Nigeria's Economy in 2020; Understanding The Past, Preparing For The Future


Friday, January 3, 2020 / 6:49 PM / By Teslim Shitta-Bey, Managing Editor / Image Header Credit: EcoGraphics


With the end of 2019, the direction of economic growth in the new year 2020 is still largely cloudy as analysts take disparate positions on how the Nigerian economy would shape up in the new year.


To fully or partially understand the outlook for the Nigerian economy in 2020 would require interpreting the events of 2019 and how these would affect outcomes in the new year.


2019 in Context


Inflation: An aircraft in flight mode


Inflation started trending downwards in Q1 and Q2 2019, but in Q3, signs of a reversal had emerged as the Central Bank of Nigeria's (CBN's) restriction on food-related imports started putting pressure on local food prices and other manufacturing inputs. Inflation which started 2019 at +11.37% in January fell to +11.22% at the end of Q2 2019, and by July the aggregate price level growth had slowed to +11.02%, raising optimism that the CBN would by Q2 2020 be within its target band of Between +6% and +9% (see chart 1 below). Unfortunately, the CBN's to tighten the noose on importers of food and related-products by denying them access to the official foreign exchange market and the importers and exporters foreign exchange window (IEFX) added to the rise in the price of food (see food price inflation increases in chart 2 below). Food inflation grew faster than the general headline inflation rate throughout 2019.  Food inflation rose from +13.51% in January 2019 to +13.56% at the end of Q2 2019 and fell slightly by +0.05% to +13.51% at the end of Q3 2019. At the end of 2019, food inflation worsened and rose to +14.48% in November.

Chart1 Inflation rate Jan.-Dec 2019

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Source: NBS Statistical Data, Proshare research


Chart 2 Food Price Inflation Rate Jan.- Dec. 2019

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Source: NBS Statistical Data. Proshare research


GDP: Running fast slowly


Gross Domestic Product (GDP) growth in 2019 was uninspiring; the GDP growth rate fell behind the 2016 estimated growth rate of the Nigerian population of +2.6%. To a large extent, the slow GDP growth reflected a tight monetary policy stance of the CBN. The central bank kept interest rates high for most of 2019 for two reasons:

1.       Containing inflation growth

2.      Keeping the external value of the Naira stable, the naira to dollar rate stayed at N360/$ for the year


High domestic interest rates as a result of double-digit rates on risk-free government treasury bills (T-bills) and bonds resulted in the federal government "crowding out" private sector access to credit and investment. The consequence of the frequent government borrowing from the local money market made real sector growth difficult. However, growth varied across sectors in 2019.


The agricultural sector, which grew at +4.93% in Q3 2016, saw growth fall to +1.79% in Q2 2019 but climbed back up to +2.28% in Q3 2019. The manufacturing sector in 2019 also had a rough patch, the sector declined by -0.13% in Q2 2019 but went up by +2.28% in Q3 2019. The service sector, especially information, communication and technology (ICT), rose from +9.01% growth in Q2 2019 to +9.88% in Q3 2019. Another service sector economic segment that has seen strong growth in 2019 has been the arts, entertainment and recreation sector, which rose from growth of +0.81% in Q2 2019 to +2.89% in Q3 2019. Indeed, for most of 2019, the service sector pushed the growth needle forward a few ticks higher than other sectors (see Table 1 below).

Table 1 GDP Growth By Sector Q2 and Q3 2019

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Source:  Central Bank of Nigeria (CBN), Proshare research


Other GDP sectors saw differential growth rates in 2019. Mining and quarrying sector growth fell from +7.00% in Q2 2019 to +6.19% in Q3 2019; this was surprising considering the federal government's insistence that it was pursuing an economic diversification agenda to de-risk the economy from the overshadowing presence of the oil & gas sector. The power sector equally performed unimpressively in the year with growth declining from an already anorexic +0.43% in Q2 2019 to a negative -11.81% in Q3 2019 (see Table 2 below).    

Table 2 GDP Growth By Sector Q2 and Q3 2019

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Source:  Central Bank of Nigeria (CBN), Proshare research

In aggregate terms, GDP grew from +2.12% in Q2 2019 to +2.28% in Q3 2019. The GDP growth rates across industries improved in Q3 2019 but fell short of the economic recovery and growth plan (ERGP) rate of +4.5% for the year.

Domestic interest rates: Rising prices and flattened yields

Nigeria's Domestic bond yields in 2019 were attractive as risk-free rates stayed at double digits throughout the year. But the tide turned in Q4 2019 when the CBN restricted open market operations to foreign investors and domestic banks, treasury yields were better than potential returns on equities, explaining why the local equities market lost -15.34% of its market value in Q4 of 2019.

Deposit rates have also stepped up over the last ten years as rates on twelve-months deposits fell from 12.85% in 2009 to 4.64% in 2011 and then rose to 9.16% in 2014 at the beginning of a global economic slump.  The following year 2015 saw twelve-month rates fall to 8.68% indicative of the build-up to a domestic recession by 2016 twelve-month rates dipped further to 6.22% as the recession was well on its way. From 2017 to 2019, twelve-month deposit rates averaged 10.49% (see last column, Table 3 below).

Table 3 Nigeria's Average Deposit Yields Across Tenors 2009-2019

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For the first three-quarters of 2019, investors had the benefit of a federal government in need of monetary support by way of T-bill market purchases by foreign and domestic investors. The tune has changed somewhat in Q4 209, as individual domestic investors become fenced from the OMO activities of the CBN. The reduction in the number of investors with access to OMO resulted in yields turning flat at the end of 2019, with digital piggy banks forced to look for alternative outlets for their depositor's money as treasury rates thinned down.


The decision whether to invest in equities (for example, banking sector stocks) or to put surplus cash in Treasury bills for 2019 was an easy win for Treasury bills. Two facts were clear from available data; The NSE bank stock index was a volatile measure of bank values and produced returns that failed to match the domestic inflation rate, which hovered above +11% for most of the year. The banking index rose from 17.61 in 2010 to -31.28 in 2011 and then climbed up to +31.86% in 2013 and +73.32% in 2017 before crashing to -16.09 in 2018 and -13.42 in 2019. On the other hand, Treasury bill rates climbed from +3.85% in 2010 +13.64% in 2012, +10.50% in 2014 and +12.34% in 2017. By 2018 the rate fell to +10.09% before climbing a notch to +10.44% in 2019.


Returns from Treasury bills over the last decade have, on average, provided less risky and better returns than their banking stock alternative. Investing in bank stocks over the last two years (2018 and 2019) have been particularly precarious (see chart 3 below).


Chart 3 Nigeria's Banking Index and Treasury Bill Returns 2009-2019 (%)

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Source:  Central Bank of Nigeria (CBN), Proshare research


Fiscal deficit: Inside the Pork Barrel                   

The federal government's escalating fiscal deficit since 2015 has raised concerns both nationally and internationally. Economists have argued that the sustained budget deficit and annual fiscal borrowings and debt service obligations could combine in a complex manner to tip the economy's balance.

Two events will shape the nature of the country's fiscal position in 2020:

  • The lower international oil prices drop in 2020, the more precarious Nigeria's fiscal balance would become. Oil price between US$55 per barrel and US$60 per barrel would require some mild devaluation of the Naira in Q1 2020 as a reduced accretion to foreign reserves would give the CBN little elasticity in its defence of the recent N360/US$ IEFX window rate. A fall in the oil price to US$50 would mean that both the IEFX window rate and the official rate of N307/US$ would need to fall much further. The consequence of falling foreign exchange rate would be a rise in domestic prices, and as the CBN tightens monetary policy, local interest rates will also increase and create challenges for real sector growth as manufacturers face higher domestic finance charges (see chart 4 below). Crude oil prices have spiked in the early days of 2020 as an escalating conflict between Iran, and the United States of America has pushed Brent oil price to US$68.59 as of January 3, 2019, the OPEC oil basket was US$67.96 on the same day. Fortuitously, if the conflict between Iran and the USA

  • Revenue gaps in 2020 will determine how the fiscal authorities will respond to treasury bill and bond sales. In Q4 2019, the government decided to exclude domestic private investors from its regular open market operations (OMO), resulting in a narrowing of yields on treasury instruments for retail investors. Local investors facing lower treasury yields will likely look for alternative opportunities for their surplus funds. The flattening of treasury yields may imply that the local stock market (the NSE) will begin to pick up modestly in the new year as investors decide on a bargain hunting for stocks with strong early growth potentials (in 2019 the NSE All Shares Index slipped by  -15.95%).
The +50% rise in value-added tax (VAT) from 5% in 2019 to 7.5% in 2020 would help in closing the budget deficit and the revision upwards of energy costs would equally encourage more investment in the energy sector and improve power supply, thereby promoting the growth of industries.  The large elephant in the room left unaddressed is the removal of petroleum subsidy in the year. Many economists believe that the removal of subsidy on the sale of local premium motor spirit (petrol or PMS) would release the money to finance priority infrastructures such as roads, schools and healthcare facilities. The federal government has been wary about the recommendation against its assessment of the wider social and economic implications for socially vulnerable members of society. Analysts have, however, argued that in addition to the removal of petrol subsidy, all levels of government should reduce their recurrent expenditures to create wider room for the capital sides of their annual fiscal plans. The reduction in recurrent government expenditure is unlikely to happen in 2020 as the government remains concerned about the socioeconomic impact of public sector cutbacks.  


Chart 4 Brent Crude Oil Price and Budget 2019

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Looking Into 2020

Analysts' general outlook for 2020 remains conflicted, ranging from optimistic to pessimistic and neutral. United Capital Limited (UCL) analysts, however, see the year 2020 outcomes coloured by a gradual recovery of GDP growth (+2.3%) and persistence in inflationary pressure (headline inflation to average +11.9%). Other perspectives include the following:

  • Benchmark interest rate (MPR) will remain unchanged or reduced marginally (MPR is currently 13.5%). The CBN's first-rate reduction in three years took place in Q1 2019 after the rate remained frozen at 14% since Q3 2016 (see chart 4 below).

Chart 4 CBN's Monetary Policy Rate (MPR) 2014-2019

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Source: CBN

  • CBN will sustain policy heterodoxy. The implication is that the CBN will continue to attempt spurring growth through direct monetary intervention in what it perceives as strategic sectors and the monetary regulator would likely sustain a policy of multiple exchange rates and selective interest rate subsidies.

  • There is the possibility of the harmonization of the official exchange rate of N306/US$ and the IEFX rate of N360/US$. The outlook for the exchange rate is stable in the near term and projected towards harmonization in the medium to long term.

  • Capital flows will not see a major change. The CBN will continue its OMO operations by selling treasury securities to foreign portfolio investors (FPIs) to support foreign reserves. The approach to reserve stabilization may keep FPIs locked in treasury instruments in preference to the domestic equity market.

  • CBN's policy heterodoxy is the strongest policy action to watch in the year.

In a 2020 preview report titled "Nigeria Outlook 2020: A Different Playing Field", analysts at UCL note that "our outlook for stocks in 2020 is anchored on developments in the domestic and global economy with monetary policy as the biggest factor to watch. From all indications, the only justification for an uptick in the equities market is the lower yield environment, supported by increased local currency liquidity."

"However, this will not be enough to trigger a major rally in the absence of the demand from FPIs. Overall, our base case scenario sees equities market return at +5.3% in 2020, driven by local demand for high-quality dividend-paying stocks and increased system liquidity", United Capital analysts conclude.

The market specialists at UCL further noted that "a quick sequence of monetary policy actions, particularly those relating to sales of CBN's OMO bills announced since July 2019, changed the dynamics in the Nigerian financial market in H2 2019. While the currency market remained broadly stable, supported largely by the CBN's sustained FX intervention, the equities market tumbled -14.6% year-on-year (Y-o-Y). Also, the average yield in the fixed income market moderated from 14.5% in December 2018 to 9.7% in December 2019". The lower yields in the fixed income market drove local investors in search of alternative returns elsewhere, but whether the local stock market will provide refuge is uncertain.

The analysts note that 2020 will be a different playing field for capital market operators. According to UCL's market monitors, "The fixed income market will be a corporate/ private issuer market due to the buoyant level of liquidity and the low yield environment. Yields on FGN T-bills will stay in the mid-to-high single-digit levels and Bonds yields at low double-digit levels, especially in H1 2020.  Hence, interest in riskier assets, mostly corporate papers, will increase. The rate on OMO bills (solely for FPIs and Banks) are unlikely to witness significant changes, as the CBN continues to deploy its set of unconventional policy tools to attract FPIs and limit an impending dollar outflow in Q1 2020 while preserving the stock of reserves above the $30.0bn threshold. Overall, we expect the sovereign yield curve to remain normal in H1 2020. However, this may reverse to a hump-shaped curve from Q3 2020."

In other words, analysts expect short term market yields to be lower than longer-term yields in the very short term, but by the third quarter of the year, the long-term yields will turn lower than short term yields as investors become increasingly circumspect of economic stability and forward inflation rates.


The Year 2020 and Ides of Imponderables

In a breakfast meeting at the Lagos Business School, analysts at Financial Derivatives Company (FDC) gave a few insights into likely developments in 2020, which they confessed involved "imponderables." The analysts noted the following:

  • Cost reflective electricity tariff likely to increase production cost in H2 2020. The increase would incentivize investment in the power sector.
  • GDP growth will remain unchanged at around +2% (below potential growth of +3.1%).
  • Trade protectionism will limit economic expansion in 2020 (the consequence of land border closure and possible retaliation by neighbours and trading partners).
  • Improved credit conditions (higher CBN-imposed loan to deposit (LDR) ratios of domestic money banks (DMBs) could lead to manufacturing sector expansion.

Cost-push worries

Costs in 2020 may rise higher as the following factors could raise prices:

  • Supply bottlenecks as a result of land border closure, foreign exchange restriction and infrastructural deficits.
  • Increase in VAT could be passed on to consumers, thereby, reducing disposable income

Demand-Pull Troubles

  • As States struggle to pay the new minimum wage of N30,000 per month, the problem of "money illusion" or the notion of imaginary incremental wealth could lead to workers going on short-lived spending sprees resulting in added pressure on domestic retail prices.

FX Headaches

  • Analysts at FDC believe that the foreign exchange rate may depreciate within the year to N375/US$ from the recent N360/US$, but this will depend on international oil prices, as long as oil prices stay around US$60 per barrel, the CBN would have adequate leg room to intervene and stabilize the market, whether this is a wise choice is a different discussion.
  • The multiple exchange rate adopted by the CBN over the past five years will likely remain
  • The CBN may hold onto heterodoxy and try to keep the naira exchange rate at a relatively fixed value in 2020 as it did in 2019

Money Market Meekness

  • Investors may see lower yields in 2020 relative to 2019, yields have already dropped by 400 basis points
  • The equities and foreign exchange markets may absorb the excess liquidity in search of better than risk-free returns on government treasuries


Policy Outlook 2020: When More is Less


  • Rising inflation and falling external reserves will compel the CBN to keep MPR at recent levels (see illustration 1 below for CBN's policy dilemma)
  • CBN may only cut rates when inflation falls below its targeted upper limit of +9%
  • Heterodoxy will stay for as long as the CBN can continue to use foreign reserves to fix the exchange rate at present rates while it tries to sustain GDP growth at a rate higher than the recent Q3 rate of +2.28%
  • CBN may impose further foreign exchange restrictions to keep the exchange rate at the current numbers

Illustration 1 Central Bank of Nigeria's 2020 Policy Dilemma

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  • Efforts at tax collection will intensify as the government works towards funding the 2020 budget without worsening the country's debt service ratio and budget deficit as a proportion of GDP
  • Oil revenues in 2020 will remain uncertain with falling prices (if the Iraq-US conflict does not persist) and OPEC production quotas become more stringently enforced
  • FDC analysts believe that subsidies will persist, thereby limiting the potential for revenue generation and recommitment of federal funds to capital projects
  • Inflationary pressures may lead to a strong political backlash in the year

FDC analysts in their 2019 Review and 2020 Outlook believe the following possible outcomes are likely in 2020;

  • 2020 will be better than 2019, with stronger perception if not performance
  • Investor confidence will rise
  • Yields on fixed income instruments will be flatter in 2020 than 2019
  • Higher revenue and tax collection in the year 2020, thereby potentially narrowing the budget deficit
  • Potential increase borrowing to meet the revenue shortfall
  • Supplementary budget expected in Q2
  • Sustained interventionist policy
  • Possibility of further forex restrictions
  • Interest rates will increase in Q2
  • Real estate activity likely to remain depressed (vacancy rates at 24%)


Pondering the Imponderables

The year 2020 throws up a variety of outcomes equally likely but with major drivers being external shocks from developments in the international crude oil market and internal fiscal policy orientation. Fiscal policy will depend on the government's boldness and determination. Boldness would be required to remove subsidy on domestic sale of petrol or PMS and determination is needed to cut back the excessive recurrent fiscal spending of government ministries, departments and agencies (MDAs).

The federal government will equally need to decide to sell off idle assets that would best be managed by private entrepreneurs based on experience, competence and ability to raise the full purchase price within the stipulated Offer period. The government needs to optimize its operations by creating liquidity and reinvesting cash in capital projects that are self-sustaining and self-financing. Road and hospital projects, in particular, would low be hanging fruits for investing the proceeds of privatization.

Throwing money at small and medium-sized enterprises (SMEs) is not going to be a sustainable way of creating wealth and generating inclusive growth in the new year, the best place to start would be to concentrate on massive infrastructure development involving roads, rail and sea transportation. In the area of air transportation, the government should concern itself with supporting private sector construction and management of a world-class maintenance, repair and overhaul (MRO) facility rather than getting snared by running an airline or airlines. Arik and Aerocontractor should both be sold off by the debt resolution company of the CBN, the Asset Management Company of Nigeria (AMCON).

If the government of President Muhammadu Buhari is to fulfill or betray its destiny, in 2020, it would have to make hard, intelligent and far-reaching decisions and take decisive actions regardless of their popularity, or lack thereof. Populism has its place but not in the management of an economy that would have to cater to 300m people in the next two decades.

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