• Nigeria is exiting recession but GDP growth is projected to remain low and flat
  • Increased oil prices and production boost current account receipts
  • New policies enhanced hard currency availability but transfer and import restrictions continue to cause disruptions
  • Banking vulnerabilities are on the rise
  • Public finances deteriorated, marked by very low revenue collection
  • Security risks remain multiple and could derail progress

Since 2014, Nigeria’s economy was severely affected by historically low oil revenues, political uncertainty and security issues. The subsequent delayed or counterproductive implementation of reforms (like foreign exchange restrictions) worsened investor confidence, leading to capital outflows and higher borrowing costs. Since 2017, Nigeria has been gradually exiting recession supported by new policies and higher oil prices (anticipated to average around USD 62 per barrel in 2018). Nonetheless, GDP growth projections for the coming years remain flat and restrained to around 2%. Also the inflation rate remains high and is expected to continue to balance around 14% despite a tighter monetary policy. Nigeria’s current account displays a small surplus; yet the external balance of payments tends to be in deficit due to a deeply negative capital account. Despite the sharp 2016 devaluation, Nigeria’s Central Bank eventually did not allow for the naira to float freely. As a result, there continues to be a gap between the official and parallel exchange rate, although the value of the naira did stabilise somewhat.

The level of foreign exchange reserves held at the Central Bank of Nigeria started to accumulate again in 2017 after reaching its absolute lowest point in October 2016. In fact, at the end of 2017 reserves reached over USD 40 billion again, good for more than 7 months of import cover. The inflow of hard currency increased thanks to improved oil export revenues and better access to international capital markets as foreign investors flocked toward government securities, leading to a record performance of the Nigerian stock market. As a result of these large capital inflows, the external balance of payments is expected to be in (a temporary) surplus in 2017 and 2018 for the first time since 2012. Moreover, the Central Bank provided windows for buying foreign exchange which enhanced the availability of hard currency in the Nigerian market. However, concerns and challenges remain. First of all, capital controls and Central Bank interventions continue to obstruct transfers (although this improved thanks to the windows). Secondly, import restrictions on a significant number of goods still cause disruptions and supply shortages. Banking vulnerabilities are also on the rise which, together with the exchange market distortions, hinder attracting long-run investments in Nigeria’s non-oil economy. Large infrastructure gaps, corruption, security concerns and humanitarian emergencies (in the north-east) are other factors that keep investments below their potential.

Public finances have noticeably weakened since 2015 and the low government revenue collection in particular is an important concern. As a result of lower oil earnings, a limited non-oil tax base and weak institutional capacity, government revenues hardly reached 6% of GDP in 2017 creating important fiscal pressure and a heavy debt-servicing burden. The balances of local governments are especially weak, marked by delayed salary payments and arrears to contractors. The public-debt stock augmented rather fast, dominated by borrowing on the domestic market. Yet, thanks to the low starting point, total public debt only reached 22% of GDP in 2017. Also Nigeria’s total external debt (private and public) reached merely 14% of GDP in 2017, coming from 6% in 2013, as the need for external debt issuance was limited before the historic drop in oil prices.

On the political and security side, risks and uncertainties are multiple: the 2019 presidential election run-up could initiate a period of ambiguity, resuming Niger Delta pipeline attacks are a threat, the pastoralist conflict in the Middle Belt has been intensifying and Boko Haram still destabilises the north-east of the country. These important vulnerabilities could derail recent progress. Therefore, Credendo’s medium- to long-term political risk classifiation is stable in catergory 6, while the short-term political risk is under a positive outlook.

Analyst: Louise Van Cauwenbergh - l.vancauwenbergh@credendo.com