What are the major events that affected Nigeria’s economy in 2019? How are these events going to shape the 2020 outlook for the Nigerian economy?
My approach is to identify significant economic issues that occurred in 2019 and then using scenario planning, map out the impact of these issues on the Nigerian economy in 2020. It is important to remember that the future cannot be predicted, but we can identify economic trend-lines and reach assumptions with the degree of certainty of those trend-lines occurring and to the impact of those events to the economy.
The rise of US as a major crude oil exporter
Nigerian exports of crude and petroleum products to the United States plunged from 36.4 million barrels in July 2010 to 5.6 million barrels in January 2019, according to the U.S. Energy Information Administration. The US, however, has boosted exports from her shale oil deposit in the Permian basin to Nigeria’s traditional markets in Western Europe, and India. Europe imports about 46% of Nigerian oil, and India 18% according to Reuters. This is a major event because the Nigerian budget is essentially funded by fiscal receipts from oil and gas exports.
Re-election of President Buhari with a veto-proof assembly
President Buhari’s political party was re-elected with a majority in the Senate and House of Representatives. This is significant because the President can pass through his tax, borrow and spend agenda. A key policy thrust for the Buhari govt has been the retention of subsidies on PMS. The Buhari government spent N650.2bn in subsidizing petrol from April 2018 to March 2019, a figure higher than health and education spend. The Buhari administration is seeking to borrow a massive $30b from the international debt markets.
[READ MORE: NSE in 2019, events & outlook]
The increased role of the Central Bank of Nigeria (CBN)
2019 saw a very assertive Central Bank of Nigeria (CBN) play a larger role in the overall economy, not just in exchange rate and price stability policy, but also in direct lending and trade policy. The CBN emphasized strict adherence to her list of items banned from the fx window to access USD from it. The CBN also mandated commercial banks to target a minimum loan-to-deposit ratio of 60% or maintain higher cash reserves. This is targeted at “encouraging” banks to lend to real sector.
Boko Haram becomes a forgotten war
Boko Haram has left the Nigerian newspaper headlines, but the insurgency is not over. In April 2019, death by Boko Haram was measured at 1,072 per month[1] by the Nigerian Security Tracker, this is as high as February 2016.
The new tax economy
With oil GDP growth still anaemic, the Federation has looked to diversify earning by also focusing on non-oil and gas fiscal earnings. To this end, the VAT rate has been increased by 50%. A new Finance Bill 2019 was passed to update, amend and increase the Federation’s tax to GDP ratio. In this regard, for instance, all bank accounts maintained for business activities must have Tax Identification Numbers.
ACFTA and Border policy
Nigeria signed the African Continental Free Trade Agreement (ACFTA). The ACFTA allows goods to move between member states in Africa without tariffs. This agreement favours African nations that have lower costs of production, as they can export cheaper and gain market share. In the same vein, Nigeria has closed her land border because the Country of Origin being’s not being respected. Nigeria is seeking to enforce that imports through her land borders originated or have had value addition from African markets those imports come from.
Brexit
The UK has voted to leave the EU. Africa represents 2% of British trade activity, with Nigeria accounting for a tenth of that trade activity, according to the Nigerian trade ministry. Brexit means Nigeria can sign a bilateral agreement with the UK. The Nigerian trade ministry quoted the UK Foreign Secretary Jeremy Hunt as saying “…Britain has a big pool of funds that could be tapped for investment in infrastructure in Nigeria.”
US/China trade war
The US and China are in a battle of tariffs. The effect of this has been a slowdown of economic activity in China. Keep in mind China is a key export destination for Nigeria, which is the biggest Chinese investment destination in Africa, the second largest export market and the third largest trading partner of China in Africa.
Pension Fund Long-term saving
The Nigerian pension fund Assets under Management are estimated at N9.81trn (US$32.0bn), about 7.7% of 2018 GDP.
How then will these events form the economic outlook for 2020 in Nigeria? We will attempt to answer with an optimistic and pessimistic scenario mapping.
Optimistic Scenario
- Even with increased US shale output, Nigeria’s sales to key clients in India and Europe stays unchanged, as both the US and Nigeria are marketing same kinds of light, sweet grades that are ideal for refining into gasoline. Iran out of the global market is also a plus.
- The President can leverage on his legislative majority to gain approval to borrow $30b from international debt markets, creating thousands of infrastructural jobs and reflating the economy, boosting household spending and increasing productivity.
- The CBN directive on loans to deposit significantly increases credit to private sector, creating jobs, and spurring tax revenues. The CBN fx ban list creates incentives and opportunities for local import substituents, boosting SMEs, diversifying federation revenue base and reducing imports, thereby boosting the naira and fighting inflation. The opening of the banking space to FINTECH increases financial inclusion and reduces cost of doing business in Nigeria. Key direct funding support by the CBN to sectors like rice increases local supply of rice, reducing smuggling and boosting the ACFTA is viewed as an opportunity, not a threat.
- BREXIT: The FGN can reach a trade agreement with the UK to see opening of markets in the UK for agriculture. More importantly, the CBN can tap into the UK markets for long-term infrastructure funds. Nigeria is also able to secure BASA agreement to make Lagos to London hub the main air travel corridor.
- Trade tensions ease, Chinese GDP growth and economic output rebounds, and Chinese trade with Nigeria remains strong. Naira/Yuan swap deal with China is expanded, reducing demand for US dollars for trading.
- PFAs begin channelling pension contributions to fund home purchasing by contributors. This unlocks the mortgage sector, especially for affordable homes. More units come to market, reducing deficits and denting rent marginally.
Pessimistic Scenario
- Nigerian export cargos are squeezed by the US exports, especially as US makes energy purchases these parts of bilateral trade deals with INDIA and the EU. Oil prices also fall as more supply hits market, hitting Nigeria with a double blow of falling prices and quantity. This loss of revenues ultimately leads to fall in US dollar receipts, leading to a devaluation of the Naira and rising inflation.
- The new CBN loan to deposit guidelines forces banks to lend to poor credit customers, creating a moral hazard and an uptick in bad loan provisioning. Bank profitability falls, leading to a muted stock market. Also, CBN fx restriction list simply makes goods listed expensive, driving up inflation.
- Tax Revenues indeed rise but cannot cover new minimum wage, causing the Federal Government to borrow more locally to pay salaries, or also seek more tax increase.
- ACFTA and border policy: FG continues to view ACFTA as a threat to local industries and jobs, reopens borders but makes land-based commerce more cumbersome. Nigerian SME exports become noncompetitive.
- Nigeria fails to gain the initiate to sign a comprehensible trade deal with the UK, and Britain goes to Ghana as her launchpad into ECOWAS. With ACFTA, UK firms can establish factories in Benin Republic and simply drive in finished goods to Nigeria.
- Nigeria’s trade with China improves but in China’s favor; Nigeria builds up huge trade deficits with China, needing more Yuan to repay trade obligations. Ultimately accepting a discounted barter agreement in China’s favor to pay for imports.
- Pension Fund Industry Returns suffer as yield on Sovereign debt falls due to CBN policy. FGN attempts to “nationalize” RSA contributions to fund infrastructure, causing loss of confidence in the pension system as a whole, and private companies stop making contributions.
[READ ALSO: Crude oil and gas export hits $355.93 million, as pipeline vandalism increases]
In conclusion, 2020 will be a distillation of the optimistic and pessimistic scenarios. Will the Nigerian economy continue to grow or enter a recession? The answer will largely be which of these assumptions hold true.
If a preponderance of positive events occurs, then economy grows, and vice versa, more pessimistic scenarios and the economy stalls.
[1] Data from the Nigerian Security Tracker producer by the Africa Program at the Council of Foreign Relations
