E-Financial
Is Nigeria Heading for a Technical Recession?
By Lukman Otunuga, Senior Research Analyst at FXTM,
Nigeria’s monetary and fiscal policymakers face enormous challenges as the country confronts a looming technical recession just three years after the last downturn in 2017.
The COVID-19 pandemic circumstances have combined with low Oil demand and prices to brew up a perfect storm. Buffeted by the strong headwinds, Nigeria’s second-quarter GDP shrank by 6.1 per cent, the biggest drop since 2004.
Government revenues which rely on Oil sales shrank along with the demand for crude Oil. Besides that, low Oil prices may pressure foreign exchange earnings and reserves, as 90 per cent of Nigeria’s currency earnings stem from sales of crude Oil.
Country remains exposed to external risks
The second-quarter contraction highlights Nigeria’s exposure to external risks around the Oil markets, redoubling the urgency behind the state’s diversification efforts.
The World Bank expects Nigeria to face the worst economic recession since the 1980s because of the collapse in Oil prices. It projects the economy to shrink by 3.2 per cent for the full-year 2020 on the condition that Nigeria contains COVID-19 by the third quarter. If not, the contraction will be worse, according to the World Bank.
The International Monetary Fund (IMF) is more pessimistic about Nigeria’s economic outlook. It sees GDP shrinking by 5.4 per cent this year, the biggest decrease in 40 years. Goldman Sachs puts the full-year GDP contraction at a five per cent GDP contraction, closer to the IMF’s than to the World Bank.
The coronavirus lockdown weighed on the economy, as domestic and international activity caved in at the same time.
Domestic risks must not be overlooked
The economic contraction presents significant risks around consumer spending and investor confidence. The pandemic also triggered a higher threat of poverty. The World Bank sees the poverty rate rising to 42.5 per cent from its previous estimate of 40 per cent in 2020.
Along with the human cost, a rise in the poverty rate can affect macroeconomic stability and pose setbacks to economic benchmarks like inflation, unemployment, consumer spending and fiscal spending.
These macroeconomic statistics are already highly sensitive to further risks, like a second wave of COVID-19 or another Oil price collapse.
Unemployment stood at 27.1 per cent in the second quarter. The inflation rate rose to 12.8 per cent in July, the highest since March 2018, meaning a reduction of purchasing power. These benchmarks are likely to remain sources of concern in the second half of the year.
US Dollar scarcity remains another threat to growth, with Naira weakness and ongoing foreign exchange restrictions likely punishing the non-Oil sector.
Adding to the macro-economic challenges around COVID-19, Nigeria will have to reduce Oil production in August and September to comply fully with OPEC’s supply cuts. Coming on top of lower Oil prices, reduced production means decreased government revenues and foreign exchange earnings. An accompanying knock-on effect on GDP is likely.
In conclusion, Nigeria is likely heading for a technical recession. If the country contains COVID-19 and pro-actively prepares for more localised outbreaks, the World Bank believes this may support GDP and limit the economic damages. Over the last three months, COVID-19 cases have risen to 52,227 cases with 38,945 recoveries. The number of deaths stands at 1002, at the time of writing. When compared to South Africa’s 607,045 cases, Nigeria is in a better public health position. If the authorities limit the spread of coronavirus and continue to manage the situation effectively, Nigeria’s economy has better chances of recovering in line with a global recovery in the medium term.