The just released GDP growth numbers affirm the fact that the Nigerian economy is on its recovery path. Contrary to market expectations, the Nigerian economy recorded positive growth of 0.11% (year-on-year) in Q4'20 after two consecutive quarters of negative growth. This puts full year growth for 2020 at -1.92% and implies that the recession is over.
The surprise recovery was driven by the resumption in most business activities. The number of sectors that expanded increased from 14 in Q2 to 21 in Q3 and 29 in Q4. The fourth quarter is typically the fastest growing quarter in the year due to increased consumer spending during the festive period.
However, 2020 was different because of the impact of the lockdown on revenues and livelihoods, which significantly lowered consumer spending in comparison to previous years.
In Q4, the EndSARS impact was muted and the border reopening happened late in the quarter. The full impact of the border reopening will be felt in Q1'21. Forex rationing had an impact on manufacturing, which contracted by -1.51% and is a major employer of labour.
Oil and Non-oil Sectors
The oil sector contracted further, recording a negative growth rate of 19.76%. This was on the back of sharply lower oil production levels of 1.56mbpd compared to 1.67mbpd in Q3'20 and 2mbpd in the corresponding period of 2019. The reduction in Nigeria's oil output could be linked to its gradual movement towards adhering to its OPEC quota of 1.4mbpd. The sector's contribution to GDP also fell further to 5.87% from 8.73% in the preceding quarter and 7.32% in Q4'19. In 2020, the oil sector grew at -8.89% compared to 4.59% in 2019.
The non oil sector on the other hand returned to positive growth territory of 1.69% from -2.51% in Q3'20. However, this was a slower pace of growth when compared to Q4'19 of 2.26%. The non oil sector posted a full year growth of -1.25% compared to 2.06% in 2019. The sector's contribution to GDP increased to 94.13% from 91.27% in Q3'20 and 92.68% in Q4'19. The sector's positive performance was largely driven by the information and communication sector, agriculture (crop production), real estate and construction.
Sector breakdown - 29 positive, 17 negative (more sectors shifting into positive territory)
The number of sectors that moved into positive territory increased to 29 from 21 in Q3'20, while 17 were in negative territory (Q3'20: 25). This is indicative of the ongoing recovery process, coupled with seasonal factors.
Drivers of growth the usual suspects- services related
The fastest growing sectors are in the service business- quarrying & other minerals (48.42%), telecommunications & information services (17.64%), cement manufacturing (6.59%), broadcasting (4.42%) and crop production (3.68%). These top five sectors have a cumulative nominal contribution of 34.46% to total GDP.
Meanwhile the laggards include oil refining (-56.5%), air transport (-51.67%), coal mining (-23.16%), oil & gas (-19.76%) and accommodation & food services (-15.03%). These sectors are still reeling from the impact of the lockdown and other restrictive measures still in place.
What does this mean for the policy environment in 2021?
The Nigerian economy is off to a strong start post-covid with the positive Q4'20 growth numbers. It is safe to say that the combination of the fiscal stimulus packages, accommodative monetary policy and other relief plans, have achieved the desired objective. This means that the central bank's focus can now shift to other pressing issues such as price and exchange rate stability, whilst ensuring that output levels are boosted.
The MPC left its policy stance unchanged at its first meeting of the year. It cited quickening the pace of the recovery through CBN interventions and targeted/ sustained fiscal spending as its current priority. The return to positive growth provides the monetary policy committee, of the CBN, with some headroom to strongly consider a different course of action. This may occur in the second half of the year, when the Q1 and Q2 2021 growth numbers would have been released and would confirm or refute the recovery process.
Already, interest rates at the primary and secondary markets are on the increase, with the CBN using more of the orthodox monetary policy tools at its disposal to mop up liquidity. On the fiscal front, the federal government's increased infrastructure drive cannot be occurring at a more opportune time. Collaborating with the private sector and other stakeholders to develop an infrastructure development agenda, to bridge the burgeoning infrastructure gap, will provide the necessary impetus required to support the recovery process
The recovery process in 2021 is expected to be gradual and tough, especially for sectors such as trade and manufacturing that are income elastic and forex dependent. We expect the CBN to ease its forex rationing and boost dollar supply in the forex market. This, coupled with the ongoing naira convergence, should provide some respite for these sectors. The agriculture sector, which has been able to withstand the health pandemic, is facing a new and probably more severe crisis- growing insecurity. With the spread of attacks and tribal clashes to the South West, if left unchecked, agricultural output will reduce sharply.
More so as it coincides with the planting season (end of Q1 into Q2), which is when output is typically lower. Civil works and construction activities will ride on increased government focus on bridging the infrastructure gap, while the likes of ICT and financial services will benefit from the increased use of data and electronic platforms to transact economic and business activities.
In summary, the GDP growth rate will rise this year but at a slow pace due to lingering structural challenges. The AfCFTA, border reopening, higher oil prices and availability of the vaccines will support the growth trend. Based on the above, we expect that the policy thrust of the government will become more focused on ensuring price and exchange rate stability as output levels increase. This means that we are likely to see interest rates increase further in subsequent quarters.