What next for Nigeria’s economy? Nigerian Economy Facts – Navigating the rocky road ahead

What next for Nigeria’s economy? Nigerian Economy Facts – Navigating the rocky road ahead

Nigeria in the eye of the Storm For net oil exporters like Nigeria, then fall in oil price by 60% in 2015 had far reaching impact on the economy with government revenue declining rapidly,

foreign investors exiting the domestic market and the Naira value coming under pressure.

Importance of oil to Nigeria Oil as is common knowledge, is Nigeria’s main source of foreign exchange earnings and government financing, (See Figure 1). The impact of the oil price drop on the economy has led to downward adjustments of growth expectations for the country by

the World Bank who in June 2016 said Nigeria would grow at 0.8% this year, down from an estimate of 4.6 it made in January. This the bank said is owing to weakness resulting from oil output disruptions and low prices. More so, Nigeria’s economy contracted for the first time since 2004 in Q1 2016 with indications that a recession is imminent after a four-month delay in the nation’s budget, stalled economic stimulus programs in addition to foreign-exchange restrictions, fuel shortages and a plunge in oil production following renewed militancy in the oil rich Niger Delta. The federal government on Wednesday 13 June 2016 said its earnings had declined by 40 per cent as a result  response right matters a lot as the situation imposes a real ‘human’ cost on the population. On the other hand, businesses must react and adjust in the right way in order to be able to weather the storm. More so, our World In 2050 analysis, expects GDP per capita to hit $10,000 in Nigeria in 2030 – just a one percentage point slower growth rate per year would see this development threshold delayed by almost a decade, to 2038.

The possible scenarios and Outcomes : We explored two types of shocks in the May 2015 Economy watch report: an oil price shock and a political shock. The first scenario looks at

oil price averaging $55/bbl over 2015 and stabilising at $70/bbl in 2016 with a smooth transition and maintenance of political stability in the country. Scenario 2, envisaged the re-emergence of Iran oil production in Q2 of 2015 which could drive oil prices to as low as $35/bbl and reaching a

new equilibrium level of $60/bbl in 2016 consistent with the most bearish forecasts from analysis. The third scenario follows a similar pattern as scenario 2 with oil prices averaging $45/bbl in 2016 in addition to severe political or security shock arising from

escalation of Boko Haram insurgency and/or resurgence of restiveness in the Niger Delta.

The result of our study indicated that while the economy will continue to struggle even under the most optimistic scenario, there will continue to be growth in the economy even if oil

prices fall to $35/bbl and average just $45/bbl in 2015. However, we expect that a deterioration of the political and security landscape could unnerve investors and tip the country into

recession. If a ‘medium’ political shock occurs against the backdrop of a severe oil price scenario, Nigeria’s economy could see zero growth or even contract in 2015 and again in 2016. Gross government oil revenues will fall dramatically from their 2013

level: by $21bn alone in Scenario 1 (equivalent to a 50% decline) if recent oil production trends continue. This financing hole could widen to $10bn in Scenario 2, where significant

debt issuance and cuts to recurrent expenditure will be needed. State governments could struggle to borrow on financial markets or pay their workers. Some highly-indebted states may miss planned interest payments on their debt.

In scenario 3, we assumed that oil production would fall by 15% through bunkering and other supply disruptions. Gross oil revenues would fall to a third of their 2013 level. Combined with difficulties administering tax collection from unstable parts of the country, we would expect the federal government to fall over three months behind on paying employee wages and government bond yields on US$-debt could approach 20%. The effect on the exchange rate and inflation in our report was also telling.

If the oil price continued to stabilise, the CBN’s November 2014 adjustment of the exchange rate regime was going to be sufficient to ease pressure on the Naira in 2015. If oil prices deteriorated

further however, we expected that a further 10% devaluation of the Naira  will be necessary in 2015. Inflation the report stated was likely to accelerate as the Naira depreciated given Nigeria’s

heavy reliance on imports. While it was expected that some of this inflationary pressure will be offset by falling domestic fuel prices and lower rates of GDP growth, we expected inflation to be at least 3 percentage points higher than in 2014.

The impending recession indicates a manifestation of the worst case scenario in our projections (scenario 3) and requires proactive response by both policy makers in their fiscal and monetary response as well as business leaders especially in the financial services sector.

The content was pulled from PWC. To get the full document , click here .