Nigeria Defies Recession, Blows up Analysts Expectations


Friday, February 19, 2021   /03:00 PM / By Adesola Borokinni, Proshare Research/Header Image Credit:Corporate Finance Institute


Nigeria's gross domestic product (GDP) numbers recently released by the national bureau of statistics (NBS) blew analysts morbid growth expectations out of the water. It even made mincemeat of Proshare's forecast for full year 2020 growth of -2.1% to end 2020 at slightly above zero percent with Q4 growth coming in at -1.92% (down from -3.62% in Q3 2020). Proshare analysts predicted that the economy would wheel out of recession at the end of Q1 2021 but the +0.11% growth of the economy in Q4 2020 busted the forecast of a Q4 GDP growth of - 2.37%. The economy's powerful recovery suggests unforeseen built-in stabilizers that pulled businesses out of their earning holes. 


The slow rise in business activities  between Q3 and Q4 2020 was enough to counter the downward pull of COVID-19-induced slow downs in sales and manufacturing that were particularly biting between Q1 and Q2 2020 as the federal government declared a total lockdown of economic activities in three states of the country including Abuja, the federal capital. Apart from total lockdowns the federal government also imposed travel restritions between states which posed challenges for company logistics and jerked-up the cost of local goods distribution. Nigeria's hockey-stick growth recovery bucked global trends which have seen economies outside the Asian continent shrink steeply in 2020.


Most analysts had expected that the impact of the EndSARS protest will be catastrophic for the Nigerian economy e.g., the Lagos State Chamber of Commerce and Industry (LCCI) noted that the EndSARS protest cost the Nigerian economy N700bn in 12 days. Also, the Lagos State government had announced that it would need over N1trn to recover from losses that arose because of the EndSARS protest. The dynamics of the impact of the halt in economic activities, as well as the coronavirus pandemic, were expected to affect the Nigerian economy adversely in Q4 2020.


Although the growth rate was somewhat slow, it speaks volumes of the impact of the multilateral grants, collaboration of fiscal and monetary policy as well as the private sector (CACOVID) in helping the Nigerian economy to stay up during the pandemic- induced recession. Some of the policies implemented during the year included the federal government's MSME Survival Fund, the Central Bank of Nigeria (CBN) coronavirus pandemic intervention scheme, CBN ways, and means to support government expenditure, etc. Furthermore, the CBN cut the monetary policy rate (MPR) rate twice in 2020 to stimulate the growth of credit to the real sector of the economy e.g., in September 2020, the CBN cut the MPR by 100 basis point to 11.5%. The impact of the rate cuts and other stimulus policies suggest a doorstop to the downard economic glide that started in Q2 2020 (see Chart 1). 


Chart 1: Nigeria's GDP Growth Rate (%)

Proshare Nigeria Pvt. Ltd.

Source: NBS, Proshare Research



The Data Crunch

The breakdown of the full-year GDP figures shows that the economy contracted by -1.92% in 2020. By full year, the sectors that recorded growth included agriculture +2.17%, information & communication +12.9%, financial and insurance +9.37%, public administration +0.10%, human health and social services +2.23%. On the other hand, the top three sectors with the highest recorded decline in 2020 include transportation and storage -22.26%, accommodation & food services -17.75%, and education -13.57%.


A further breakdown of the Q4 2020 data revealed that the top three growth sectors in Q4 2020 were the information and communication sector +14.7%, the agriculture sector +3.42%, and the uman health and social services sector +3.05%. On the other hand, the top three sectors with the largest contraction in Q4 2020 were mining and quarrying -18.44%, accommodation &  food services -15.03%, and education -11.43%.


The real growth of the oil sector was -19.76% (year-on-year) in Q4 2020 indicating a decline by -26.12% points relative to the rate recorded in the corresponding quarter of 2019. Growth decreased by -5.87% points when compared to Q3 2020. Quarter-on-quarter (Q-o-Q), the oil sector recorded a growth rate of -26.27% in Q4 2020. For the full year 2020, the oil sector grew at -8.89% compared to +4.59% in 2019. The oil sector contributed 5.87% to total real GDP in Q4 2020, down from the corresponding period of 2019 and the preceding quarter, when it contributed 7.32% and 8.73% respectively.


The non-oil sector grew by +1.69% in real terms, an improvement from the contraction of -2.51% recorded in the previous quarter and slower than the +2.26% recorded in the corresponding quarter of 2019. The growth in the sector was driven by the information and communication sector (telecommunication and broadcasting) while other drivers were agriculture (crop production), real estate, manufacturing (food, beverage, and tobacco), mining and quarrying & other minerals, and the construction sector.      


The sector that stood out in Q4 2020 was the real estate sector. The sector grew in Q4 2020 by +2.81% after it recorded contractions for six consecutive quarters but declined by -9.22% in the full year. The rebound indicates that there has been a springiness in activities in the sector.


Unsettled Dust

Despite the slow growth of the economy in Q4 2020, inherent challenges such as forex, unemployment, insecurity, policy inconsistency still pose a threat to sustained economic improvement in 2021. Achieving sustainable growth and avoiding a double-dip recession would require that these challenges be addressed. Both local and foreign investors are increasingly becoming wary of Nigeria's rising inflation which has been amplified by rising exchange rate uncertainty. Challenges ranging from investor's inability to repatriate funds abroad, retsricted access to forex and the worsening goods congestion at the local ports squeeze the economy's capacity to run faster.


Foreign investors in 2021 would be concerned about returns on investment, domestic security, and rising domestic inflate. Hence, sentiment will play a smaller role in determining the economic-destination of their funds to countries such as Nigeria.  According to United Nations Organization for Trade and Development (UNCTAD), global FDI in 2020 declined by -42% to $859bn from $1.5trn in 2019. The decline in available FDIs in 2020, implies that there will be increasing competition by economies to attract more FDIs, as most economies seek a quick rebound from the pandemic driven contraction to pre-covid levels of economic growth. Therefore, the  Nigerian government may need to expedite policy actions that could pull competitive FDIs into its economic space. Although Nigeria recorded a rise in its FDI in 2020 to $1.02bn from $934.34m in 2019, its FDI per capita remains low. Improved FDI per capita accompanied with improved absorptive capacity could help fire sustainable growth of the local economy.


Analysts are optimistic about the economy's growth outlook for 2021. Stakeholder optimism are buoyed by the improved oil price above the budget benchmark of $40 per barrel. The stronger confidence in global recovery has also added to the general feeling of a strong growth performance in 2021 as supply chains become restored and more people get vaccinated for the coronavirus disease. Although optimism appears justified, the Nigerian government still needs to step up its quest to diversify its revenue source away from oil to insulate the economy from future shocks that may arise from oil price volatility.


Thinking Creatively; Stepping Outside the Cage

No doubt Nigeria needs creative ways to bolster growth and development and this may require doing the unconventional. The country may need to adopt strategies that suit its peculiarities, diversity, and competitive superiority. It is well known that countries like Japan, China, South Korea adopted industrialization policies as a major strategy in transforming their economies. Focusing on industrialization policies comes with visible benefits but analysts have noted that Nigeria may need to adopt alternative strategies in the short to midterm to attract FDI and boost economic growth given Nigeria's peculiar economic structure and composition.


Some analysts have highlighted sectors that Nigeria has a competitive advantage such as services, arts, and the entertainment sectors that would fast-track the inflow of FDI. They note that Nigerian artists, movies, IT experts are globally recognized, hence, the need to fast-track growth through these highlighted sectors. Nigerian music has gained prominence both on the African continent and amongst Africans in the diaspora. Nigerian musicians like Burnaboy, Wizkid, Davido are increasingly gaining global prominence and respect. Furthermore, Nigerian movies are increasingly gaining global attention, for example, Funke Akindele's movie Omo Ghetto: The Saga as of January 26th, 2021 grossed N468m surpassing the record of 2016 film The Wedding Party to become the highest ever grossing film in the Nigerian film industry.


It has been noted that Nigeria has a large array of human talent yet to be tapped in the ICT, fintech, and banking sectors. Therefore, it has been argued that increasing investment in human capital, services, arts, and entertainment could bridge the gap needed to achieve sustainable growth.


Proshare Nigeria Pvt. Ltd.

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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