A superstar of West Africa not too long ago, the Nigerian economy is reeling from the drop in oil prices, and the near-term outlook is bleak. Despite desperate attempts to diversify the economy in the aftermath of the oil-price collapse, Nigeria remains overdependent on foreign exchange (FX) revenues from crude oil exports.
Business continuity is being hampered by the wide gap between FX rates in official and parallel markets. The official FX rate has been stable at around 200 naira to $1, but the currency has devalued rapidly in the parallel market, trading close to 300 naira to $1 at times, due to a persistent shortage of dollars. The Central Bank of Nigeria has imposed a host of restrictions to control US dollar supplies to the market, in a bid to prevent the erosion of its FX reserves. However, some importers are already finding it hard to pay their bills as a result.
The ongoing fuel scarcity has also been a big hindrance to business continuity; for months now, businesses and civilians have faced long queues for refined petroleum as Nigeria’s refining capacities are inadequate despite being Africa’s top crude exporter. The US dollar shortage has further exacerbated the crisis; Nigeria imports the lion’s share of its petrol and other refined products, but the Nigerian National Petroleum Corp. has been unable to pay for imports due to the drop in FX revenues.
Dun & Bradstreet has downgraded its near-term growth forecast for Nigeria, following a sharp slowdown in real GDP growth from 6.2% in 2014 to 2.8% in 2015. We forecast growth to pick up only slightly to 3.2% in 2016, accelerating to 3.8% in 2018. Although oil prices and global financial markets have shown some signs of stability in recent weeks, prices will remain subdued relative to the last cycle for the near term.
Given that Nigeria still depends disproportionately heavily on oil exports, it will take the economy longer to recover from the impact that has already been inflicted by low oil prices. A recent assessment by the International Monetary Fund takes an even more bearish view of the Nigerian economy. The IMF report highlighted many of the downside risks that are included in our baseline forecast, like lower oil prices, shortfalls in non-oil revenues, continued degradation in finances of state and local governments, and an escalation in disruption to business continuity due to constraints on access to foreign exchange (a casualty of the FX restrictions implemented by the central bank to protect its reserves). In addition, the report notes the resurgence in security concerns due to Boko Haram.
While the IMF expects the economy to grow only 2.3% in 2016 and 3.5% in 2017, it specifically alerted the government to the “critical need to raise non-oil revenues to ensure fiscal sustainability while maintaining infrastructure and social spending.”
The fund report suggested several remedial measures to the government, led by a gradual increase in the VAT rate to broaden the tax base. Soon after the IMF released its report, Finance Minister Kemi Adeosun, speaking at the spring meetings of the IMF/World Bank, ruled out the prospect of Nigeria seeking an emergency loan from the IMF. The minister stressed that the government is taking adequate policies to diversify the economy to overcome the crisis.
The government’s attempts to maintain infrastructure spending received a boost from President Muhammadu Buhari’s trip to China, which yielded $6 billion in investment for Nigeria. Agreements with Chinese businesses are expected to yield long-run investment for key sectors of the economy like power, solid minerals, agriculture, housing, and rail transportation.
Domestic inflation is a persistent near-term risk. Headline CPI inflation has now come in above the central bank’s target range of 6%-9% for the 11th straight month. From a recent low of 9.6% in December 2015, it spiked to 12.8% in March 2016. Core inflation, which excludes farm prices, has also risen steadily and reached 12.2% in March.
The weak naira is no longer the only factor fueling inflation; it has been joined by the lingering scarcity of refined petroleum products, seasonal factors, and an increase in the electricity tariff. Confronted by the dilemma of inflation control in the face of slowing growth, the central bank opted to raise the policy rate from 11% to 12% in late March.
Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.