February 22, 2022/United Capital Research

Last week, the National Bureau of Statistics (NBS) released a flurry of relatively positive economic data. The Q4-2021 GDP report estimated that the Nigerian economy grew 4.0% in Q4-2021, while expanding by 3.4% y/y in FY-2021. Non-Oil sector growth remained the main driver, expanding by 4.4% in FY-2021. Also, the Consumer Price Index (CPI) report by the NBS showed a marginal steadying in Nigeria’s Jan-2022 annual headline inflation rate, down by 3bps to print at 15.6% y/y.

The rebound in oil prices, trade recovery, international financial aid, and policy support propelled Nigeria’s growth. However, the FGN will have to navigate potential headwinds in 2022, as the 2020 recession left a lasting imprint on the vulnerable and poorest Nigerians. Also, oil production has remained subdued, accounting for 8.3% of GDP, reflecting ageing infrastructure, the shortfall in investments, and technical and security challenges. The maintenance of implicit oil subsidies results in lower remittances to the FGN coffers needed to fund the arms of the government.  Lastly, Nigeria faces increased financing costs in the longer term due to the risks of monetary policy normalization in developed countries. Increased debt financing by developed central banks could also see capital flights and cause further fiscal imbalance.

Despite positive macro-economic data, downside risk remains; we ascertain that the actions of the fiscal and monetary policies need to be more aligned going into 2022, especially as the political risk becomes higher going into the 2023 election cycle. On the fiscal side, we call for the FGN to expand its non-revenue by increasing its tax base rather than its continued strangulation of the middle class and sophisticated services. Also, we recommend the adoption of structural reforms to improve governance and reduce big government. On the monetary side, we call on the ongoing credit support facilities to the non-oil sector need to be escalated. The liberalization of the FX windows and a possible devaluation are also potential short term fixes.