Emerging

Struggling to rebound

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Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
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NIGERIA  
STRUGGLING TO REBOUND  
After declining 1.9% in 2020, Nigeria’s GDP is unlikely to rebound but mildly in 2021 due to persistent and significant  
macroeconomic imbalances. Despite the first signs of stabilization, inflation is still very high, and several adjustments  
to the naira have failed to correct the dysfunctions in the foreign exchange market. Although the rebound in oil prices  
should help reduce somewhat the squeeze on external liquidity, it will surely take more than that to restore the  
confidence of investors. Without reforms and with no fiscal manoeuvring room, the economy will continue to be  
vulnerable to external shocks.  
Nigeria did not escape recession last year, although it was smaller  
than expected, with GDP contracting only 1.9%. On top of restrictions  
FORECASTS  
to combat the pandemic, the country had to deal with massive capital  
outflows and plummeting oil revenues. The economy has picked up  
2
019  
2020  
2021e  
2022e  
again since Q4 2020, after two quarters of contraction. Even so, its  
growth dynamics are fragile. GDP rose only 0.5% YoY in Q1 2021 despite  
a good performance in agriculture and an upturn in oil production  
Real GDP growth (%)  
2.3  
-1.9  
13.2  
-6.1  
29.4  
-4.0  
12.7  
36.7  
6.1  
2.4  
2.3  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
11.5  
-4.8  
25.0  
-3.6  
11.5  
38.3  
4.6  
16.8  
-4.0  
29.6  
-1.8  
13.2  
38.2  
5.7  
12.4  
-4.4  
30.8  
-1.7  
13.6  
39.5  
5.7  
(
including condensates), which rose to 1.72 million barrels a day on  
average, up from 1.56 m b/d the previous quarter. Excluding agriculture  
and the oil sector, growth slowed to 0.3%, from 1% in Q4 2020, due to  
a downturn in the services sector (-0.4%) after the pandemic flared up  
again. GDP growth is expected to rebound, albeit mildly, starting in Q2  
as the second wave of COVID-19 infections dissipates and oil prices rise.  
Yet with the unemployment rate now at 33% and GDP per capita (in  
PPP) falling back to the 2017 level, household consumption will have a  
hard time recovering. This is especially true given the slow pace of the  
vaccination campaign (only 1% of the population has received a first  
dose). Moreover, inflation is at a record high. Other major constraints  
are the persistent pressure on the currency and external liquidity, as  
well as the low level of fiscal leeway.  
Current account balance / GDP (%)  
External debt / GDP (%)  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
MONETARY ENVIRONMENT  
2
5
0
%
Headline  
Core inflation  
Food  
Key policy rate  
INFLATION AND THE EXCHANGE RATE: UNRESOLVED  
PROBLEMS  
2
The monetary policy stance continues to raise numerous questions.  
Although inflation has risen constantly since mid-2019, the central  
bank decided to maintain its key rate (Chart 1). To bolster the economy  
at the height of the health crisis, the key rate was cut by 200 basis  
points to 11.5% in 2020. The sluggish pace of growth argues against a  
too early tightening of monetary policy. Inflation has also been showing  
signs of levelling off over the past two months, thanks to a slowdown  
in food prices (51.8% of the index). Yet headline inflation was still high  
at 17.9% in May, and core inflation rose again to 13.7%. Although the  
current shock on prices can be attributed in part to external factors  
that are beginning to wind down (mostly food supply constraints and  
the naira’s devaluation), inflationary pressures are also being fed by  
the absence of a clear mandate for the central bank’s targets and the  
recurrent monetisation of the fiscal deficit.  
15  
1
0
5
0
2
015  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 1  
SOURCE: CENTRAL BANK  
rates is a step forward, albeit a symbolic one, in the reform of the  
Effortstostabilisetheexchangeratearealsogeneratingmajormonetary exchange rate regime. Yet it is still insufficient. The spread with the  
distortions. Faced with the drop-off in oil exports, the authorities tried parallel rate continues to widen. The current premium is more than  
to protect forex reserves by limiting access to foreign currency and by 20%, reflecting high demand for dollars fed in part by expectations of  
adjusting the naira’s official exchange rate on two occasions in 2020 further devaluation. Another adjustment in the exchange rate seems  
before merging the official exchange rate with NAFEX rate (Chart 2) inevitable. Adopting a more flexible exchange rate regime seems  
in May 2021. The AFEX rate is used in the majority of commercial and unlikely, however, despite the insistence of the IMF and the World  
financial transactions. Although it is supposed to reflect an equilibrium Bank, which made it a prerequisite for unblocking a USD 1.5 bn loan.  
of market forces, this rate is still controlled by the central bank. Naira But the monetary authorities continue to oppose a move that they fear  
is now trading at NGN 410 against the US dollar, up from NGN 306 in would strengthen the inflationary dynamics. This point is debatable:  
early 2020, a devaluation of 25%. The unification of the two exchange entire segments of the economy have already turned towards the  
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3rd quarter 2021  
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parallel market to obtain foreign currencies. Compared to the previous  
oil shock, when imports of goods fell by nearly half between 2014 and  
MULTIPLE EXCHANGE RATES  
2
017, the decline in imports was relatively limited in 2020 at 16%.  
00NGN/ USD  
6
FRAGILE DYNAMICS OF THE EXTERNAL ACCOUNTS  
Official rate  
Parallel rate  
NAFEX rate  
The squeeze on external liquidity is expected to ease although it will not  
disappear. According to the central bank’s preliminary estimates, the  
current account deficit narrowed significantly to USD1.7bn in Q1 2021,  
down from USD 5.2 bn in the previous quarter. This is essentially due  
to a rebound in remittances from the Nigerian diaspora (two thirds of  
current account non-oil revenues, even though they are still a quarter  
below pre-crisis level), and to travel restrictions (more than a quarter  
of current account spending). Moreover, the Nigerian economy has  
not benefited much from the rebound in oil prices so far. Exports even  
contracted during the quarter, down 8.6%, due to an unfavourable  
volume effect. Assuming India, the largest export outlet for Nigerian  
oil, does not slide into a protracted recession, the dynamics should  
improve in the months ahead, although without fully balancing the  
external accounts. At 1.8% of GDP in 2021, the current account deficit  
is expected to remain high, although that would be a big improvement  
over the 2020 level of 4% of GDP.  
500  
400  
300  
200  
100  
0
14  
15  
16  
17  
18  
19  
20  
21  
CHART 2  
SOURCE: CENTRAL BANK, BLOOMBERG, ABOKIFX  
The financial horizon is also expected to clear up somewhat. The  
authorities are preparing to issue at least USD 3 bn in the international deficits in recent years also goes hand in hand with a rapid increase  
financial markets. With external government debt amounting to only in the public debt and interest cost. Interest payments are expected to  
8
% of GDP, and with the considerable easing of financing conditions in absorb a quarter of fiscal revenues in 2021, up from less than 10% in  
recent months, the bond issue should be well received. Moreover, with 2014. Even so, the sustainability of the debt is not a problem since it is  
the IMF’s general allocation of special drawing rights (SDR), Nigeria still moderate at 30% of GDP.  
could receive funds of between USD 2.5bn and USD 3 bn.  
In the end, the rebound in GDP is likely to be very small at 2.4% in  
All in all, forex reserves could reach USD 38 bn at the end of the year, 2021, and growth should continue to be limited to 2-2.5% as of 2022.  
the equivalent of 5.7months of imports of goods and services. As As a result, GDP growth will continue to fall short of population growth,  
comfortable as the level of external liquidity may seem, it is much less as has been the case since 2015. It is thus vital to accelerate reforms.  
certain that the situation in the forex market will return to normal. The One positive point is that apparently the government has never been  
monetary authorities must already clear a backlog of FX accumulated closer to passing the draft oil industry bill. At this stage, however, it  
in 2020 (USD 2 bn for non-resident investors). The current economic is difficult to determine what impact it will have given the persistent  
environment seems propitious, but nothing says this will be sufficient safety and security issues. Most importantly, it will not resolve the  
to restore the attractiveness of Nigeria, given the uncertainty over problem of diversifying the economy, whose development is hampered  
the evolution in the foreign exchange regime. The stock of portfolio by numerous structural constraints (lack of infrastructure) and a  
investments remains significant, despite massive capital outflows macroeconomic environment that is not propitious for investment  
in Q1 2020. At year-end 2020, it totalled USD27bn (the equivalent (high inflation, dysfunctions in foreign exchange market).  
of 73% of foreign reserves), including more than USD11bn in short-  
term debt issued in the local currency. And since the level of foreign  
Completed on 5 July 2021  
direct investment is structurally low (averaging USD2 bn over the past  
five years), Nigeria thus exhibits strong financial vulnerability both  
in terms of stock and flows. Above all, the economy is not sheltered  
from corrections in oil prices, which account for more than 90% of total  
exports.  
Stéphane ALBY  
stephane.alby@bnpparibas.com  
OUTLOOK: RISK OF STAGNATION  
Another constraint is the low level of government revenues. They  
contracted by nearly 2 points of GDP to only 6% of GDP in 2020, due to  
the downturn in oil prices and the economic shock. Despite a relatively  
small fiscal support package in 2020 (0.3% of GDP), budget deficit rose  
to 6% of GDP. Despite the expected upturn in oil revenues, it is still  
expected to reach at least 4% in 2021. Spending is rigid, and given  
the fragility of the social-economic environment, the authorities are  
adopting costly support measures, as illustrated by the reintroduction  
of oil subsidies (about 0.5 points of GDP). The accumulation of budget  
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QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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