Prospects for the country has remained positive for the 2019 fiscal year, as analysts and economists continue to revise outlook for the country upwards. In July, the International Monetary Fund (IMF) upgraded its growth rate forecast for Nigeria’s Gross Domestic Product (GDP) in 2019 to 2.3 percent, while retaining 2.1 percent for 2018, citing improved crude oil prices. The 2019 GDP growth forecast of 2.3 percent published for Nigeria was 0.4 percentage points higher than the 1.9 percent announced in April this year.
Similarly, the African Development Bank (ADB) also forecasted growth projected at 2.1% in 2018 and 2.5% in 2019. The outlook is predicated on higher oil prices and production, as well as stronger agricultural performance, according to the multilateral institution in its Africa Economic Outlook report published in 2018.
Rand Merchant Bank (RMB) is the latest financial institution to revise its forecast for the Nigerian economy upward. According to the RMB’s recently released Nigeria report, growth forecast for Africa’s largest economy has been reviewed northward from 2 percent to 2.1 percent and 2.3 percent respectively in 2018 and 2019. Again, the key driver for the growth projections is the rise in oil prices, with the sector growing at 14.8 percent year on year in the first quarter of this year, supported by higher oil prices.
In 2016, Nigeria experienced its first full-year of recession in 25 years. Global oil prices reached a 13-year low and oil production was crushed by vandalism and militant attacks in the Niger Delta, resulting in the severe contraction of oil GDP. Although the oil sector represented only 8.4 percent of GDP in 2016, lower foreign exchange earnings from oil exports had spill over effects on non-oil sectors (industry and services) dependent on imports of inputs and raw materials, and overall real GDP contracted by 1.5 percent.
GDP and Economic Growth
Though the economy experienced recovery with growth at 2.1 percent in 2017 year on year. The economy remains fragile reflected by GDP falling to 2 percent in Q1 2018 indicating that the thrust toward recovery has waned. Activity in the non-oil sector remains weak as lower purchasing power weighs on consumer demand and as credit risk continues to limit bank lending, according to RMB research.
Furthermore, an undiversified production base coupled with infrastructural deficiencies and political uncertainty, fuelled by the continued unpredictable events leading up to the 2019 elections, have all contributed to constitute a prolonged and gradual economic recovery period.
The report also predicts that inflation is set to come under pressure in the second half of 2018, as base effects subside and election spending increases.
Furthermore, food prices are set to come under pressure as well, as a result of farmers’ crisis across the country, particularly in areas of the North and Middle belt regions, as well as the resultant negative impact on food supply chains coupled with the high cost of transport. With a contribution of about 22 to 25 percent to Nigeria’s GDP, Nigeria’s agricultural sector is yet to deliver as much output and wealth as counterpart sectors.
There is overwhelming evidence that lack of structure in the sector, limited modern farming skills, lack of affordable financing, supply insecurities, inconsistencies in government policies and regulations are top among constraints facing agribusiness investments in Nigeria.
However, it is the rising demand and the falling production of rice on the back of higher costs and insecurity that will intensify the pressure on food inflation. A recent study by the United States Department of Agriculture (USDA) shows that Nigeria will produce 3.7 million tonnes of rice in the 2018/19 farming year, which is not enough to meet consumer demand. The USDA projects rice consumption to increase to 6.7 million tonnes from the 6.4 million tonnes recorded in 2017/18.
Inflation and Monetary Policy
Further exacerbating inflationary pressures in the second half of 2018 is the amendment of excise duty rates for alcoholic beverages and tobacco. RMB further posits that the NiFEX rate is likely to converge with the NAFEX naira rate, which will result in more pressure on inflation in 2019. The Merchant Bank therefore expects the rate to average 11 percent and 10 percent in 2019 and 2020. RMB also anticipates monetary policy rates to remain unchanged at 14 percent for the rest of the year.
In July, the Central Bank of Nigeria (CBN) kept its benchmark policy rate at 14% at its latest MPC meeting, citing potential inflationary pressures especially from food prices, a liquidity injection in the second half of the year from the implementation of the 2018 budget and pre-election spending.
Fiscal policy
The recently-approved budget for 2018 marks another large increase in spending, which contributes to a rise in budget deficit forecasts to 3.2 percent of GDP from 3 percent in 2018 (compared to the government’s 1.7 percent deficit target). Less than a month after signing the 2018 spending plans into law, President Buhari has requested a N229bn supplementary budget for electoral spending.
Budget implementation remains a key challenge for the government. The late passage of the 2018 spending plan will most likely impact on the targets of the Economic Recovery and Growth Plan (ERGP), as well as capital projects planned for 2018.
Foreign exchange
A positive development for the currency is the increase in foreign reserves from US$29bn two years ago to US$47bn recorded in May 2018. Between US$5bn and US$7.5bn has already been used for intervention since 2017. The Eurobond issuance has also helped to fill demand. However, RMB warns that the unprecedented level of domestic and offshore borrowing has been factored in to the reserves amount, inflating the numbers by around US$8bn.
The RMB report maintains that the NAFEX will continue to trade within a tight range between 359 and 363 against the dollar for the next two years. To take strain off the maintenance of the peg, the Bank does not rule out the possibility of a 5 percent depreciation to around USD/NGN365.
Despite this, the report views that the official CBN rate will be kept intact is based on two scenarios, which are driven by the outcome of the general election. If incumbent President Buhari wins the election, the status quo will remain, and he will be happy to keep the CBN rate as is to pay oil importers (technically maintaining the fuel subsidy). If the opposition wins, there will be attempts to distance itself from Buhari policies, so there might be the possibility of the CBN rate being removed.
Overall, there is the general consensus that outlook for the economy is positive, on account of oil prices. As the country moves closer to its sixth national elections in 20 years of democracy, economists and analysts are not in doubt that the risks to Nigeria’s economic recovery remains high.
