NCM2020 (6) - Nigeria's Fiscal Deficit is Projected to Widen to 4% of GDP

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Sunday, January 26, 2020 / 06:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics

 

Domestic Macroeconomic Review and Outlook

The year 2019 began with uncertainty concerning the direction of the Nigerian economy. Early in the year there was a keenly contested election between two main candidates who had different economic philosophies on how to run an economy.  President Muhammadu Buhari's policies were more statist and market-protectionist, but he was able to defeat his closest rival, Alhaji Atiku Abubakar, whose economic orientation was more market-based.

 

The economy saw an improvement in its growth rate in Q3, 2019, to +2.28%. Despite the growth rate in the economy, there were still concerns about the ineffectiveness of the real GDP growth impact on the economy, as the GDP growth rate was below the average population growth rate of +2.6%. The economy witnessed a rise in agriculture contribution to the GDP from 21.89% of Q1, 2019 to 29.25% of Q3, 2019; while there was a fall in the contribution of industries and services from 23.56% and 54.55% in Q1, 2019 to 22.17% and 48.59% Q3, 2019 respectively. There was a fall in non-oil sector contribution to the GDP from 90.78% in Q1, 2019 to 90.23% in Q3, 2019, while oil sector contribution increased from 9.22% to 9.77% Q3, 2019.

 

The inflation rate from January to November ranged between +11.0% and +11.85%. The recent rise in the inflation rate to +11.85% resulted from the closure of the country's land borders and forex exchange restriction on some commodity imports. The central bank has said that Community development initiatives would help combat the rise in inflation and serve as a cushion to the adverse effect of the closures of borders.  The community development initiatives were designed to finance the agricultural value chain of ten ((10) commodities, namely; Cassava, Cocoa, Cotton, Rice, Tomato, Poultry, Livestock and Dairy, Fish, Oil Palm and Maize, which has received N171.66bn in funding. Four of these crops received over N140.12bn or 81.6% of total disbursements (Cassava, N11.44bn; Cotton, N40.47bn; Rice, N53.40 bn; Oil palm, N34.81bn).

 

The country's unemployment rate is significant, with a gap between the high population growth rate and the low rate of job creation widening. The rise in the rates of unemployment and underemployment has contributed to the expansion of the informal sector in Nigeria.

 

To expand credit and spur growth in the real sector, the CBN issued directives to deposit money banks to increase the loan-to-deposit ratio (LDR) to 65% by December 31st, 2019. 

Although, with good intentions, the minimum loan-to-deposit ratio (LDR) could lead banks to approve loans that expose them to more risky credits, undermining the quality of their loan portfolios.

 

Nigeria's dependence on oil is still worrisome; the economy still relies heavily on the revenues from oil export to fund its economic activities. The high oil dependency makes the economy vulnerable to negative shocks that arise from an oil price change.

 

There was a rise in Nigeria's fiscal deficit from -1.8% of GDP in H1, 2018 to -2.1% of H1, 2019; the increase in the deficit, mainly financed by the central bank, was linked to lower oil and independent revenues and higher capital spending around elections. The increase in fiscal deficit has reduced the funds available to state governments. With the increase in the minimum wage from N18.000 to N30, 000, the burdens of the federal and state government is expected to worsen.

 

 Table 1: Economic Indicators 

Economic Indicators in 2019

Indicators

Beginning of 2019

Current

Unit

GDP

2.1

2.28

Percent

Inflation

11.61

11.85

Percent

MPR

14

13.5

Percent

Import

7,711,105.91

13,165,127.35

NGN bn

Export

18,532,039.98

9,131,503.82

NGN bn

Foreign Reserves

43116863593

39803153019

USD bn

Debt to GDP

21.30 

NA

Percent

Exchange Rate

306.15

306.95

Naira

Unemployment Rate

23.1

Nil

Percent

CRR

22.5

22.5

Percent

NSE ASI

31,430.50

26,990.59

Basis Points

PMI

60.8

59.3

Basis Points

Source: CBN, NSE, Trading Economics, NBS


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outlook

Projections for the Nigerian economy would be affected by the following factors;

  • The slowdown in global growth and demand.
  • A slowdown in the growth in the Euro Area as a destination for Nigerian exports.
  • Trade pressures, the tension between U.S and China which has reduced their growth projections
  • Geo-political tensions in the middle-east.

 

Projections

  • The World Bank projects Nigeria's real GDP to grow by +2.0% in 2019 and at about +2.1% in 2021. The population growth rate is expected to exceed GDP growth, dampening the effect of any poverty reduction strategy.
  • Agricultural labour productivity is expected to stagnate, failing to improve the living standards of the 40 million Nigerians it employs would be precarious.
  • Manufacturing growth outlook seems positive as the food and beverage sector slowly expands in response to the policy drive to develop domestic industries but likely to be hindered by access to a constant power supply.
  • Oil production is projected to remain around 2mbd in the medium term.
  • External balance is projected to be vulnerable to both external shocks and domestic policy decisions.
  • The fiscal deficit is projected to widen to nearly 4% of GDP.
  • Nigeria’s stock of public debt and the related interest payments are projected to rise.

 

Nigeria: Opportunities and Threats from Moody's Report

Moody's Investors Service changed the outlook on the government of Nigeria's ratings to negative from stable. Concurrently, Moody's has affirmed the B2 long-term local and foreign currency issuer ratings, the B2 foreign currency senior unsecured ratings, and the (P)B2 foreign currency senior unsecured MTN programme rating.

 

Threats

  • Weakening fiscal strength as a result of rising debt burden and persistent sluggish economic growth.
  • Weakening external position caused by adverse change in capital flows as a result of increasing reliance on foreign investors to fund the country's foreign reserves.


Opportunities

  • Vast natural resources, large and diversifies economy supported by vast oil and gas endowments.


Real GDP Growth Rate (%)

 

2017

2018

2019 (Forecast)

2020 (Forecast)

Sub-Saharan Africa 

2.7

2.6

2.4

2.9

Nigeria

0.8 1

1.9

2.0

2.1

South Africa

1.4

0.8

0.4

0.9

Angola

-0.1  

-1.2

-0.7

1.5

Source: World Bank

 

Do feel free to share your opinions/observations and feedback with us vide content@proshareng.com and/or research@proshareng.com

 

Proshare Nigeria Pvt. Ltd.

 

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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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