Oil Illusion And Financial Delusion (LBS Executive Breakfast Session – April 2021)

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The LBS Executive Breakfast publication for this month is an upgrade from the usual format. This is because it coincides with the end of Q1 which enables us to carry out a review of the quarter as well as provide a quick analysis of Q2. It also happens to be the end of Easter and the start of the Ramadan fasting period.

From our perspective, we can say that Nigeria will experience an inverted V-shaped recovery while battling persistent inflation. Institutional and domestic investors are jittery as they attempt to make sense of ambiguous pronouncements and conflicting data.

Oil GDP: Nigeria Records Average Oil Production of 1.81 million barrels per day in Q2 2020 - Agusto & Co.
Source: Shutterstock

Recovery imminent in 2021?

The IMF and World Bank, at their spring meetings in Washington, expressed optimism about Nigeria’s economic recovery. The upward review of their projections rests heavily on optimal vaccine rollouts and stronger oil prices. The IMF revised its 2021 GDP growth projection to 2.5% from 1.5%. This is a confidence boost for the much-needed investment inflows. However, the snares of insecurity, hyperinflation and policy uncertainty could force investors to take their funds elsewhere. 

Exchange rate policy – Yay or Nay!

The nuanced interpretation of flexible or floating exchange rates by policymakers made investors wary and was seen as a missed opportunity to embark on a unified exchange rate system. Exchange rate convergence remained the sole objective of the CBN. However, forex rationing has continued, and the I & E window is still controlled. Limited forex supply has forced manufacturers to source over 90% of forex from the parallel market. Forex intervention in the I & E window fell throughout March to an average of $66.63mn. Indicating a preference for reserves accretion at the expense of exchange rate alignment. So, it is neither a yay nor nay situation…we take it as it is and hope for the best.

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In all of this, the Nigerian consumer remains financially embattled. Disposable income is flat but discretionary income is sharply lower due to rising food prices, transport costs and electricity bills. Many state governments owe salary arrears and labour is on a warpath. For example, Kano state announced a slash in salaries and reverted to the old minimum wage of N18,000. These point to a further squeeze in consumer disposable income. The EIU estimates aggregate private consumption to fall by 2% to $363.4bn in 2021 from $370.8bn in 2020.

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In the link below, Bismarck Rewane and the FDC Think Tank analyse the performance of the economy in Q1’21 and provide projections for Q2’21.

Download the full report Oil Illusion And Financial Delusion (LBS Executive Breakfast Session – April 2021) here

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