Owing to the novel Covid-19 pandemic, reduced demand in the oil market, and restricted international trade activities, the outlook of the nation’s Gross Domestic Product (GDP) had been expectedly negative.
The International Monetary Fund (IMF), for one, predicted that the plunge in crude prices could cause GDP to contract by 3.4% in 2020, a rate that is by far the highest in at least four decades. The Minister of Finance Zainab Ahmed projected a far worse outcome of an 8% contraction.
As such, when the National Bureau of Statistics on its website on Monday, noted that the country’s Gross domestic product (GDP) expanded by 1.87% in the quarter from a year earlier, many were ecstatic. While the growth, in real terms, represented a drop of 0.23% points compared to Q1 2019 and 0.68% points decline compared to Q4 2019, it has largely been perceived as positive.
For context, the median estimate of three economists in a Bloomberg survey for the quarter was for a 0.8% expansion. However, just before we doff our hats to the seemingly positive growth rate (albeit comparative to projections), here are a few things to bear in mind:
It’s Still A Major Decline
Nigeria’s Q1 GDP of 1.87% reveals that there are indeed challenges that cannot be ignored. Beyond the effect of the pandemic, the oil price wars driven by Saudi Arabia & Russia, have increased the level of uncertainty in the oil market. While the growth rate for the quarter might not have been as bad as expected, the GDP still contracted from the fourth quarter. Also note that in its 2020 budget, the country had significantly cut the benchmark price to $25 per barrel without changing so much in terms of spending, making the nation susceptible to borrowing even more.
We Amped Up Oil Production
A core reason the country’s GDP growth rate was higher than estimated is that it witnessed a four-year rise in oil production. The country had increased its production after crude oil prices started crashing in the first quarter of 2020 as a result of the Covid-19 pandemic as well as the tension between the world’s biggest producers of the commodity. This was in order to curb the crash in income.
Output, consequently, rose to 2.07 million barrels a day, as compared to the 2 million in the fourth quarter and 1.99 million barrels in the first quarter of last year – an output that had not been attained since at least early 2016.
Q2 will be worse
Let’s face it, the pandemic has taken its toll on the Nigerian economy and very little can be done to hide that. However, the impact of the pandemic has not yet been reflected in Q1 results. This is because the economic impact of the pandemic actually commenced in April. If the projections for Q1 were bad, Q2 will be worse – and there are many reasons for this.
Top on the list is that the non-oil economy will likely not offer the solace we need. The statistics office explained that the slowdown reflects “the earliest effects of the disruption, particularly on the non-oil economy.”
With the oil economy down, the non-oil economy had been expected to ease the burden. However, results in ICT and Trade, two main components of the non-oil economy performed below expectations. For one, Trade contracted by 2.82%. Nigeria’s trade sector ranks as the second-largest contributor to Nigeria’s GDP. Consequently, its underperformance has material implications on GDP growth. On the other hand, ICT attained a growth of only 7.65%.
With the typical perils of increasing inflation as well as the continued closure of the border, growth may remain farfetched for the sector. Of course, restrictions in international trade and travel are set to worsen the said outlook. Given the forgoing, there is no gainsaying the fact that bigger challenges will ensue from the second quarter of the year.