The State of Nigerian Economy and Outlook for H2 2021

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Thursday, September 16, 2021 / 5:40 PM / by Dr Doyin Salami / Header Image Credit: CIBN

 

Nigeria's Real GDP Growth by 5% in Q2 2021

  • Year-on-Year real GDP expanded by 5% in 2021Q2.
  • This was mainly due to the base effect following the implementation of lockdown and restrictions in 2020Q2.
  • The deeper an economy contracted in 2020Q2, the higher it will grow in 2021Q2.
  • In the third and fourth quarters of 2021, the base effect is expected to fade out. Hence, growth will be lower.

 

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...but is the economy really recovering?

  • Typically and especially in a period of recovery, real GDP value in the first quarter is the lowest in the four quarters.
  • Quarter on Quarter real GDP suggests a 0.79% decline in 2021Q2.
  • Issues relating to insecurity and FX are persistent.

 

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Key sectors of the economy showed strong growth in the quarter

  • On a year-on-year basis, the Services sector grew by 9.3% in 2021Q2.
  • The Industrial Sector, which is mainly driven by crude oil, contracted by -1.23%
  • Agricultural sector recorded a growth of 1.30%.
  • Sectors that contracted the most in 2020Q2 (except crude oil) because of the lockdown are those that posted high growth rates in 2021Q2 due to the base effect.

 

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Investment Climate in Nigeria Faces Major Headwinds

  • Total foreign investment inflows into Nigeria remains low.
  • Investment inflows was US$875 million in 2021Q2 - the lowest quarterly inflow since 2016Q1.
  • FDI inflow into Nigeria has revolved around US$1.0 billion in the last five years. FDI inflow in 2021Q2 was US$78 million, even lower than 2020Q2.
  • Key hurdles Nigeria's investment climate include:
    • macroeconomic instability.
    • policy inconsistency.
    •  inadequate infrastructure.
    • insecurity.
    • Tough business climate


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Nigeria's Trade Remains in Despite High Crude Oil Price

  • There was a significant improvement in Nigeria's trade deficit position in 2021Q2. The deficit narrowed to N1.87 trillion.
  • While the value of imports declined by 1.5% yoy, exports value increased by 75%.
  • Crude oil continued to dominate exports, accounting for 80% of total export
  • Notable change in the composition of trade Export Vs. Import - now 42:58 from 30:70 in Q1-2021.
  •  The deficit will narrow further in H2-2021 on the back of improved economic activities, and exchange rate harmonization.

 

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Exchange rate depreciation continues despite increasing CBN's FX interventions

  • The foreign exchange market continues to witness supply shortage to meet its demand. Consequently, the gap between the various markets keeps expanding.
  • From N92 in June to N99 in July as CBN stop sales of forex to BDC operators
  • As of July 2021, interbank and Parallel rates have depreciated by 6.27% and 6.67% year to date.
  • Foreign exchange pressure will continue into H2-2021owing to limited inflows from both crude and non-oil sources, rising imports and a backlog of foreign currency demand.
  • External Reserves trended upwards and currently at US$34.2billionas of September 2 following higher oil prices.
  • Weaker foreign investment inflows, high demand for foreign currency to finance imports and other needs and possible clearance of FX backlogs are factors that continue to weaken External Reserves.

 

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Social resilience weakens as economic fragility amplified

  • Inflation rate stood at 17.38% in July2021 from 16.5% in Jan-2021 and food inflation at 21.03%.
  • Increases in food prices is mainly driven by insecurity
  • Social resilience has deteriorated further with misery index at 51.2% in May-2021 from 49.8% in Jan-2021 and youth unemployment at 45%.
  • World bank estimates that additional 7 million Nigerians have been pushed into poverty in 2020 due to falling purchasing power. This makes the total number of poor people to be 90 million from 82.9 million in 2019.

 

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… States dimension of unemployment rate

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FG Expenditure keeps increasing at a faster pace than revenue

  • From Jan to May 2021, actual fiscal deficit was N3.01 trillion (53.8% of total budgeted deficitfor 2021)
  • While overall expenditure has grown by 102% from N5 trillion to N10.1 trillion between 2015 and 2020, revenue increased by just 15%.
  • This subdued government revenue is as a result of;
    •  constraints around domestic production/investment.
    • Low tax base as tax revenue to GDP still revolvesaround 7%.
    • Limited effort to explore and unlock opportunities for revenue generation at state level - over-centralization.
    • Issues relating to efficiency in revenue collection.

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Public debt continues to expand on the back of growing fiscal deficit

  • Nigeria's public debt stood at N33.1 trillion as at March 2021, according to figures from the DMO.
  • When Ways and Means, AMCON liabilities and projected fiscal deficit for 2021 are considered, total debts is expected to increase to about N54 trillion in 2021.
  • Nigeria's debt/GDP at 35% appears comfortable, however, debt service to revenue at 97.7% (Jan to May 2021) suggests Nigeria's debt is already unsustainable.
  • To improve revenue, we must block leakages, unlock opportunities at state level, improve tax efficiency and coverage, sell-of dead assets, which are estimated at US$900 billion.

 

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Monetary policy maintains status quo

  • Outcome of the MPC meeting held in July-2021
  • The benchmark interest rate (MPR) retained at 11.50%
  • The asymmetric corridor remained at +100/-700 bps around the MPR
  • The cash reserve ratio retained at 27.50%; and
  • The LiquidityRatio retained  at 30.00%

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  • Yields are trending upward across segments of the market
  • Rising yields are driven by the numerous liquidity management strategiesof the CBN to stabilizethe market which include:

  • Introduction ofthe CBN Special Bill;
  • Week on week OMO Auctions;
  • Direct debit on banks' cash balance.
  • As well as expanded government's debt programme
  • Rising yields are expected to push short-term rates higher and attract investment

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Way Forward: 5 action points to rebound the economy for strong growth


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Role of State House of Assembly in improving state competitiveness


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Economic Outlook for H2 2021


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About the Author

Dr Doyin Salami is the Chairman, Presidential Advisory Committee on the Economy

 

Download PDF Version - The State of Nigerian Economy


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