Q3 2020 GDP Report: Deepest Recession in Decades Offers Opportunity for Extraordinary Reforms

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Tuesday, December 15, 2020 / 9:32 AM / by PwC Nigeria / Header Image Credit: NBS


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Twin Shocks Precipitate Another Recession

Along with most countries of the world, the Nigerian economy is technically in a recession, as real GDP contracted for the second time by 3.6% in Q3 2020. This implies that, on a year-on-year basis, real GDP declined by N1 trillion and N670 billion in Q2 and Q3 2020 respectively. The share of Nigeria's real GDP loss in the period is larger than the economies of Sierra Leone, Liberia, Gambia, Lesotho, among others.

 

With this contraction, Nigeria is experiencing a second economic recession in less than a decade, due to the impact of the COVID-19 pandemic on the global economy. So far in Q3 2020, except for China, other economies have recorded consecutive economic contractions, as the global economy is expected to decline by 4.4% in 2020 from an uptick of 2.8% in 2019, according to the IMF.

 

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The pandemic has exposed oil dependent economies to the twinshock of a bearish international oil market and disruptions to global and domestic supply chains for the movement of goods, people and services.

 

Nigeria's leading indicators reflect that the expected pace of recovery in Q4 2020 could reflect an improvement from the previous quarter. The purchasing managers' index (see figure 1) shows a marginal uptick in October/November compared to the third quarter of 2020, which also aligns with the consumer and business expectation survey reported by the Central Bank of Nigeria (CBN).

 

Against this backdrop, the country's economic growth rate in Q4 2020 could most likely fall between -1.5% and 0.5%, translating to a 2% annual contraction in 2020 from a growth of 2.3% in 2019. This growth rate is better that most outlooks for Nigeria (IMF: -4.3% and World Bank: -3.2%).

 

Impact of COVID-19 on International Oil Markets Further Subdues Nigeria's Oil Sector

In the third quarter of 2020, oil prices were less volatile compared to the previous quarter due to positive sentiments largely hinged on the expectation of further OPEC cuts; the ease of restrictions to the movement of people and goods; and the proposed economic stimulus packages in advanced economies.

 

OPEC reduced its production by 7% from 26 mbpd in Q2 2020 to 24 mbpd in Q3 2020, while non-OPEC members increased production by 0.9% to 67 mbpd. This shows that the position of non-OPEC members' impacts the outlook for oil prices. Going forward, OPEC foresees a 10% decline in production to 90 mbpd in 2020 from nearly 100 mbpd in 2019, as non-OPEC players are predicted to keep supply elevated for the rest of the year.

 

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Meanwhile, the combination of OPEC cap on oil production by member countries and the declined outlook for oil demand led to a dip in Nigeria's oil production, which fell by 18%y/y to 1.7 mbpd (lowest since 2016) from 2 mbpd in the corresponding period last year. The performance set the pace for a divergence between the oil and non-oil sector GDP, as both sectors fell into negative territory.

 

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Analysis of the sectors in Q3 2020 showed that the Quarrying and Other Minerals (42%), the Information and Communication (15%), Cement (12%); the Water supply, Sewage, Waste management and Remediation (7%), and the Motor Vehicle & Assembly (7%) sectors improved significantly.

 

On the other hand, the Oil refining (-68%), the Transportation and Storage (-43%), the Accommodation and Food services (-23%), the Education (-21%), and the Electrical and Electronic (-20.1%) had the highest contractions.

 

Turning the Curve, Respite for the Construction, the Quarrying and the Entertainment Sectors...

Of the 46 sub-sectors of the Nigerian economy, 29 sub-sectors declined in the period under review, as against 33 subsectors in Q2 2020, which reflects that some sub-sectors underwent transition in the period (from negative to positive territory and vice versa). Though two sub-sectors contracted from the growth recorded in the previous quarter, 6 sub-sectors, on the other hand, expanded due to the easing of the lockdown, although at different paces depending on the sectoral risk exposure to the pandemic.

 

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Global Recovery and Outlook are Premised on COVID-19 Vaccines and Therapeutics

The prospect and progress of international trade is hinged on the discovery of a cure or halt to the spread of the COVID-19 pandemic. There are several progress reports toward the successful development of a vaccine to stem the spread of the Virus. Though the affordability for most underdeveloped countries remains a concern.

 

The Way Forward: The Work of the Fiscal Authority

At the core of the best and most effective approach to expediting Nigeria's economic recovery is the implementation of fiscal reforms, some of which have been captured in the Nigeria Economic Sustainability Plan (NESP).

 

In addition, the Finance Bill 2020 seeks to stimulate economic growth and drive sustainable development. Some of the key considerations of the Bill include:

 

  • A 50% reduction in the minimum tax rate from 0.5% to 0.25% of gross turnover for financial years ending between January 1, 2020 and December 31, 2020;
  • Reduction to the rate of import duties on motor vehicles and tractors - to 5% and 10% respectively, among others;
  • An exemption from tertiary education tax by small companies with turnover of less than N25 million, among others.

 

Resources available to the government to support growth and development are limited. Hence, the limited resources are to be deployed optimally to address the low hanging fruits that will lead to economic growth and transformation in the short to medium-term.

 

Credit:

The post Nigeria Economic Alert: Q3 2020 GDP Report: Deepest Recession in Decades Offers Opportunity for Extraordinary Reforms first appeared in PwC Nigeria on December, 2020.

 

This report has been republished with the permission of PwC Nigeria.


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