With 200m population surge on $2,000 GDP per head, Market analysts assess Nigeria’s oil and non-oil economic prospects


Nigerians are set to become poorer for the fourth year in a row, with economic growth, estimated by the IMF at 2.3 per cent, undershooting the 2.6 per cent increase in population.

The fund does not see this scenario reversing before 2022, a grim prospect for the 200m people in a country whose gross domestic product per head is a little over $2,000.

Despite lower global prices, the oil sector has made modest progress this year. Production is up thanks to the Egina oilfield coming on line and fewer acts of sabotage by militants in the Niger Delta.

Non-oil growth, however, fell back to just 1.6 per cent year-on-year in the second quarter, held back by a lack of investment.

Few observers foresee any material change in the near-term, with government finances constrained by weak revenues, consumers under pressure and business hampered by restrictions on access to foreign currency.

Indeed, matters could become worse. A proposal to extend the ban on the use of foreign currency reserves to import food could hurt the poor and push up inflation — although Nigeria’s inability to control its borders is likely to limit its effect.

Separately, if Nigeria, an Opec member, was pressured to comply with the cartel’s production quotas, the consequent decline in output could wipe one percentage point off GDP growth, almost halving it, says John Ashbourne, senior emerging markets economist at Capital Economics.

While this scenario is unlikely, talk of a debt default or restructuring in the next few years is increasing as the federal government struggles with an interest bill that soaks up more than half the money it has left after giving funds to the country’s 36 states.

Below, experts from banks, consultancies and think-tanks discuss Nigeria’s challenges.

The Panel:

Cheta Nwanze, head of research, Lagos consultancy SBM Intelligence
Charles Robertson, global chief economist, Renaissance Capital
John Ashbourne, senior emerging markets economist, Capital Economics consultancy
Nonso Obikili, director, Turgot Centre for Economics, Abuja
Yvonne Mhango, sub-Saharan Africa economist, Renaissance Capital investment bank
Amaka Anku, Africa head for the Eurasia Group consultancy
Razia Khan, chief Africa economist, Standard Chartered bank

GDP rise lags behind population growth

Economy specialists assess what needs to be done

John Ashbourne: In the short term, the government needs to abandon its protectionist trade policies and tightly managed currency regime. This would encourage investment and allow for more competition. In the longer term, the government needs to diversify its revenue sources, formalise the non-oil economy and break up large uncompetitive companies that have near-monopolistic powers. The government should also stop subsidising petrol, which is an expensive policy with few benefits. There is, unfortunately, little chance of these things happening quickly.

Amaka Anku: Nigerians have been getting poorer for some time now. That is largely because we have had an uncompetitive and largely unproductive economy [with] poor infrastructure, poor human capital and education and poor welfare. It would be great to see longstanding [infrastructure] projects completed, such as the [Lagos — Kano] railway that has been in the works since the early 2000s.

Cheta Nwanze: Nigeria’s structure needs to change completely. At present it is a unitary state where Abuja holds the levers for the most productive activities and the states are not given a chance to earn revenue independently. This could be remedied if the 68-item exclusive legislative list [which determines federal government powers] was trimmed. For example, the government has no business preventing states from building rail links.

Nonso Obikili: The economy continues to be sluggish. To get back to strong growth, more investment is needed and it is unclear where that will come from. A surge in oil revenue-driven investment is unlikely. Other investments, besides short-term portfolio flows, continue to be hampered by the difficult operating environment and uncertainties in the foreign exchange market. To break out of this trap Nigeria will need to show it is a serious investment destination, for example by enacting legislative-driven reforms to attract capital to infrastructure.

Razia Khan: While GDP growth has disappointed in recent years, largely because of the collapse in the price of oil in 2014 and poor accumulation of savings up to that point, five years on there are signs of a turnround. Oil sector growth saw its strongest momentum for some time in 2019, accelerating to more than 5 per cent year on year. Non-oil GDP has lagged behind but the hope is that better adherence to a tighter budget cycle in 2020, and an initiative to encourage more bank lending, may bring faster economic growth.

Federal finances are in poor shape

Debt load ‘unsustainable’ in a country in ‘fiscal crisis’

John Ashbourne: The debt load is clearly on an unsustainable path. If things continue, we think Nigeria will face some form of debt crisis within five years. Several off-ramps are available, though. One would be to raise federal revenue through improved tax collection. Nigeria has a revenue problem rather than a debt problem. The faster way is if oil goes up to $110 a barrel.

Cheta Nwanze: Nigeria is already in a fiscal crisis. The government’s desperate attempts to raise revenue are proof of this. Recently, Central Bank of Nigeria-backed securities became larger than the actionable portion of the foreign reserves. Nigeria is one drop in the oil price away from default.

Charles Robertson: Fixed income investors tend to take a short-term view on Nigeria’s debt burden, which is not too worrisome. In the long term, if revenue generation cannot be increased, the risks are significant.

Nonso Obikili: Federal finances are in a poor shape. Data for the first half of 2019 show a debt service to actual revenue ratio of 54 per cent, with the budget largely unimplementable due to over-optimistic revenue projections. The plethora of revenue-raising policy proposals will have some effect but are unlikely to increase revenue to the level required.

Amaka Anku: A default is quite unlikely. That said, Nigeria has a revenue crisis. I would not call it a debt crisis since the debt is manageable, even small when compared to the size of the economy. Sure, a revenue crisis can turn into a debt crisis, but Nigeria has always prioritised paying its debt and that is unlikely to change. The greater concern is what happens if debt-service reaches 70-80 per cent of revenue and there is less money for infrastructure and social services, all the things you need to ensure stability in a country that is projected to become the third-most populous in the world.

Razia Khan: Opinion is divided on Nigerian debt sustainability. One view holds that with a low level of public debt to GDP [26 per cent in net terms], Nigeria has a “clean” balance sheet with plenty of scope to borrow more for infrastructure financing. Another focuses on the country’s high debt service-to-revenue ratio at federal level, and sees limited sustainable public finances unless revenue collection accelerates. However, it is noteworthy that China has unveiled several new financing initiatives in the country. This may be evidence that China is looking closely at credit quality and is still comfortable with Nigeria risk.

Inflation rate remains above central bank target

Will a ban on the use of FX reserves to import food lead to shortages and raise prices more?

Cheta Nwanze: A rate of 11 per cent seems to be equilibrium for Nigerian inflation. We believe this represents the limit it can stably reach without structural reforms. The items targeted by bans and border closures have seen their prices rise by about 50 per cent in the past month. The longer it persists, the higher the prices will rise and this will lead to inflation.

John Ashbourne: In theory, a well-enforced ban would push up domestic prices. Imported food makes up 13 per cent of the inflation consumption basket. The government, though, has limited ability to prevent non-compliant food crossing the border. The price effect will depend heavily on government success in disrupting trade in food across porous borders.

Charles Robertson: Countries can live with, and even industrialise, during double-digit inflation — Turkey, Brazil and others are proof of this. It will, however, always lead to currency devaluation. The next devaluation is only a matter of time.

Nonso Obikili: Domestic production of staple foods, such as rice, is still significantly below consumption. Banning food importers from foreign exchange markets, combined with border closures, is likely to push up food prices. This will effect inflation in the coming months. Double-digit and rising inflation is problematic for the central bank because it limits its scope to use monetary policy to boost the sluggish economy. In the medium term it has implications for the de facto fixed exchange-rate regime with the naira diverging even further from the real effective exchange rate.

Amaka Anku: You have to achieve a balance between inflation targeting and growth. Growth will inevitably lead to higher prices, as demand rises. I would be OK with some inflation if it means more growth. Inflation in and of itself is not a bad thing. A ban on the use of FX to import food is neither feasible nor desirable. A blanket ban on perishable items would have no positive impact.

Razia Khan: Inflation is down from the 19 per cent level seen at the height of Nigeria’s post-2014 currency crisis, so even the recent back-up in September inflation needs to be put in perspective. While market participants are comfortable with the primacy given to FX stability in the central bank’s policy mix, the rush to accelerate bank lending, and concern over the extent of the bank’s deficit financing of government, are seen to be risks.

Few of country’s insurgency conflicts are resolved

Are Nigeria’s security problems under control or likely to flare up again?

Cheta Nwanze: The lack of headlines has more to do with censorship and the global media being distracted by events such as Brexit, Trump and the Middle East.

Different conflicts are in different states of flux. Almost 10 per cent of daily oil production for instance, is stolen and many see this as an unofficial tax paid to militants by the government to keep the oil flowing. In the north-east, Boko Haram attacks rise and fall on the back of whether or not the government is on the offensive.

The split in Boko Haram means the Islamic State’s west Africa province faction, which is stronger, controls much of the ungoverned space in Borno and it is on a “hearts and minds” mission, rarely killing civilians and focusing on military formations and taxing economic activity instead.

Charles Robertson: Nigeria achieved considerable success against Boko Haram but vigilance and strong economic growth are required to keep unrest at bay.

Amaka Anku: Militancy in the Niger Delta is a political problem, which makes it the easiest to tackle. I think significant production disruptions are unlikely, given the administration’s continued outreach.

The violence in the north-east and between Muslim herders and Christian farmers in the Middle Belt are much more complicated and ultimately have to do with poor security capabilities and desertification in the north. These problems need sustained co-ordination and money, which Nigeria does not have. They cannot and will not be fixed in the next few years. Overhauling the police service to create an efficient force could take a generation.

Yvonne Mhango: The Nigerian government does appear to have quelled the flare-ups in the north-east, Niger Delta and Middle Belt. However, anaemic growth and the disparity in wealth and opportunity between northern and southern states suggests there is a risk of another flare-up.

Razia Khan: Niger Delta militancy, while always a risk to oil production, appears to have been less of an issue during the recent election period.

Stock market performance remains weak

NSE problems run deep with little sign of recovery

Charles Robertson: Equity investors have been disappointed by low growth and had hoped to see a convergence of exchange rates, rapid reform of the electricity sector and greater efforts to attract foreign direct investment.

John Ashbourne: The poor performance is due to factors including low confidence, low oil prices and falls in bank and telecoms stocks. While the big falls are probably behind us, I expect the market will continue to struggle in 2020. It is difficult to see, in the short term, what could change to boost investors’ confidence in policymaking and growth.

Amaka Anku: The Nigeria Stock Exchange’s problems run deep and are as much about bad corporate governance as larger economic trends. Nigerians have been burnt by stock price manipulation and other deceptive practices by listed companies, so there just is not enough local retail demand for stocks. I don’t think the market will change much in 2020 without an overhaul of corporate governance.

Nonso Obikili: The performance of the NSE is a consequence of pessimism about the economy and the ability of listed firms to deliver profits, and fear of a future foreign exchange crisis. These factors have left many funds only willing to invest in short-term securities which limit their exposure to future currency problems. Those two drivers of the sluggish NSE performance are set to remain at least for the next year unless there is a change in policy direction. In all likelihood the NSE will continue to drift.

Yvonne Mhango: The lack of growth and absence of short-term catalysts has made consumer companies on the NSE unattractive for investors. Banks are unlikely to lend in a weak economy and they are also considered to be exposed to increasing regulatory risks.

Razia Khan: The state of the market is partly due to the weak performance of the economy and partly a concern that efforts to force the pace of bank credit growth will be negative for the financial sector, which still contributes significantly to the capitalisation of the NSE. With improved economic prospects in 2020, starting with the oil and gas sector, some recovery is in sight.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.