Economic structure – The primary sector remains the base of the Nigerian economy as agriculture provides the main source of livelihood for most Nigerians. According to the Food and Agricultural Organisation (FAO), Nigeria is the continent’s larger producer and consumer of rice, with this crop generating more income for Nigerian farmers than any other cash crop in the country. The secondary sector produces the oil that Nigeria is known for: it is the largest crude producer on the continent and holds reserves of 37 billion barrels. Oil production generates around 95% of export revenues and around 70% of government revenue. The country’s largest manufacturers produce cement, food products and consumer and household goods. The tertiary sector has big retail, transport, telecommunications and finance components. The continent’s most populous nation has seen robust growth in mobile communication as competition and regulatory measures lowered prices in the mobile sector. Retail spending is under pressure at present from high inflation and unemployment.
Economic growth – Nigeria will return to positive real GDP growth in 2017 following slower growth in 2015 and a contraction in 2016. The sluggish growth is mainly attributed to the inadequate supply of foreign exchange, foreign currency restrictions targeted at a list of 41 imports, cuts to oil production due to security challenges in the Niger Delta and the impact of lower oil prices on employment in the hydrocarbon sector. Furthermore, lower oil prices and disruptions to local production hurt the oil sector, on which Nigeria relies heavily. The oil price fell from an average of $99.50/bbl in 2014 to $56.30/bbl in 2015 and $41.10/bbl in 2016. The forecast improvement in economic growth in 2017 is still far from the growth previously seen in Nigeria.
Foreign investment – The National Bureau of Statistics (NBS) reported recently that total foreign investment inflows dipped by $4.52 billion (47%) to $5.12 billion in 2016 – the lowest in nine years. The NBS declared that foreign direct investment (FDI) declined by a less severe 28% as direct investors often take the long-term outlook into account. This means that Nigeria’s recession and currency problems may carry less weight in FDI investment decisions. According to BMI, the value of FDI relative to the size of the Nigerian economy remains low and the country’s acute energy, security, and foreign currency liquidity challenges could lead to a significant slowdown in FDI inflows over the medium term.
External trade – Nigeria has traditionally recorded a current account surplus that relied on its strong oil export revenues. The current account surplus averaged 8% of GDP in the decade ending 2014. Following the oil price collapse in the second half of 2014, the current account was in a deficit in 2015 for the first time since 2002. The macroeconomic challenges in Nigeria lead to some controversial policy responses where the government decided to maintain the exchange rate peg and impose capital controls – the associated sovereign ratings downgrade caused the delisting of Nigeria’s bonds on JP Morgan’s Government Bond Index Emerging Markets in 2016. The current account position will improve only slightly in 2017, remaining in low positive figures as oil revenues start to normalise.
Fiscal policy – Nigeria’s fiscal balance changed from a surplus in 2012 to a deficit in 2013, from where it continued on a downward trajectory. However, the deficit is expected to reach a turning point at 5.5% of GDP in 2017. Further devaluation of the naira is essential for a return in foreign investment – yet monetary policy will determine whether this will take place. As both oil prices and production rise, the government will be able to use fiscal stimulus to help the economy recover. Because of this, implementing an expansionary budget in 2017 would have a larger impact than in 2016. Fiscal policy will play and increasingly powerful role in growth recovery in Nigeria form 2017 onwards.
Monetary policy – Headline inflation decreased from 17.8% y-o-y in February to 17.3% y-o-y in March. The expectation is that the CBN is expected to maintain its interest rate at 14% throughout the rest of 2017: government pressure to support growth will prevent an interest rate hike. In March, the central bank’s Monetary Policy Committee (MPC) held rates constant for the fourth consecutive meeting – showing renewed consistency in its approach compared to previous years. Finance minister Kemi Odeosun has publicly called for lower rates that will stimulate the economy and make government borrowing cheaper, but the CBN has publicly resulted this and we do not expect this to change as long as inflation remains at current high levels. High inflation will therefore prevent a rate cut in 2017.