December 14, 2021/Cordros Report
EXECUTIVE SUMMARY
Supposing that parallel lines could be drawn between the reforms needed to improve macroeconomic resilience and the famous quote “never let a good crisis go to waste”, then it could be argued that the pandemic presented policymakers with another opportunity to implement a range of reforms. However, key reforms were not implemented across the downstream oil and gas and power sectors.
While the Nigerian economy has recovered from the impact of the COVID-19 pandemic, pre-existing macroeconomic imbalances have become more pronounced, thus increasing the country’s vulnerability to shocks. As observed with several economies across the globe, GDP grew substantially in the second and third quarters of 2021 as the low-base effect from 2020 magnified the impact of easing containment measures. However, economic growth remains tilted towards the Services sector while structural barriers continue to limit productivity in the Agriculture and Manufacturing sectors.
Without downplaying the threats posed by the Omicron variant, we do not envisage widespread institution of lockdown measures. Nonetheless, we think the economy will be traversing a murky recovery path as pandemic-related disruptions continue to ease and activities normalise in contact-facing sectors. We expect growth to be supported by the non-oil sector, specifically the Telecoms, Finance & Insurance, Trade and Entertainment sub-sectors. In the oil sector, we expect terminal shut-ins due to decaying infrastructure and pipeline disruptions to limit crude oil production, although growth will be higher than in 2021.
The monetary policy committee of the apex bank will come under increased pressure to switch its policy stance as major global central banks commence normalisation of unorthodox monetary policies enacted in response to the pandemic. The underlying tone of the Committee at the November meeting lends credence to our view that the MPC will likely revert to a hawkish policy stance from Q2-22; a period that we think the Committee will judge that policy initiatives had substantially supported economic recovery. We believe an increase in the monetary policy rate will also be necessitated by the need to attract portfolio inflows to mitigate currency pressures. Particularly as election uncertainties in H2-22 may compound risk-off sentiments towards naira assets.
On fiscal policy, we expect revenue generation to remain challenged due to weak crude oil output. Also, with 2022 being a pre-election year, we believe the government will pursue an expansionary fiscal stance to reflate the economy. Accordingly, we expect the actual fiscal deficit to be significantly higher than the budgeted deficit, resulting in continued debt accumulation, and by extension, adding more pressure to debt sustainability metrics.
