Nigeria mired in 4-year low growth cycle on political instability – EIU

The Economist Intelligence Unit (EIU), a member of The Economist Group, is predicting that Nigeria, Africa’s largest economy by gross domestic product (GDP) will find itself mired in a four-year low economic growth cycle ahead of the 2019 elections and into 2022.

The EIU said in its ViewsWire Nigeria country report released last week that ongoing severe outbreaks of instability and the slow progress on tackling numerous security and societal challenges at a time of economic difficulty may weigh on economic performance.

“The economy will remain mired in a low-growth cycle over 2018-22. Political instability and ongoing policy uncertainty will slow or prevent reforms, and fiscal constraints will hinder much-needed infrastructure development,” the London-based think-thank noted.

Specifically it said investors and local businesses would remain perturbed by the authorities’ often interventionist stance, especially in the foreign-exchange market, while additional factors hitting investor and consumer confidence would be the general election in 2019 coupled with a global economic slowdown in 2020, which would leave both years the weakest in the outlook period.

To this end, the EIU notes that real GDP growth will accelerate from sluggish levels in 2017 but only slowly, given ongoing policy deficiencies, infrastructure gaps and political instability, which will sap confidence in the economy more generally.

It said inflation will come down from the highs recorded in early 2017, but price pressures from election spending and expected currency devaluation over 2019-21 will persist and keep average annual inflation in double digits, adding that currency stability and a high base of comparison in 2017 both played a role in its coming down relatively swiftly over the first six months of 2018.

It therefore expects an annual average rate of 11.6 percent for the year, saying that as the naira weakens and the government beefs up spending ahead of the elections, the headline rate will then edge up to 13.6 percent in 2019 and reach 14.2 percent in 2020 as the currency slides even faster that year in conjunction with deteriorating global economic conditions.

“From there, with only a small devaluation in 2021 and then currency stability in 2022, inflation will steadily cool to an annual average of 10.4 percent.”

On exchange rates, the EIU expects the multiple-exchangerate system to persist throughout 2018- 22, with a notable differential between the official rate used for government business and the market-determined rate applicable to investors and exporters (with various other rates in- between).

“Such a system allows the government to subsidise sectors deemed important for economic or political reasons. Oil prices, and with them the level of hard-currency earnings, will in large part dictate where the authorities are able to hold the official rate and what the premium is between the official and the market rates,” the EIU said.

It highlighted that political events (such as the magnitude of instability that accompanies the 2019 election period) will also have an impact just as it maintained that oil prices will be strong enough to allow the authorities to keep the official rate stable in 2018, at N305.6/$1, but in 2019 the cumulative impact of political instability undermining confidence and high inflation over the two years prior (and so real appreciation) will prompt devaluation.

“In 2020, as oil prices slide and the US enters into a short, cyclical downturn, there will be a deeper drop in the naira-US dollar exchange rate, followed by a smaller devaluation in 2021 as prices edge upwards again and the global economy recovers,” it stated adding that in 2022 the naira will be kept stable against the US dollar as oil prices continue to rise, with the unit trading at an average of N377.2 to the dollar and N407.7/$1 at the market rate.

It emphatically stated that recent oil price spikes are not expected to herald a return to the market seen during the 2011-14 commodity super-cycle, and the net effect will be modest current- account surpluses in 2018-22–a stark contrast to the enormous surpluses recorded during the boom.

“There will also be little progress in terms of diversifying the country’s hydrocarbons-dominated export base, with many Nigerian companies unable to compete internationally amid high costs of capital, substandard infrastructure and skills gaps,” it said pointing out that prospects for the current account will remain largely tied to oil prices and the moderate recovery expected in import demand after two years of contraction.

It said import growth would be strong in 2018 on the back of a period of naira stability and recovering local demand, coupled with higher commodity prices, and that a current-account surplus will be recorded throughout 2018-22, but it will be well below historical highs.

It however notes that the rate of import growth would slow thereafter as the currency depreciates.The import bill in 2022 will also still be around 10 percent below the average value recorded in 2011-14, when the oil boom and a stronger naira allowed a spending splurge.

Overall, it said policy reform would be slow as efforts to introduce market-oriented reforms and diversify the economy away from oil come up against vested interests, ideological opposition and bureaucratic inefficiency.