Economic Update

Published 18 Apr 2013

While the latest assessment of Nigeria’s economy carried out by the IMF maintains a robust forecast for annual growth in 2013, it also highlights the challenges the country faces, led by a struggle to balance a stubborn inflation rate with a reduction in unsustainable subsidies.

Nigeria has been one of the headline attractions for frontier investors in recent years, and that looks likely to continue over the coming months. The IMF predicts Nigeria’s GDP to expand by 7.2% in 2013, up from 6.3% year-on-year (y-o-y). The forecast is double the fund’s prediction for global growth in 2013 and signals a return to the levels of economic expansion Nigeria achieved over the three-year period leading up to 2012.

In its assessment, which was released in March, the IMF noted Nigeria’s low level of external debt, calculated at $6.5bn, and overall debt-to-GDP ratio of just 17% — far below the UK’s 84% — which puts the government in a strong position should it choose to raise capital by borrowing for much-needed infrastructure and development programmes. Such projects are seen as vital for securing long-term growth and generating employment.

The IMF praised Nigeria’s prudent macroeconomic policies, which it said had underpinned a strong performance, but warned that oil dependency represents a significant downside risk; both short-term growth and the country’s medium-term outlook could be cut if global oil prices fall significantly.

The fund also voiced concerns about the length of time Nigeria was taking to secure agreement for its major fiscal reforms. That Nigeria faces an uphill battle in reforming certain aspects of its economy is no surprise. An overhaul of the country’s main hydrocarbons code has been stuck in parliament for a number of years and after a lengthy gestation process, the privatisation of the electricity sector has only finally begun to bear fruit in 2013. The difficulties the government faces in building policy consensus were highlighted again in mid-March when, not for the first time, President Goodluck Jonathan highlighted the dent that costly fuel subsidies were making in the state budget.

Speaking at an economic summit on March 19, the president hinted that the subsidy would have to be removed, although he also gave a reassurance that any such move would be preceded by extensive consultations. A past attempt by the government in January 2013 to end its price support for fuel triggered widespread protests and led to a partial reversal by the state. Since then, government agencies have sought to reduce fiscal bleeding, with some degree of success, by targeting abuse of the scheme.

The IMF acknowledged that efforts to rein in gasoline subsidies, together with higher global oil prices and strong portfolio inflows, had helped strengthen the country’s financial position. However, a spokesman for the president was forced to issue a statement denying that a cut to the subsidy was imminent, following an outcry from the unions that was given widespread media coverage.

Nigeria is one of Africa’s largest crude producers, vying for the top spot with Angola, but a lack of downstream capacity – with the country’s four main refineries usually operating at well below 50% — means that it must rely on imported fuel.

In a move aimed at reassuring protesters, the statement also referred to the national budget, issued in mid-March, confirming that almost $6.4bn in funding, or 20% of the total allocation, had been set aside for subsidies. While some observers suggested the president might have been simply testing the waters before moving to reduce or remove price support, the reaction indicated that divisions on how to tackle the contentious issue of subsidised fuel run deep.

Inflation also continues to give cause for concern, despite reaching a four-year low at the beginning of 2013. The consumer price index (CPI) rose to 9.5% year-on-year (y-o-y) at the end of February, according to data issued by the central bank in mid-March, up from 9% the previous month. In December, inflation stood at 12.3%.

While the economy appears buoyant, fears are mounting that the Central Bank of Nigeria (CBN) could opt to address the issue by lifting its key lending rate, which has stood at a steady 12% since mid-2012. The bank’s governor, Lamido Sanusi, warned that it would be difficult to keep rates unchanged for the remainder of 2013 if inflation continues to rise.

However, while such a measure may well help curb domestic demand and cool inflation, analysts have warned that it could also weigh on economic growth, causing Nigeria to miss its GDP targets. The government has targeted economic growth of 6.75%, slightly below the IMF’s expectations, according to the National Bureau of Statistics’ “Economic Outlook the Nigerian Economy (2013-16)”, published in February.

While the economy is expected to fare well in 2013, external risks such as a possible decline in international oil prices, alongside internal challenges, including security issues in the north of the country, could curb growth. The momentum of Nigeria’s economic expansion has regularly proven resilient, weathering everything from a domestic banking crisis to political uncertainty to adverse climactic conditions, but if the country is to sustain this growth rate over the medium- and long-term, it will need to address both fiscal pressures and inflation.