The monetary authorities’ willingness to preserve a stable exchange rate (despite some adjustments) continues to weigh heavily on the amount of US dollar liquidity available in the economy. This shortage has a knock-on effect on inflation insofar as large parts of the economy have turned to the black market to purchase imported products. This also weakens Nigeria’s financial attractiveness. Capital inflows collapsed further in 2021 after the shock of 2020, dropping from USD 23.7 bn in 2019 to USD 6.7 bn in 2021. The situation is unlikely to improve much in the short term, given the tightening of global liquidity. The authorities already issued Eurobonds in March 2022, but the widening of Nigerian sovereign bond spreads (EMBI) by 344 basis points (bps) since April reflects increased investor mistrust. They have now reached 962 bps, one of the highest spreads among African issuers.
While foreign capital inflows are likely to remain depressed, Nigeria is also exposed to the risk of short-term capital outflows due to US monetary policy tightening and rising risk aversion among international investors. Indeed, the total stock of "hot money" (portfolio investment stock and short-term debt) remains significant, equivalent to 44% of forex reserves at the end of 2021.
The situation of public finances is even more worrying. The heavy burden of energy subsidies and the drop in oil production meant the Nigerian government did not benefit from the rise in oil prices in 2021. This will remain the case in 2022. The cost for the Nigerian National Petroleum Corporation under the country's energy policy is expected to reach almost 2% of GDP, i.e more than 20% of the government’s total revenue. Excluding hydrocarbons, revenue is structurally weak (less than 5% of GDP), and flexibility is limited due to the extremely low level of capital spending (around 2% of GDP). Despite the sharp rise in nominal GDP, public finance indicators will therefore remain deteriorated this year. The budget deficit is expected at 5.5% of GDP in 2022, and public debt is set to rise slightly to 31% of GDP. At this stage, debt sustainability is not under threat, especially since its structure is favourable (70% of debt outstanding is denominated in local currency) and Nigeria does not have significant Eurobond debt amortization in the short term. Nevertheless, the debt dynamics is a source of a concern – public debt stood at only 13% of GDP in 2014 – and its significant cost hampers the government’s room for manoeuvre and its ability to cope with further shocks. More than 30% of government revenue is now allocated to debt interest payments, compared to less than 10% in 2014.
GDP growth: vigorous in 2022, with uncertainty beyond
Persisting pressures on external accounts and public finances has not dampened the strength of the recovery for the time being. Real GDP growth slowed to 3.1% in Q1 2022 from 4% in the previous quarter, but this primarily reflects the 26% drop in oil GDP. Excluding hydrocarbons, momentum remained strong (up 6.1%) thanks to a good performance of services (+7.4% y/y; 54% of GDP). Leading indicators for Q2 remain rather well-oriented. Provided that oil production does not fall any further, Nigeria’s growth could reach 3.4% in 2022, the same rate as 2021, which would constitute a quite remarkable performance given the dissipation of the post-Covid catch-up effect.
Nevertheless, at this pace, it will take until 2025 for real GDP per capita to return to its 2019 level. Furthermore, in the absence of deep structural changes, Nigeria will remain exposed to oil price fluctuations.
Presidential elections will take place in February 2023. While the candidates are already known, their reform programmes are yet to take shape. The overhaul of the energy subsidy sytem should be a priority, but socially, this will remain a highly sensitive subject. For the same reasons, the governor of the Central Bank (whose term of office expires in June 2024) has continuoulsy repeated his opposition to greater flexibility in the exchange exchange system.
However, in the second half of 2022, the situation should improve once operations begin at a mega-refinery that will have sufficient capacity to cover Nigeria’s oil needs. Investors’ renewed interest in the country's vast gas reserves could also revitalise a sector that has been struggling for many years. But it will take much more to allow Nigeria to find its way back to over 5% economic growth, the prevailing rate at the turn of the 2010s.
