Slow Growth Unsettles Nigeria’s Economic Recovery Expectation
Slow growth reported in the last two quarters unsettle Nigeria’s economic recovery expectation as the market awaits the release of the second quarter gross domestic (GDP) report on 26th August from the National Bureau of Statistics.
Federal Government spent more than the sovereign revenue in the first half of 2021, augmented by local borrowings following low accretion from the oil segment despite rally. However, the strong debt to revenue ratio pressure government finances due to increased debt servicing costs.
Close to 100% of revenue generated were used to service total public debts, according to data from various government agencies, the debt management office and the budget office which showed revenue dropped 45% below expectation in the first five months of the year.
‘For now, the government lacks strategic policies that can reflate the performance of the economy. All eyes are on the oil market rally which could be threatened by the rising cases of delta variant of covid-19 currently spreading in China, Japan with lockdowns across the world’, says an economist who prefers not to be mentioned.
Despite a 2.5% GDP growth projection by the International Monetary Fund, Nigeria is more likely to experience weak, fragile economic recovery in 2021, according to analysts’ reports. Recall in the first quarter, economic growth came weak at 0.51 per cent, after about a 2 per cent GDP drop in the pandemic year 2020.
A slew of analysts think base effects from a negative position in a similar period will bear upon the second quarter, however, it is unlikely to see a strong recovery amidst fiscal slippage and ballooning debt raising activities in the largest economy in Africa.
In a report, Fitch Solutions revealed the expectation that Nigeria will experience a weak and fragile economic recovery, and forecast real GDP growth of 1.8% in 2021 – well below the forecast average of 3.1% for Sub-Saharan Africa.
The firm anchored its projection on GDP data for Q1-2021 support which showed that the real GDP growth accelerated slightly to 0.5% year on year in Q1-2021 from 0.11% in Q4-2020.
This means the economy registered a second consecutive quarter of expansion after experiencing a technical recession in Q2-2020 and Q3-2020 when real GDP contracted by a respective 6.1% and 3.6% amid the first wave of the Covid-19 pandemic.
Purchasing Managers’ Index (PMI) data indicate that the economic expansion continued in early Q2-2021, with Nigeria’s April PMI score coming in at 52.9 above 50% benchmark, which indicates improving conditions, though the same level as March.
However, analysts noted that the weak private consumption will weigh on the economic recovery and add 1.0 percentage points to real GDP growth.
“We anticipate private consumption (around 80.0% of GDP) growing by just 1.2% in 2021 due to real incomes remaining under pressure as a result of high inflation and low confidence caused by the slow vaccine rollout.
Analysts at Fitch Solutions forecast average price growth of 14.6% in 2021, up from 13.2% in 2020.
As of late May, just 0.9% of the 200 million-strong population had been vaccinated, and although analysts expressed the view that the programme will gather pace in the second half of 2021, it is highly unlikely that the government will meet its target of inoculating 40.0% of the population by end-2021.
Consequently, Fitch Solutions pencilled that some moderate social distancing measures are likely to remain in place in the coming months, which together with persistently high unemployment will limit the scope for a more robust rebound in household spending this year.
More than 33% of Nigeria’s labour face were jobless in the latter part of 2020, according to the National Bureau of Statistics. Unfortunately, youths accounted for a larger chunk of the unemployed category amidst steep inflation driven by food prices.
Meanwhile, Fitch Solutions said in the report that investment, government consumption and net exports will all make small but positive contributions to headline growth in 2021.
Federal Government has increased fiscal spending to more than N13 trillion despite fiscal slippage in the first five months of 2021. After lawmakers approval of its supplementary budget, the deficit widened while borrowing is expected to increase to about N6 trillion.
Slow Growth Unsettles Nigeria’s Economic Recovery Expectation
Analysts however observed modest progress on reforms, including recent measures to simplify the foreign exchange regime, hoping to provide tailwinds for fixed investment, which Fitch expects to add 0.3 percentage points to real GDP growth, after subtracting 1.2 percentage points in 2020.
Although the government plans to ramp up expenditure to support the economic recovery, analysts at Fitch Solutions maintained that the impact on growth will be modest given that government consumption constitutes just 7.5% of GDP, and as a result, it will also add just 0.3pp to real GDP growth.
It is also expected that net exports, after subtracting 2.6 percentage points from headline growth in 2020, will contribute 0.1 percentage points as the oil sector recovers while imports remain weak due to subdued domestic demand.
Growth to Accelerate in 2022
Analysts at Fitch Solutions project real GDP growth to accelerate to 2.7% in 2022 on the back of stronger private consumption spurred by the rollout of Covid-19 vaccines.
“Although the government is likely to continue to miss its vaccination targets, a sufficient proportion of the population is likely to be inoculated in 2022 to allow the authorities to remove most social distancing measures”.
This will contribute to an uptick in private consumption as labour market conditions and consumer confidence improve amid a broader normalisation of business activity, the report added.
Further progress on reforms, notably, the Petroleum Industry Bill, which seeks to increase private sector participation in the hydrocarbons sector will support stronger growth in private investment, while still buoyant global oil prices and rising oil production will support exports.
“If the global vaccine rollout slows sharply – or new Covid-19 variants emerge that are resistant to the current crop of vaccines – global growth would be weaker than we currently forecast (5.6%), posing headwinds to Nigeria’s exports and foreign investment.
Read Also: Nigeria’s PMI Signals Slow Path to Economic Recovery
“Similarly, if the domestic vaccine rollout fails to gather momentum in the second half of 2021, Nigeria could see moderate social distancing measures remain in place well into 2022, hampering the consumption-led recovery”, the report reads.
Slow Growth Unsettles Nigeria’s Economic Recovery Expectation
