN in early 2021. The current account will then turn to balance in 2025 as falling oil prices push down export earnings. The deficit in 2021 will be financed largely by debt, with investment inflows limited by a dysfunctional foreign exchange market.
Forecast summary
Forecast summary
(% unless otherwise indicated)
2020a 2021b 2022b 2023b 2024b 2025b
Real GDP growth -1.8 1.5 3.0 3.9 3.8 1.7 Industrial production growth -4.8c 1.9 6.0 14.9 7.2 -0.7 Petroleum production (‘000 b/d) 1,506.7 1,515.8 1,545.8 1,650.8 1,660.8 1,649.8 Gross agricultural production growth 2.2 1.2 2.0 1.0 2.5 2.4 Consumer price inflation (av) 13.2 17.3 12.4 11.2 10.0 12.5 Consumer price inflation (end-period) 29.3 17.0 11.5 10.3 9.7 13.0 Commercial lending rate 13.6c 11.3 12.5 12.3 11.4 11.3 Government balance (% of GDP) -3.7 -3.3 -3.1 -2.6 -2.6 -3.0 Exports of goods fob (US$ bn) 35.9 58.5 69.9 73.4 72.8 67.7 Imports of goods fob (US$ bn) 52.3 65.5 68.8 69.9 70.5 69.1 Current-account balance (US$ bn) -17.0 -5.7 3.5 3.8 2.9 0.2 Current-account balance (% of GDP) -3.9 -1.3 0.7 0.7 0.5 0.0 External debt (end-period; US$ bn) 65.6c 73.0 78.3 83.1 84.2 83.7 Exchange rate N:US$ (av) 356.3 406.5 422.4 424.1 431.7 458.1 Exchange rate N:US$ (end-period) 379.5 419.1 423.4 424.6 435.8 485.0 Exchange rate N:¥100 (av) 333.7 385.6 407.2 405.5 401.3 424.5 Exchange rate N:€ (endperiod) 465.7 505.0 493.2 488.3 520.8 596.6 a Actual. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimates.
Country Report July 2021 www.eiu.com © Economist Intell
-August 03, 2021, 09:45 GMT|
Tags: Inflation Nigeria’s instability is chronic in some areas unemployment accentuate problem - Report
