By Felix Onuah
ABUJA, Aug 27 – Nigeria might fall into recession in the third quarter, the head of the country’s budget office said on Thursday, citing the impact of low oil prices and the coronavirus pandemic on Africa’s largest economy.
The continent’s top oil producer faces its worst economic crisis in four decades in the wake of an oil price war between Russia and Saudi Arabia at the start of the year, and the pandemic, which hurt demand for its main export commodity which provides 90% of foreign exchange earnings.
Ben Akabueze, director general of the budget office, told reporters it was expected that growth in the third quarter would be negative and the country might fall into recession.
It would be the second quarter of negative growth after the economy contracted by 6% in the second quarter of the year.
Nigeria’s economy was last in recession in 2016, its first in 25 years, since when growth has been sluggish.
The International Monetary Fund has said it sees Nigeria’s GDP falling 5.4% this year, and the government has said the economy may shrink by as much as 8.9%.
Crude contributes less than 10% to Nigeria’s GDP, but it accounts for about 90% of foreign-exchange earnings and half of government revenue. That means the plunge in oil prices in the wake of the coronavirus pandemic, which hit as the economy’s recovery from a 2016 slump was still gaining traction, have emptied coffers.
Still, the drop in output was wider than just crude. The oil sector contracted by 6.6% from a year earlier and the non-oil sector shrank by 6.05%, the first drop in non-oil GDP since the third quarter of 2017.
“The decline was largely attributable to significantly lower levels of both domestic and international economic activity during the quarter, which resulted from nationwide shutdown efforts aimed at containing the Covid-19 pandemic,” the statistics office said.
The outlook for the economy remains fragile. The International Monetary Fund sees Nigerian GDP shrinking 5.4% this year, its biggest contraction in nearly 40 years. Goldman Sachs cut its outlook to a contraction of 5% this year from its previous estimate for a drop of 4.2%. The recovery will be slow with the economy growing just 0.8% next year, the bank said.
“The data show that the domestic effects of lockdown measures in response to the Covid-19 pandemic are significant,” Goldman Sachs economists Dylan Smith and Andrew Matheny said in a research note. “We expect Nigeria’s output slump to be more prolonged than regional peers, owing to its higher reliance on crude oil production” and the central bank’s foreign-exchange policy, they said.
What Bloomberg’s Economist Says
“We expect the economy to contract again in 3Q, but at a slower rate than 2Q. The above target oil production in April-June, though, mean steeper production cuts will be required in August and September in order to reach full OPEC compliance. At the same time, a weaker naira and ongoing foreign-exchange restrictions will continue to weigh on growth in the non-oil sector.”