Nigeria’s Economic Recovery: Fragility Lingers

Nigeria's GDP Shrinks by -6.10% YoY in Real Terms in Q2 2020 - NBS

The Nigerian economy appears to be moving in the right direction: the economy expanded by 2.01% in Q1 2019, the highest Q1 performance since 2015. This was contained in the Q1 2019 Gross Domestic Product (GDP) report released by the National Bureau of Statics (NBS). Sorry to rain on your parade but there is a hitch: the Nigerian economy is still growing slower than its population, an indication of growing poverty.

According to the World Data Lab, the world poverty clock estimates that as of April 2019, the number of people living in extreme poverty in Nigeria stood at 91.47million. Additionally, the growth in Q1 2019 reflects a slowing recovery as the expansion continues to hover around the 2% mark, below the pre-recession growth. FSDH Research believes that Nigeria has the ability and potential to grow well above the 2% mark but concerted efforts must be made to invest in infrastructure and implement the necessary policies.

The good news is that there has been growth in some key growth sectors of the economy. The Agriculture sector gained momentum, recording the highest growth since Q4 2017. The Real Estate sector also appreciated by 0.93%, the first expansion in the sector since 2015. The multiplier effect of the expansion in these sectors cannot be overemphasised: these sectors can promote activities in other sectors of the economy and help to generate jobs while growing the economy. The Information and Communication sector also recorded a strong growth of 9.48%, albeit at a slower pace than in Q4 2018. The growth in Information and Communication, Agriculture, Trade, and Transportation and Storage sectors were the major drivers of the growth in Q1 2019.

The bad news is that Oil, and Finance and Insurance sectors continue to contract. The contraction in the Oil sector can be attributed to lower oil prices and production. According to the NBS, Nigeria produced 1.96mbpd in Q1 2019, the highest production level since Q1 2018 but lower than 1.98mbpd produced in Q1 2018. In a similar vein, the average Bonny Light price in Q1 2019 was US$65.01/b, lower than the average of US$68.56/b in Q1 2018. Considering Nigeria is a price taker in the crude oil market and a member of the Organization of the Petroleum Exporting Countries (OPEC) that currently sets a production quota, the country’s ability to influence price and production is limited.

However, what Nigeria does have control over is removing the uncertainty surrounding the passage of the Petroleum Industry Bill and the subsidy on Premium Motor Spirit (PMS), which have had a negative effect on investment into the sector. Investors do not like uncertainty and will hesitate to put money into a sector in which the direction it is heading is unclear. Therefore, the resolution of both issues may spur investment into the sector and stimulate activity.

In its last meeting on 20-21 May 2019, the Monetary Policy Committee (MPC) held the Monetary Policy Rate (MPR) at 13.50% in line with FSDH Research expectations. In its considerations, the MPC noted that the growth in the economy remains well below Nigeria’s long-run potential, leaving considerable space for growth. The Committee emphasised that increased consumer and mortgage lending in the Nigerian economy will have a positive impact on the flow of credit and
ultimately result in economic growth. The MPC expects that monetary policy will focus on improving access to credit, reducing unemployment and stimulating economic growth. FSDH Research reiterates that complimentary fiscal policies are needed to stimulate strong credit creation. The MPC, in a similar vein, enjoined the Federal Government of Nigeria to build fiscal buffers by adjusting the oil price benchmark for the budget downwards.

Other policies that can reduce the risks inherent in the country that dampen investment include infrastructure development and reforms to unlock the value in the power sector and ensure improved power generation. The government can also continue on its drive to improve the ease of doing business. These investments and policies in addition to the monetary policy objectives that MPC is pursuing will attract more domestic and foreign investment in the non-oil sector. This will also stimulate lending activities, which would pull the finance and insurance sector out of economic recession.

The growth in the Nigerian economy, although fragile, remains on the right path. The suggested reforms will accelerate the country’s potential to grow far beyond its current growth rate.