Nigeria stuck in slow lane despite high oil prices: Capital Economics

Nigeria’s economic rebound has lost speed this year, despite the steep rise in the price of crude oil, the lifeblood of Africa’s biggest economy, London-based Capital Economics has said.

The country’s GDP growth slowed from 4.0 percent year-on-year in the fourth quarter of 2021 to 3.1 percent y-o-y in Q1 2022 as the continued recovery outside of the key oil sector was not sufficient to offset a much sharper fall in oil GDP, it said in a report.

“More recent indicators suggest that weakness has spread outside of the oil sector. The PMI has dropped considerably since the start of the war in Ukraine,” the economic research firm said. “High energy prices will improve Nigeria’s terms of trade this year, but we don’t think this will translate into much of a boost to the recovery.”

Nigeria’s oil output will stay low as production problems are likely to persist, Capital Economics said, adding that this would limit the country’s export gains on the back of high energy prices.

It said, “What’s more, the import bill is set to surge due to the country’s reliance on imported food and petroleum products – global prices of these goods remain elevated.

“And while we still expect the current account balance to improve, flipping from a deficit of 0.5 percent of GDP in 2021 to a surplus of 1.5 percent of GDP this year, the boost will be much smaller compared to other oil producers.”

The firm noted that policymakers had kept the official exchange rate stable and overvalued through FX restrictions and the central bank is unlikely to change course.

“The naira is likely to remain under pressure, especially on the black market. And ever-more restrictive FX policies to retain a tight grip on the naira will increasingly disrupt activity,” it added.

Capital Economics expects the government to increase spending ahead of elections in early 2023, while also facing a surging petrol subsidy bill.

It said these costs would trump extra oil revenues linked to high energy prices, adding that the budget deficit would probably widen from 3.8 percent of GDP in 2021 to 4.5 percent of GDP this year.

It said the authorities may be tempted to rely more on central bank financing.

“Deficit financing and currency weakness on the black market will probably keep price pressures high even as food inflation softens. We think that policymakers will deliver at least one more interest rate hike in Q3,” Capital Economics said.

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