2021: Nigeria needs fiscal space to help stimulate economic growth

A financial services corporation, EFG Hermes, has said urgent reform measures are needed to create some fiscal space to help stimulate economic growth in Nigeria.

EFG Hermes, in its economic outlook for 2021, said the country’s low revenue to Gross Domestic Product (GDP) ratio, one of the lowest in the world, is crippling the government’s capacity to upgrade the country’s infrastructure and provide support to those in need.

According to the corporation, Nigeria’s economy faced tough challenges in 2020, suffering from the double collapse in oil prices and pandemic shock with both problems weighing heavily on the country’s fiscal position and the real economy.

It said foreign exchange shortages emerged with a parallel market that’s trading at +20 per cent premium to official rates, fiscal space was eaten up and the economy fell into recession. Equally, it noted, inflation has accelerated to close to a three-year high driven mostly by food prices in a further blow to already weak purchasing power.

Head of Macroeconomic Research, EFG Hermes, Mohamed Abu Basha, said: “Going into 2021, we see the macroeconomic situation remaining challenging, notwithstanding some improvements. The recovery in oil prices to $50/barrel by the end of 2020 and prospects for a slightly-higher price in 2021 is definitely good news for the economy and should help avail more resources for both the government and the Central Bank of Nigeria (CBN).”

Basha said a rollout of a vaccine should also help the economy recover from the pandemic shock, enabling a bounce-back of economic and business activity.

The improvements, according to him, are largely marginal even though they could help support some level of macroeconomic stability. He said they would not create the environment for reasonable economic recovery.

He said: “Despite the higher oil price, we think the country would still be running thin on FX liquidity, unable to replicate the more relaxed environment which existed back in 2017/18. Then, the market was relying on carrying trade flows – foreign flows into the local debt market – to provide excess liquidity in the system, but this trade now has low prospects of recovery given the very low level of interest rates the country is now offering in addition to FX shortages, which make foreign investors wary of sending their money to Nigeria.

“The recent approval of a $1.5bn loan to the Nigerian States, and the prospects of a Eurobond issuance sometime in 2021 are positive for reserves, but again, we don’t see them as representing a game-changer.

“In this context, we see it as critical that authorities utilise the improved economic environment to press ahead with much-needed economic reforms. Authorities have indeed taken a number of reform measures which are encouraging. De-regulation of domestic fuel prices was an important step to avail more resources to the government, which it can then better target to spend on those who need support.”

Basha said Africa needs a reformed Nigeria.

According to him, it is important to note that Nigeria’s economic problems did not start with COVID-19 but since 2014 when oil prices saw a structural collapse from above $100 per barrel.

“We argue that until this moment, the economy has not really adjusted to this drop in oil prices – despite some sharp moves in the currency – considering that the system remains plagued with various import controls and tight monetary policy to keep the currency stable.

“Putting the noise on FX and financial sector aside, a look at the real economy would summarise the country’s economic challenge: Nigeria, the largest (by GDP economy in Africa, has seen its economy shrinking on a real per capita basis for the past five years. This means the economy has been growing below the rate of population growth.

“The World Bank’s most recent report on Nigeria estimates that by 2023, the country’s GDP per capita is expected to be roughly similar to that of 2010 meaning that Nigeria would lose 13 years in per capita income. More worryingly is that the World Bank estimates that once adjusted for inflation, a per capita GDP going back to 2010 is equivalent to going back to the 1980s. These challenges show that authorities need to take a fresh, more holistic approach towards an economic adjustment in order to help an economy with huge potential to revive,” he said.