Nigeria Faces Severe Stagflation as GDP Declines, Unemployment and Inflation Rise


Wednesday, August 26, 2020 / 2:58 PM / By FSDH Research / Header Image Credit: FSDH


Find attached the GDP and Inflation 2020 Q2 slide deck and below are the key highlights. 

1. The Nigerian economy contracted by -6.1% in the second quarter of 2020.

  • This represents the highest quarterly decline since the first quarter of 2004 (-7.6%).
  • The contraction in GDP was as a result of the decline in crude oil price and the implementation of lockdown and movement restrictions due to COVID-19.
  • Nigeria joins the list of countries - South Korea (-3.3%), Singapore (-41.2%), US (-9.5%), Germany (-10.1%) - that experienced GDP contraction in Q2.
  • For full-year 2020, we expect the economy to contract by 4.6%.


2. Nigeria faces severe stagflation as GDP declines, Unemployment & Inflation rise

  • The impact of COVID-19 was largely felt on output, employment and inflation.
  • With COVID-19, many companies engaged in non-essential items were forced to shut down operations.
  • As a result, the total number of individuals employed in the country declined to 35.6 million in 2020 Q2. Unemployment rate rose to 27.1% in the quarter.
  • Key sectors such as Agriculture, Trade and Manufacturing experienced significant job losses.
  • A fall in output was also accompanied by rising prices with inflation rate at 12.6% in June 2020. Supply bottlenecks and value chain disruption were largely responsible for the rise in inflation.


3. Both Oil & Non-Oil GDP declined in 2020Q2 as a result of COVID-19

  • The oil sector reversed its positive growth trend and declined by 6.6% in the second quarter of 2020.
  • The non-oil sector which had been resilient was also affected by the lockdown and restrictions.


4. COVID-19: Nigeria's resilient sectors in 2020Q2 

FINANCE: In the midst of the pandemic, the sector grew by 18.5% in 2020Q2 and retained its position as the fastest growing sector in the quarter. The insurance segment of the sector, however, experienced a decline.


ICT: Given the nature of the pandemic, the ICT sector, led by Telecoms, is one of the gainers following the increase in teleconferencing, data usage and remote working. The sector grew by 15.1% in the quarter.


Agriculture: Agriculture has remained resilient even during the economic recession in 2016. Although the sector grew marginally by 1.6% in 2020Q2, it has maintained positive annual growth rate for over three decades.


5. Nigeria-s FX shortages could forestall economic recovery in H2 

  • GDP decline of -6.1% in the second quarter of 2020 is the first negative growth since the first quarter of 2017. In the first half of 2020, GDP growth averaged -2.12%.
  • In H2, we expect this sluggish economic performance to continue especially given the lockdown of key sectors, the tough business climate and persistent challenges in the fiscal space.
  • In addition, Nigeria's foreign exchange challenge will play a major role in shaping economic outcomes in 2020H2. Already, there have been limited FX supply which has resulted in depreciation of the currency in the parallel market.
  • More recently, the CBN has embarked on FX rationing and exchange rate adjustments, among other measures, to reduce pressure on the Naira and maintain a stable exchange rate.
  • Drawing from experience during the last recession, limited availability of FX as well as FX rationing could have unintended consequences on broad economic aggregates such as GDP, Inflation, external reserves and foreign investments.
  • Growth of key sectors such as trade, manufacturing and agriculture could also be constrained by limited availability of FX to secure inputs.


6. Inflation rate rises to 12.8% in July 2020 

  • Headline inflation rate rose to 12.82% in July 2020, a 26 basis points increase from 12.56% in June 2020.
  • Increase in food inflation is a major driver of overall inflation  in Nigeria.
  • The rise in inflation rate and decline in 1 year Treasury bills rate extended the real interest rate gap to -9.4 percentage points (pp) in July 2020 from 8.7 pp in June.
  • Excess liquidity in the fixed income space has suppressed yields since the last quarter of 2019.
  • In relation to the Monetary Policy Rate (MPR), real interest rate also expanded by 0.3pp in July.
  • With inflation rate expected to increase further in coming months, negative real return on investments is expected to continue in 2020.


7. FSDH Projection

We project an inflation rate  of 12.9% for 2020 and a GDP contraction of -4.6%.


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