Kunle Aderemi

With Britain’s imminent exit from the European Union and the highly anticipated chaos this will cause a lot of SMEs and other businesses, it is imperative that businesses make plans on where to go next for partnerships — and it will pay to keep Africa on their radar, in particular the strengthening economy in Nigeria.

The oil price shock from mid-2014 severely affected the Nigerian economy. In 2015 it slowed sharply, as annual real GDP growth declined from 6.2 per cent the previous year to just 2.7 per cent. By 2016, Nigeria recorded its first recession since 1991, with a 1.5 per cent decline as oil production shortages exacerbated drop in oil prices. Notably, underperformance in the oil sector spilt over to the rest of the economy.

By second quarter of 2017, however, the Nigerian economy had exited its recession, recording 0.5 per cent growth. This recovery was in part due to a sharp revival of the oil sector, driven by an improvement in prices and production volumes. Beyond that was an ongoing recovery in the manufacturing sector due to improved foreign exchange liquidity. Aside from the improvement in real GDP, the performance across several other macro-indicators suggest that the economy is on track for a broad-based recovery.

I have developed three scenarios that show Nigeria’s potential economic performance over the next five years. In these scenarios, assuming that oil continues to be the main driver, we will examine the impact of political shocks and the implementation of structural reforms and economic diversification on key economic indicators.

In the first scenario, the oil price increases from an estimated average of $55 per barrel in 2017 to $60/bbl in 2018 and remains at this level to 2022. Between 2018 and 2019, the supply of oil moderates due to OPEC production cut agreements, while the demand for oil increases mildly in line with the global growth recovery. On the other hand, between 2020 and 2022 the demand for oil weakens as advanced economies gradually move to greener sources of energy, and investment in oil production slows. Towards the end of the forecast period and beyond, the global oil market rebalances.

Domestic oil production rises to 2.0 mbpd in 2018, and increases further to 2.2 mbpd by 2019, remaining at this level through to 2022, with minimal production disruptions in the Niger Delta region.

Meanwhile, growth increases steadily from 0.7 per cent in 2017 to trend at seven per cent in 2022. There is stability in oil exports and tax reforms being improvement in non-oil revenues. The fiscal deficit narrows and the pace of borrowing slows, providing headroom for significant rate cuts. The economy records a consistent and growing current account surplus, driven by a significant reduction in imports between 2019 and 2020 as the government’s import substitution policies yield results. However, between 2021 and 2022 imports pick up as a result of strong economic growth and increasing per capita income.

Meanwhile, foreign investments return to pre-recession highs, there is improved macroeconomic stability and consistency in policy-making which improves investor confidence, and increased credit to the private sector provides a boost to investments.

In the second scenario, oil prices remain stable at an average of US$60/bbl through the forecast period and domestic oil production remains firm at 2.2 mbpd from 2018, through to 2022. The implementation of structural reforms to improve the business environment, the drive for non-oil revenues and import substitution progress at a sluggish pace.

Economic growth increases marginally to 2 per cent in 2018, and further to an average of 4.3 per cent between 2019 and 2022. Oil export earnings increase, supported by higher oil production and prices. However, initiatives to boost non-oil revenue record only marginal success. And the fiscal deficit remains large, negatively impacting capital expenditure.

The share of investment to GDP rises only slightly to an average of 16 per cent between 2018 and 2022 — below the 26 per cent required for the economy to return to trend. The business environment remains challenging due to the slow pace of reforms, and the lack of a market-driven exchange rate policy puts a lid on investment. As a result, capital inflows remain below pre-recession levels.

The combination of these factors, in addition to a narrowing current account surplus, results in uncertainty and volatility in the foreign exchange market. Although monetary policy is accommodative between 2020 and 2022, domestic investment provides no significant reprieve as banks are cautious in lending to the real sector.

In the third scenario, oil prices remains stable at an average of US$60/bbl through the forecast period, but there is a reduction in oil production to an average of 1.7 mbpd by 2019 due to security challenges in the Niger Delta region. Political tension accelerates in the wake of the 2019 general elections, causing insecurity in the crisis-prone North-East.

Government revenues weaken as oil exports fall, while non-oil revenues suffer a setback due to deteriorating conditions in the broader economy. Consequently, the government records a significant increase in its fiscal deficit and ramps up borrowing. This comes at a high cost in the domestic and external debt market, due to rising risk premium as credit rating agencies downgrade Nigeria’s sovereign bonds in 2019.

Economic growth deteriorates considerably from 1.8% in 2018 to 0% in 2019, but government interventions to quell unrest see growth pick up to 2.3 per cent in 2020, before rising steadily to 4 per cent by 2022.

Households consumption declines by 1.3 per cent in 2019, before recovering to an average growth of four per cent between 2020 and 2022. The share of investment to GDP remains flat at an average of 14 per cent from 2019 through to 2022.

We assume that Nigeria’s economic freedom will weaken to 5.2 points in 2019 (from 5.9 points in 2016), similar to the levels recorded at the beginning of the democratic dispensation between 2000 and 2001. As a result, capital outflows increase, and foreign direct investment weakens to about $4.4bn, around levels recorded during the 2016 recession.

Kunle Aderemi is an Africa-focused FDI expert based in the UK. He can be contacted at info@fodionconsultants.co.uk.