NIGERIA

Over the past decade, the Nigerian economy registered +4.8% growth on average, which was mainly sustained by the performance of hydrocarbon sector. Yet, it was facing some headwinds already before the Covid-19 crisis, with growth of only +2.3% in 2019. Generally speaking, oil represents 84% of Nigeria’s total exports, 30% of its banking-sector credit and 60% of the overall government revenues. To ensure sustained and less volatile growth, diversifying the economy away from the hydrocarbon  sector remains the main challenge ahead.

The Covid-19 sanitary crisis coupled with the oil price shock severely dampened economic activity also in non-oil sectors. Nigeria's GDP contracted by -6.1% in the second quarter of 2020, the deepest decline in a decade. Together with plummeting oil exports, the Covid-19 crisis caused severe external liquidity stress, reflecting large capital outflows, declining remittance inflows and the freefall of tourism revenues. We expect GDP to contract by -5.3% in 2020, wiping out all the gains from the three consecutive years of growth since the 2016 recession. In 2021, we expect activity to rebound by +2.5% with the support of gradually recovering oil prices and export volumes.  

Poverty remains widespread and high in Nigeria on the back of deteriorating labor market dynamics since the 2016 recession. The World Bank projects the poverty rate to rise to 42.5% in 2020, from 40.1% in 2019. At 27%, the unemployment rate reached a record high level in the second quarter of 2020 (up from 14% in 2016)  while the underemployment rate reached 29%. Declining purchasing power of households since 2016 constitutes a potential source of social unrest. In August, consumer price inflation was 13.3% while food inflation reached 16%.  We expect inflation to remain in double-digit territory for a prolonged period, driven by elevated food prices, high domestic energy prices and highly accommodative monetary policy. The central bank has been persistently missing its inflation target range of 6% over the past few years. The last time Nigeria recorded a single-digit inflation rate was in January 2016 (9.6%). In September 2020, despite high and persistent inflation, the central bank unexpectedly cut its monetary policy rate by 100 basis points (from 12.50% to 11.50%) – the lowest rate since 2016 – in an attempt to boost the economic economy. The central bank had already lowered its interest rate by 100 basis points to 12.5% in May.

Infrastructure inadequacy, segmented foreign exchange markets and excessive central bank financing of government debt has undermined confidence in the economy and discouraged foreign investment over the past few years. In addition, poor governance and endemic corruption continues to create bottlenecks for a private sector-led growth. On a positive note, increasing urbanization together with developing communication infrastructure offer an attractive  market potential. The World Bank Doing Business Index 2020 ranks Nigeria 131th (out of 190 countries), 15 places up since 2019. Nigeria stands out, for the second time, as one of the top 10 countries with the most notable improvements in the areas of starting a business, dealing with construction permits, getting electricity, registering property, trading across borders and enforcing contracts.

The Covid-19 economic fallout has exacerbated persistent sources of social discontent since 2016. In addition, Nigeria is facing some security challenges. The activity of the Islamist terrorist group Boko Haram in the north-east of the country has displaced millions of people since 2015. The closure of the borders with Cameroon, Niger and Benin in 2019 - to reduce food smuggling and promote national production - has caused political tensions in addition to surging domestic food prices. Finally, disputes between state powers and indigenous groups (particularly in the oil-rich Niger delta) and the federal government over allocations of oil earnings have led in the past to sharp divisions and lawlessness.