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Nigeria

Recovering from challenging times

D3

SENSITIVE RISK for enterprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

Updated in December 2021.

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GDP USD432.29bn (World Ranking 25, World Bank 2020)
Population 206.14mn (World Ranking 7, World Bank 2020)
Form of state Federal Republic
Head of government President Muhammadu Buhari
Next elections 2023, General elections
  • Dominant economy in West Africa in terms of population and GDP and now the continent’s largest economy.
  • Hydrocarbons resource base, with 2.2% of global oil reserves (11th in global rankings and 43 years of additional extraction at current rates) and 2.7% of natural gas reserves (9th and over 100 years).
  • High oil prices in 2011-2014 boosted export earnings, provided current account surpluses and accumulation of international reserves (import cover markedly in excess of the international comfort benchmark of three months).
  • External debt ratios are again deteriorating but remain comfortable.
  • With oil and gas accounting for over 90% of export revenues, the economy is susceptible to volatility in global markets and to large swings in energy prices.
  • The federal government is hampered by the strength of state and tribal authorities. Deep ethnic, religious and regional divisions provide risks to systemic stability.
  • Personal and corporate security is high risk.
  • Long history of economic mismanagement and corruption continue to affect perceptions of doing business in the country.
  • Data provision remains poor for a country of such size and strategic importance.
  • Weak investment level.
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The dire need for economic diversification

Over the past decade, the Nigerian economy registered +2.5% growth on average, which was mainly sustained by the performance of the hydrocarbon sector. The Covid-19 crisis coupled with the oil price shock severely dampened economic activity in 2020, with the economy contracting by -1.8%. We expect economic activity to rebound only mildly in 2021 (+2.6%) and  in 2022 (2.7%), with the support of gradually recovering oil prices and export volumes. 

Oil represents 84% of Nigeria’s total exports, 30% of its banking-sector credit and 60% of overall government revenues. To ensure sustained and less volatile growth, diversifying the economy away from the hydrocarbon  sector remains the main challenge ahead. Moreover, poverty remains widespread and high in Nigeria on the back of deteriorating labor market dynamics since the 2016 recession, coupled with the detrimental impact of the Covid-19 crisis.  The World Bank forecasts a jump in the national poverty rate from 40.1% in 2019 to 45.2% in 2022: 100.9 million Nigerians would be living in poverty in 2022.

The deteriorating purchasing power of households is one of the key economic issues that needs to be addressed in the near term. The central bank has been persistently missing its inflation target range of 6% over the past few years. The last time Nigeria recorded a single-digit inflation rate was in January 2016 (9.6%). At the end of 2021, consumer price inflation soared to 16% while food inflation reached 22%.  We expect inflation to remain in double-digit territory in 2022, driven by elevated food prices, high domestic energy prices and accommodative monetary policy.

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Solvency is not yet a concern but external liquidity tensions persist

Financial flows indicators suggest that Nigeria is facing “medium” short-term financing risk. The Covid-19 crisis created strong external liquidity tensions in 2020, when the central bank's international reserves fell sharply (to USD35bn), reflecting large portfolio outflows, a deteriorating current account and declining remittance inflows. In 2021, foreign exchange reserves recovered to USD41bn with the impulse from the new IMF Special Drawing Right Allocation and Eurobond issuances. The tightly managed exchange rate regime in a context of double-digit (mostly imported) inflation continues to constraint the effectiveness of monetary policy. In 2021, the central bank sought to implement greater exchange rate flexibility to unify progressively multiple exchange rates while keeping inflation at bay. Overall, the private sector’s access to foreign currency funding remains hindered, creating payment difficulties for importers.

Nigeria’s fiscal revenue mobilization is extremely low (7% of GDP) even by regional standards (16% of GDP), putting its public financial under pressure. Although the public debt level remains low at 35% of GDP, debt accumulation has shown a dramatically increasing trend (+15pp of GDP) since 2015. Low oil revenues, weak non-oil tax mobilization and a high debt service burden have created greater external borrowing needs for the government. Even before the Covid-19 crisis, optimistic budget targets led to sizeable revenue shortfalls, with federal government interest payments absorbing around 60% of government revenues. We expect the fiscal deficit to hover around -5.5% of GDP in the medium term.

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Long way to go to fully reap the benefits of the large market

Infrastructure inadequacy, segmented foreign exchange markets and excessive central bank financing of government debt have undermined confidence in the economy and discouraged foreign investment over the past few years. In addition, poor governance and endemic corruption continue to create bottlenecks for private sector-led growth. On a positive note, increasing urbanization together with developing communication infrastructure offer an attractive market potential. The approval of the Petroleum Industry Act in 2021 should also provide a clear roadmap on infrastructure investment in the hydrocarbon sector. The World Bank Doing Business Index 2020 ranks Nigeria 131th (out of 190 countries), 15 places up since 2019. Nigeria stands out, for the second time, as one of the top 10 countries with the most notable improvements in the areas of starting a business, dealing with construction permits, getting electricity, registering property, trading across borders and enforcing contracts.

The Covid-19 economic fallout has exacerbated persistent sources of social discontent since 2016. The government is facing significant challenges in implementing key economic  reforms (e.g. tax increases and cutting fuel subsidies)  in a context of chronic instability, high inflation and rampant unemployment. Nigeria is exposed to diverse security threats although armed violence remains concentrated in specific geographic corridors. The activity of the Islamist terrorist group Boko Haram in the north-east of the country has displaced millions of people since 2015.

Trade structure by destination/origin

(% of total, 2020)

Exports Rank Imports
India 20.7%
1
30.5% China
Spain 8.4%
2
11.4% United States
China 7.8%
3
5.7% Belgium
Indonesia 7.0%
4
5.4% India
Netherlands 6.0%
5
4.9% Netherlands

Trade structure by product

(% of total, 2020)

Exports Rank Imports
Petroleum, petroleum products and related materials 76.0%
1
14.8% Petroleum, petroleum products and related materials
Gas, natural and manufactured 13.6%
2
9.4% Road vehicles
Coffee, tea, cocoa, spices, and manufactures thereof 1.5%
3
6.9% Other industrial machinery and parts
Metalliferous ores and metal scrap 1.1%
4
5.0% Cereals and cereal preparations
Oil seeds and oleaginous fruits 1.0%
5
4.5% Specialised machinery

Contacts

 
Allianz Research
research@allianz-trade.com
Selin Ozyurt
Senior Economist for France and Africa
selin.ozyurt@allianz-trade.com

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