Nigeria is bracing up for a “sharp contraction of public investment and domestic demand” leading to slower growth this year, according to projections from the IMF Executive Board Article IV Consultation concluded last Friday.
Africa’s largest economy is expected to underperform its decade-long growth story, as real output growth decelerates to 4.75 percent in 2015 from 6.3 percent in 2014, the IMF projected in a March 4 press release.
The Executive Board of the Fund premised its 2015 outlook for Nigeria on external and internal downside risks, including changes in oil market developments, investor sentiment, uncertainty over the election outcome and the security situation.
“Like every transition, the elections do raise caution amongst investors, but I think investors have been most unsettled about the currency” says Pabina Yinkere, head of research at Vetiva Capital Management Ltd.
“The military’s recent advances against Boko Haram have been well received. We think investors will like to see the elections come and go with no material post-election violence and signs of stability in the currency before taking big bets on Nigeria,” Yinkere added in an emailed response to BusinessDay.
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Already, foreign investors have traded fewer volumes on the Nigerian Stock Exchange (NSE) as transaction values declined by 20 percent to N90 billion in January 2015, from N134 billion in December 2014, according to NSE data polled from major market operators.
The IMF sees Nigeria’s inflation rate rising to 11.5 percent in 2015, owing largely to the pass through effects from the exchange rate depreciation.
However, the National Bureau of Statistics estimates the inflation rate to remain within single digit at 8.8 percent for the same period.
Nigeria’s brand of crude oil will average $52.8 per barrel this year, although crude oil prices have already fallen by almost 50 percent since June 2014 to about $61 per barrel in March 2015.
External reserves currently at $31 billion could drop further to $28.4 billion, according to IMF data, as exchange rate pressures and oil price shocks continue.
The Fund acknowledged Nigeria’s recent gains in diversifying the economy but warned that limited reserves, heavy reliance on oil for revenue and foreign exchange, combined with the sharp decline of oil prices, highlighted the “compelling need” to address development challenges in the economy.
The IMF also “agreed” that recent naira devaluation and the revisions to the 2015 budget were “appropriate responses” to the oil price shocks impacting the economy.
However, achieving the fiscal targets would require careful prioritisation of public spending, cautious implementation of capital projects and initiatives to strengthen tax administration.
Directors of the Fund also recommended improved budgeting at the state and local government levels to better manage the needed adjustments.
Nigeria’s state budgets generally lack the rigor of the federal budget process, and are mostly reliant on revenue coming from the centre, to fund state activities, with the exception of Lagos State and a few others.
The Executive Board of the IMF concluded the assessment with an emphasis on Nigeria’s longer-term prospects, which according to them, rests on lowering oil dependency and strengthening private sector’s participation in economic activity.
Nigeria now accounts for over one-third of Sub-Saharan Africa’s gross domestic product (GDP), after a rebasing exercise in April 2014 showed a more diversified and service-based economy than previously thought. The services industry contributes 50 percent of Nigeria’s GDP while oil accounts for 13 percent.
Akin-Olusoji Akinyele
