Nigeria should brace for ‘its worst recession in four decades’

As expected, one of Africa’s biggest economies took a big hit, recording the steepest contraction in more than nine years, at -6.10% year-on-year (YoY).

Some analysts were quick to call this a recession – generally defined as two quarters of consecutive negative growth – but economy eked out growth of 1.5% YoY in the first quarter of 2020. One quarter of negative growth is not enough to create a recession.

Nigeria’s data show a recession is likely, “but the worst may be over,” say analysts at Chapel Hill Denham Securities.

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The International Monetary Fund estimates that the annual growth rate will be -5.4%, according to data released by the National Bureau of Statistics on 24 August.

Sector breakdowns

The shrinking of the Nigerian economy is a result of contractions in both the oil sector and the non-oil sector – which recorded the country’s biggest-ever contraction. The oil sector had grown by 5.5% in Q1 2020 but contracted by 6.6% in Q2. As for the non-oil sector, it was 1.5% growth in Q1 and a 6.1% drop in Q2.

According to the analysts at Chapel Hill Denham Securities, including Omotola Abimbola: “This was against the backdrop of a 10.40% YoY and 12.6% quarter-on-quarter (QoQ) decline in oil production to 1.81mb/d, in line with the OPEC oil production cut agreement, which limited Nigeria’s oil production to 1.41mb/d (excluding condensates) between May and June.”

Although the Nigerian oil and gas sector has seen tougher periods, “particularly at the peak of militant attacks on oil & gas infrastructure in 2016, the larger non-oil sector, which accounts for over 90% of economic output, shrank by a record -6.05% YoY,” say the analysts.

Not going according to plan

The latest data shows that the Economic Recovery and Growth Plan is not going according to plan, projecting a likelihood that the country led by President Muhammadu Buhari may not see the turnaround it seeks. The World Bank is predicting that Nigeria is on the way to its worst recession in four decades.

Inflation is high, as is unemployment, and the presidency issued a statement on 26 August that “it is anticipated that […] the third and fourth quarters will reflect continued effects of the slowdown.”

“Unless we achieve a very strong Q3 2020 economic performance, the Nigerian economy is likely to lapse into the second recession in four years, with significant adverse consequences,” minister of state for budget Prince Clem Agba said a week prior to the release of the GDP figures.

The analysts at Chapel Hill Denham Securities say “the most important question to ask now is how fast and sustainable the recovery will be.”

While the after-effect of a lockdown on global coronavirus pandemic is seen as responsible for the sharp drop in Nigeria’s GDP growth, some analysts argue that other factors – including policies introduced by the Buhari government – contributed to the country’s shrinking economy.

Ikemesit Effiong, head of research at SBM Intelligence says:

• “The policies of the current administration have hollowed out large segments of the economy. Most Nigerian importers of essential secondary or tertiary commodities or inputs have been adversely affected by a short-term forex policy and the unnecessary border closure.”
• “Aggressive regulatory behaviour, including the introduction of new charges and levies as well as the duplication of others, has not only ensured the growth of the country’s informal economy, it stands in marked contrast with the government’s own ease of business agenda.”
• “When added to the growing fiscal deficit – the administration has not fully funded a budget since it came to power – what this has meant is that jobs, food security, infrastructure, education and every other indicator of a growing economy have trended south for the vast majority of Nigerians. Economic growth, in effect, has remained invisible.”

Fragile hope

“Based on high-frequency data we track, we believe economic activities have shown signs of improvement, and a recovery may be underway,” say the Chapel Hill analysts. For instance, the Nigerian government, on 4 May, lifted the 35-day lockdown in Abuja and Ogun and Lagos states.

It has also gradually eased other restrictions, by doing the following:

• lifting the inter-state travel ban in July;
• allowing schools to resume teaching for students in terminal classes;
• allowing restaurants and bars to open;
• and lifting the ban on international air travel, which is expected to resume from 29 August, among other measures.

“Even at that, the implementation of the remaining restrictions has been less than perfect, due to compliance fatigue. While the weak implementation could help limit the downside impact of social distancing measures on growth, it also increases the risk of the virus spiralling out of control and return to strict measures. However, we are yet to observe any major spike in the infection wave in Nigeria, while the Covid-19 curve appears to be flattening, although testing remains underwhelming. This implies that the risk of rollback of economic reopening is minimal,” note the Chapel Hill analysts.

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Analysts say there could be a gradual reopening of the economy to drive a sharp rebound in activity in Q3. “We expect the growth contraction to ease to a forecast range of -3.5% to -4.5% YoY in Q3 2020.

The oil sector contraction is expected to deepen to -17% YoY, due to increased compliance with OPEC+ production cuts. Conversely, the non-oil contraction is expected to ease, due to the gradual reopening of the economy, and sustained outperformance of financial institutions and telecoms sectors,” Omotola Abimbola, said an analyst from Chapel Hill Denham Securities.