Previous Quarterly Editions
Expropriation Risk: 55 59 63 64 Political Violence Risk: 62 63 63 64 Terrorism Risk: 75 75 75 75 Exchange Transfer and Trade Sanction Risk: 57 57 61 62 Sovereign Default Risk: 50 52 56 56
TREND ► OUTLOOK ▲
The combination of low oil prices and the disruption caused by COVID-19 means that the Nigerian economy is expected to contract by more than 5% this year. Before the pandemic, growth was expected to be around 2%. Part of the problem remains to be Nigeria’s long-standing dependence on oil revenues. Hydrocarbon sales account for 80% of the country’s total exports and 50% of government revenues. As a result, the fall in oil prices caused by the fall in global demand has meant a precipitous drop in income, which has occured at a time when government needs to increase spending to combat the public health challenges of the outbreak and stimulate the faltering economy. After a dithering initial response from the federal government, particularly compared to the action taken by the regional government of Lagos State, the lockdown which was imposed in April and May 2020 (although intermittent and with varying degrees of compliance), caused widespread job losses and supply chain disruption. There are fears that unemployment could rise from 23% in 2018 to 33%, or some 39 million people, by the end of 2020. Mindful of this, President Muhammadu Buri’s COVID-19 economic recovery package earmarked 5.9 billion USD to prevent job losses as well as provide assistance to manufacturing and agriculture, with a particular focus on micro businesses and SMEs. However, the oil sector remains the centre of attention. As oil prices started to tumble at the end of the first quarter in 2020, Nigeria began to ramp up production in an attempt to compensate for falling prices. Output rose to two million barrels per day (bpd), the highest level since 2016. The government’s budget benchmark oil price was more than halved to 25 USD per barrel for 2020 but the government kept its spending targets largely unchanged, meaning that it cannot fund the current budget without recourse to large-scale borrowing. While parliament has approved Buhari’s request for an additional 22.5 billion USD in foreign borrowing, the fall in the oil price will erode any boost from the economic stimulus package. However, Abuja is taking the opportunity of low oil prices to phase out fuel subsidies. The dispute between Nigeria and its neighbours over the smuggling of goods, which resulted in the closure of Nigeria’s land borders in 2019, remains unresolved and the pandemic has overtaken diplomatic efforts to end the impasse. But as the closures have failed to stem the surge in imports, or increase revenues from customs duties while causing a significant increase in food prices, Abuja will likely seek a quiet way to re-open borders after the worst of the COVID-19 pandemic is over.
TREND ▲ OUTLOOK ▲
The Nigerian National Petroleum Corporation (NNPC) said that it would not introduce a new bidding round for fresh oil production licences until the long-delayed Petroleum Industry Bill (PIB) has been approved by the National Assembly. Passage of the PIB has been pending since 2000, with the failure of successive governments to make any progress on the draft legislation preventing much-needed foreign investment from reaching the sector. The disruption caused to the government’s legislative programme by the COVID-19 outbreak is likely to see yet further delays to the PIB, which had already been affected by the death in April 2020 of Buhari's long-time advisor and influential Chief of Staff Abba Kyari. Meanwhile, the latest point of contention between the major oil companies and the government has been over the unilateral fiscal terms that the government imposed in 2019 on production sharing contracts.
TREND▲ OUTLOOK ▲
By mid-July 2020, Nigeria had reported more than 35,000 confirmed COVID-19 cases but fewer than 750 deaths, far less than initially feared. In addition to the loss of life, however, the outbreak is expected to push more than five million Nigerians into poverty in 2020. School closures alone reduced the food intake of more than seven million children enrolled in the national school feeding programme, while more than 40% of Nigerians employed in non-farm enterprises reported a loss of income in April and May 2020. There are fears that the COVID-19 pandemic could lead to food shortages and higher food prices, potentially triggering street protests which the security forces, already fully stretched, would be hard pressed to contain.
Gunmen believed to be members of the Islamic State West Africa Province (ISWAP), the Boko Haram breakaway faction, attacked villages, killed 120 civilians, and rustled hundreds of cattle in Borno state in June 2020. Regional politicians, most notably state governor Kashim Shettima, are becoming much more vocal in criticising the federal government’s handling of the decade-long insurgency and demanding that thousands more soldiers be recruited to take the fight to the insurgents, including those operating in the shores of Lake Chad and the Sambisa Game Reserve. President Buhari has repeatedly claimed success against the insurgents, most recently during a major speech in June 2020, but they continue to remain active despite the heavy spending by Abuja to defeat them. The federal government is widely seen as unable to address the country’s current level of insecurity.
In June 2020, the central bank governor prioritised efforts to increase the bank’s foreign reserves in a bid to safeguard the value of the naira and put in place new measures to curb speculation. After the central bank quietly devalued the naira in March 2020 to 360 to the dollar (USD), having kept it at 306 naira to the US dollar for more than three years, it has been stressing its commitment to a stable exchange rate despite the economic impact of COVID-19. This looks increasingly unrealistic given the weak price of oil, which is the main source of foreign exchange- a further loss of value is possible during the second half of the year. The currency was trading as low as 455 to the US dollar on the illegal parallel market in May 2020. The central bank cut its interest rate from 13.5% to 12.5% in May 2020 despite the rising trend in inflation, which is now running at an annual rate above 12% as a result of the increase in food prices.
Nigeria’s reserves, which in 2020 began at 38 billion USD, continue to decline on efforts to defend the naira and meet the costs of COVID-19. Abuja had already announced the postponement of its planned 3.3 billion-USD Eurobond, which was meant to be part of a 22.7-billion-USD spending package for vital infrastructure projects, but the decision by Fitch to cut the country’s rating further at the start of April 2020 will make accessing commercial markets even more expensive. At the end of June 2020, parliament approved an additional 5.5 billion USD in external borrowing from the IMF and World Bank.
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