Emerging

The growth engine is still jammed

EcoEmerging// 2nd quarter 2019  
20  
economic-research.bnpparibas.com  
Nigeria  
The growth engine is still jammed  
Nigeria is having a hard time recovering from the 2014 oil shock. Although the economy has pulled out of recession, growth  
remains sluggish at 1.9% in 2018. Moreover, the central bank’s recent decision to cut its key policy rate is unlikely to change much.  
With inflation holding at high levels, it is still too early to anticipate further monetary easing. Defending the currency peg is another  
constraint at a time when the stability of the external accounts is still fragile. Between soaring debt interest payments and the very  
low mobilisation of public resources, there is only limited fiscal manoeuvring room. It is hard to imagine a rapid economic  
turnaround without the intensification of reforms.  
The beginning of the year was dominated by the presidential  
1
-Forecasts  
election held on 23 and 24 February. In what was expected to be a  
tight race, Muhammadu Buhari, the incumbent, won a clear-cut  
victory with 56% of the vote, compared to 41% for his main rival.  
Shortly thereafter, the monetary authorities lowered the key policy  
rate by 50 basis points (bp). Although there is no apparent link  
between these two events, the central bank’s decision might signal  
a change in economic policy goals towards greater support for  
growth after a first mandate focused essentially on strengthening  
the external position. Yet there is very little manoeuvring room.  
Without any structural reforms, the recovery is bound to be slow.  
2017 2018 2019e 2020e  
Real GDP growth (%)  
0.8  
16.5  
-5.3  
18.9  
1.9  
12.1  
-4.9  
2.2  
2.5  
Inflation (CPI, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt/ GDP (%)  
11.5  
-4.7  
11.0  
-4.0  
21.3  
1.2  
23.7  
1.5  
25.3  
1.1  
2.8  
Currentaccountbalance / GDP (%)  
External debt/ GDP (%)  
19.4  
39.6  
9.3  
19.8  
42.9  
7.2  
18.9  
46.1  
8.4  
17.8  
48.9  
8.2  
Forex reserves (USD bn)  
Forex reserves, in months ofimports  
Exchange rate USDNGN (year end)  
Key policy rate cut: a symbolic move  
305  
305  
305  
305  
e: BNP Paribas Group Economic Research estimates and forecasts  
The Central Bank of Nigeria (CBN) surprised the markets by  
lowering its key policy rate from 14% to 13.5% at the end of March,  
the first move since July 2016. Although inflation has stabilised at  
2- Monetary environment  
1
1%, this is nonetheless higher than the monetary authorities’ target  
 Key policy rate  Inflation (y/y)  Interbank rate (3-month moving  
average) ▪▪▪ 12-month Treasury bond yields  
range of 6-9%. There is even a risk that inflation could rise again if  
the public sector minimum wage is raised from the current level of  
NGN18000 currently (USD 60 at the official exchange rate) to  
NGN30000 (USD 98). It is difficult to assess the impact of this  
measure given the numerous obstacles to its implementation,  
starting with the very delicate financial situation of numerous states.  
%
40  
35  
30  
25  
According to the governor of the central bank, the monetary policy  
easing is supposed to boost economic activity by stimulating bank  
lending. At this stage, however, we think the decision is mainly  
symbolic. First, issuance of CBN bills is the main tool used by  
monetary authorities to manage liquidity. Since 2016, interbank  
rates have regularly surpassed the key policy rate, diluting the  
signals it transmits. Second, transmission channels to the economy  
are limited. Nigeria not only has a low bank penetration rate, but the  
oil shock has also weakened the financial system, and the  
correction phase is not yet complete. The growth of lending to the  
private sector was still a negative 2.6% at the end of February.  
Although they have begun to improve, financial soundness  
indicators are still deteriorated. Especially, the doubtful loan ratio  
remains high at 12.4%, compared to 3% at year-end 2014.  
20  
15  
1
0
5
0
2
014  
2015  
2016  
2017  
2018  
2019  
Source: Central bank  
the second half of 2018 (interbank rates and Treasury notes) was a  
stark reminder of the persistent fragility of Nigeria’s macro-financial  
situation.  
Macroeconomic stability: still fragile  
The strengthening of external accounts came to a sudden standstill  
in 2018. Not only did the current account surplus contract sharply, to  
.2% of GDP in 2018 (vs. 2.8% in 2017) due to a surge in imports of  
services, but Nigeria was also hit by massive capital outflows as of  
April (USD 9 bn according to the IMF), the impact of which was only  
partially offset by a new USD 2.86 bn Eurobond issue in November,  
after February’s issue of USD 2.5 bn. Foreign reserves shrank by  
In a context of strong risk aversion for the banks, monetary policy  
will surely have to be more accommodating to have an impact. But  
the room for manoeuvre is thin. In addition to latent inflationary  
pressure, the fact that non-residents hold nearly 30% of bills issued  
by the central bank implies that yields must be high enough to  
maintain their attractiveness. An abrupt surge in short-term rates in  
1
EcoEmerging// 2nd quarter 2019  
21  
economic-research.bnpparibas.com  
1
0% in the last 9 months of 2018, ending the year virtually flat after  
3- Sector contribution to growth  
doubling between October 2016 and year-end 2017.  
Primary  Secondary  Tertiary  GDP growth (y/y)  
Pressures have eased since the presidential election. In the month  
of March alone, foreign reserves increased by USD 2 bn. The 100bp  
decline in 1-year Treasury notes indicates the return of non-resident  
investors to the local debt market. By removing uncertainty about  
naira trends, Mr. Buhari’s victory seems to have been decisive for  
restoring attractiveness. Under the current system, several  
exchange rates co-exist, with a 20% spread between the official  
exchange rate, set at NGN/USD305 (used for oil product imports  
and external debt servicing) and the NAFEX rate, which fluctuates  
around NGN/USD360 (70-80% of transactions). Despite the  
distortions this dual system implies, president Buhari and the CBN  
governor do not favour converging the two rates, which they believe  
would mainly have an inflationary effect. Moreover, foreign reserves  
are still high (covering 7 months of imports of goods and services at  
year-end 2018) and the current account should continue to run into  
a slight surplus. Everything suggests that the status quo will be  
maintained for the next two years.  
8 %  
6
4
2
0
2
4
-
-
2014  
2015  
2016  
2017  
2018  
Source: NBS  
Growth prospects: towards a slow recovery  
Under these circumstances, how can Nigeria revive its economy?  
The country may have pulled out of recession in 2017, but growth  
remains sluggish at 1.9% in 2018. Excluding the net rebound in the  
momentum of the Information and Communication Technologies  
sector as of Q2, the overall picture is even more deteriorate, with  
real GDP growth of only 0.9%, vs. 1.1% in 2017.  
All in all, we do not think the stability of the external accounts is at  
risk in the short term, although the situation is still fragile because  
portfolio investment are making up an increasingly big share of  
capital flows.  
However, the public finance situation continues to be a source of  
concern. Very low progress in improving tax collection makes any  
prospects of a rapid consolidation of the public accounts a distant  
possibility. The government’s consolidated revenues fell to an all-  
time low of 5.6% of GDP in 2016, but have since recovered  
somewhat thanks to the rebound in oil prices. Even so, they only  
amounted to 8.7% of GDP in 2018, one of the lowest rates in Sub-  
Saharan Africa. The current oil market environment does not raise  
much hope for potential fiscal gains. Yet the state also faces other  
major financial headwinds. The widening of the budget deficit since  
Moreover, the IMF does not foresee any significant improvements.  
Even though the start-up of production at the Egina oil field adds an  
extra 200,000 barrels per day (10% of national production),  
economic growth will pick up only slightly, to 2.5% in 2020, before  
levelling off thereafter. At this growth rate, real GDP per capita will  
continue to contract. According to the IMF, another scenario is also  
possible. Through the intensification of reforms, Nigeria could reach  
its potential growth rate to 4.5% in the medium term, assuming the  
macroeconomic and external environment were to stabilise. This  
roadmap has been clear for some time and boils down to two  
priorities: 1) improving the business climate, including in the oil  
sector, and 2) upgrading infrastructure. But, during President  
Buhari’s first term, only limited progress was made in these two  
areas.  
2014 has been accompanied by an increase in the cost of debt on  
the domestic market. Interest payments now absorb more than 20%  
of government revenues, up from 9% in 2014. The government is  
trying to circumvent the problem by borrowing more on the  
international financial markets. This would seem to be a coherent  
strategy given the favourable financial conditions (about 6% vs 15%  
on the domestic market) and the low level of public debt in foreign  
currencies (5% of GDP), but it will expose public finances to  
currency risk. Above all, with a budget deficit remaining above 4% of  
GDP in 2019-2020, the government will continue to cover a large  
part of its financing needs on the domestic market at interest rates  
that are bound to remain high (due to inflationary pressures and the  
necessity to defend the currency peg). Consequently, there is  
reason to doubt the authority’s capacity to go ahead with majors  
economic projects. Public investment amounted to only 3.3% of  
GDP in 2018, which is also extremely low compared to the other  
African economies. Given the need to clean up public finances, this  
figure could even drop below 3% by 2020.  
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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