Previous Quarterly Editions
Expropriation Risk: 65 65 65 66 Political Violence Risk: 66 66 66 67 Terrorism Risk: 75 75 75 75 Exchange Transfer and Trade Sanction Risk: 64 64 64 64 Sovereign Default Risk: 75 75 75 75
TREND ►
Nigeria’s economy emerged from recession in the final quarter of 2020 with just 0.1% recovery in overall economic output, following negative growth rates of 3.6% posted in the second quarter and 6.1% recorded in the third. While members of President Muhammadu Buhari’s government hailed the recovery as heralding the end of the second recession in five years, the economy still shrank by 1.8% for the year overall.
Despite the fragile economic turnaround in the wake of the global collapse in oil demand and subsequent fall in prices, combined with the economic dislocations arising from COVID-19 (which is small enough to be a statistical error), the economy is expected to rebound in 2021 to around 2% of gross domestic product (GDP), mostly on the back of a modest increase in oil prices.
However, domestic critics of Buhari’s economic performance, particularly former Vice-President Atiku Abubakar, have warned that the government’s failure to reduce unemployment (which is now running at a record 33%) along with rising poverty and collapsing school attendance rates, runs the risk of Nigeria becoming a ‘failed state’. Such critics argue that a preoccupation with economic growth is misleading, and that a comparison of GDP per capita gives more revealing insights into a country’s economic performance. According to this metric, Nigeria’s GDP per capita of some USD2,250 compares poorly to South Africa’s GDP per capita of USD5,300 and Botswana’s USD7,230. By this measure, Nigeria is not only underperforming, but this underperformance is deteriorating.
While Nigeria remains Africa’s largest oil exporter, the country continues to struggle with stubbornly low growth rates which trail population growth. After the initial shock caused by COVID-19 (mostly attributable to the lockdowns imposed between March and May 2020) the country appears to be on the rebound. Nigeria recorded its first COVID-19 case in February 2020 in Lagos. As of January 2021, the Nigeria Centre for Disease Control recorded 2,048 deaths and 162,593 cases, a fraction of 1% of its 200 million population. Even allowing for the country’s inefficient and insufficient testing capacity, these numbers are far lower than comparable death tolls and infection rates elsewhere in the world.
With the worst of the pandemic seemingly passed, attention will return to the economy. The 2% of GDP growth forecast for 2021 falls far below what the country needs to climb out of poverty. Moreover, that recovery will be held back by the scarcity of foreign exchange, infrastructure gaps, persistent power outages and the security-related disruptions caused by the continued Boko Haram insurgency in the north.
The long-delayed Petroleum Industry Bill (PIB), which seeks to overhaul the hydrocarbons sector, is again before the National Assembly. The Nigerian National Petroleum Corporation earlier said it would not introduce a bidding round for fresh oil production licences until the PIB had been approved. The international oil majors are unlikely to resume investing in the sector until the bill has passed, and only then if the fiscal terms are attractive.
As the PIB has been pending since 2000, few industry observers foresee a quick turnaround. The unilateral fiscal terms imposed in 2019 on production sharing contracts remain a source of friction with the oil majors, few of whom will invest in Nigeria’s ailing oil sector if they remain. With prices expected to hover around USD60 a barrel for the near term, and with more attractive jurisdictions available elsewhere, investment in Nigeria’s offshore potential is unlikely to materialise unless the PIB makes it attractive to do so.
PIB aside, the wider risk of expropriation in Nigeria remains high, particularly while the Buhari government pursues what it sees as the national interest over the interests of the private sector.
Federal officials were monitoring popular reactions to the government’s pledge to phase out all energy subsidies (particularly the fuel subsidy) by the target date of March 2021- the target was missed, and a new target date is yet unclear. Fuel subsidy reductions only become challenging when prices rise and such initiatives have been promptly reversed in the past in the face of popular opposition.
Fears remain that COVID-19 could lead to food shortages and higher food prices; Nigeria’s National Bureau of Statistics reported a 21.79% rise in food prices in February 2021. Such fears have been augmented by the rise in unemployment to 33% from 27% during 2020. The arrival of 4 million Oxford-AstraZeneca COVID-19 vaccines in February 2021, under the COVID-19 Vaccine Global Access (COVAX) initiative, has helped to allay public fears over COVID-19’s spread- although Nigeria needs many more doses of vaccine.
Nigeria’s Boko Haram Islamic insurgents claimed to have shot down a Nigerian Air Force jet fighter in early April 2021, in what appears to be a major setback in the federal government’s ten-year campaign against the jihadists. A video taken by the militants purportedly confirms the downing. The claim came two days after the air force reported that the fighter had gone off radar and may have crashed.
Air power has played a key role in the protracted battle between the federal authorities and Boko Haram’s insurgents and their more militant Islamic State West Africa Province (ISWAP) offshoot. While the aircraft downing will do little to alter the balance of forces between the federal government and the rebels, it will embarrass Buhari’s government, which has repeatedly claimed victory over the insurgents.
Central bank governor Godwin Emefiele continues to conserve Nigeria’s US dollar reserves by curbing access to the foreign exchange markets for a wide range of imports, in the hope of stimulating import substitution and thereby boosting domestic production. The strategy has been called into question by Ngozi Okonjo-Iweala, the former finance minister and newly appointed World Trade Organisation director general, but to little avail.
Inflation hit a four-year high of 17% in January 2021 (with food inflation at 21%) and is projected to hit 18% in 2021 and fall to 13.4% in 2022. Despite some exchange rate devaluation over the past twelve months, Nigeria’s naira currency is still regarded as overvalued at 381 to the US dollar, with Nigeria’s central bank going to considerable lengths to maintain that value. That overvaluation is likely to inhibit the correction of Nigeria’s external imbalances in which a longstanding current account surplus swung into deficit in 2019 by 4% of GDP, attributable to a rapid rise in imports.
Despite the economic setbacks faced by Nigeria due to COVID-19’s effects, including the collapse in international oil prices, Abuja continues to maintain its B- investment rating status. That status rests on the size of Nigeria’s economy, its relatively low rate of indebtedness and the bullish outlook for oil prices over the short to medium term.
The prospects for the public finances depend largely on what happens to oil prices as government oil receipts continue to account for 90% of all foreign exchange earnings. Nigeria’s debt-to-GDP ratio continues to remain low at 32%, although up from 13% a decade ago. Debt interest costs consume around 24% of total revenues, which is well below the average of Nigeria’s African peers.
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