Macroeconomic Report & Economic Updates

The Federal Executive Council has ratified Nigeria’s membership of the African Continental Free Trade Area (AfCFTA) agreement ahead of the December 5, 2020 deadline.¹ The AfCFTA, which comes into effect on the 1st of January 2021, aims to create a single market for goods and services in Africa that can potentially increase consumer and business spending to over $6.7 trillion by 2030.² Nigeria with its substantial market, large labour force and the economy is likely to be a major beneficiary of the agreement. However, the Nigerian government in some instances has taken an anti-trade policy stance such as the closure of land borders with Benin, Niger, and Cameroon in order to curb the smuggling of food products, and the new import prohibition on Maize. As such, the government will have to improve its preparedness towards implementing the AfCFTA by identifying and achieving quick wins to enhance trade across borders. Another important policy objective is increasing the awareness of the AfCFTA among local businesses in order that they leverage on the increased market access.

The manufacturing and non-manufacturing Purchasing Managers’ Index (PMI) for the month of October showed a slowing contraction relative to previous months, making it the 7^th consecutive month both indices have been below the 50-index point benchmark.¹ Manufacturing PMI increased from 46.9 index points to 49.4 index points while non-manufacturing increased from 41.9 index points to 46.8 index points, but still below the 50-index point benchmark. However, 6 out of 14 subsectors in the manufacturing sector recorded an expansion relative to the previous month. In the non-manufacturing sector, only 3 out of the 7 sub sectors recorded growth relative to the previous month. Production is expected to improve significantly as the economy rebounds and the festive season approaches, thus both manufacturing and non-manufacturing PMI are expected to advance towards the 50-index point benchmark. However, the increase in PMI, as a result of increased demand, is likely to be associated with rising inflation. As such, the Central Bank of Nigeria (CBN) should increase efforts towards addressing the rapid increase in the price of commodities.

The International Monetary Fund (IMF) has projected that the GDP growth for Nigeria will shrink to -4.3 percent at the end of 2020 from 2.2 percent in 2019.¹  The negative growth forecast is attributed to fall in oil prices, coupled with a reduction in crude oil production due to production cut agreement by Organization of Petroleum Exporting Countries and other major oil producers (OPEC+). Also, the decline in domestic demand owing to the lockdown is another driver of the negative outlook. Growth is however projected to rebound in 2021 at 1.7 percent, when crude oil price and production increases. The pandemic has exposed the vulnerabilities of Nigeria’s mono-product economy and emphasized the need for diversifying the revenue base of the economy. Efforts towards boosting the performance of non-oil sectors such as agriculture, mining and entertainment should be increased and time-sensitive.

Total geographical distribution of credit by state increased by 1.82 percent to N18.9 trillion in the second quarter of 2020 from N18.56 trillion in the first quarter of 2020.¹ Lagos State (N14.92 trillion) accounted for 78.94 percent of the total credit. Further disaggregation shows N77.6 billion was distributed as loan for mortgages in 2019 compared to N25 billion in 2018. 220,935 individuals registered for the National Housing Fund, representing a 33.6 percent increase from 2018. Also, N4 trillion was distributed under the Agricultural Credit Guarantee Scheme Fund in 2019, an increase from N2.9 trillion in 2018. The increase in credit particularly towards the agriculture sector will not only improve the living standard of beneficiaries but also enhance development through an increase in economic activities and trade; alongside building the resilience of the economy by improving the balance of payment account. However, providing loan guarantees to borrowers can considerably increase the contingent liability of the government with implications on its fiscal performance. As such, a cost-benefit analysis of these credit facility programmes and other available options to boost economic activities is required in order to determine the best approach.

President Muhammadu Buhari presented the Federal Government’s Proposal for the 2021 fiscal year before a joint sitting of the National Assembly. The proposed Revenue and Expenditure budgets are ₦7.89 trillion and ₦13.08 trillion respectively, representing a ₦5.20 trillion fiscal deficit.¹ With an estimated Gross Domestic Product (GDP) of ₦1.43 trillion², the fiscal deficit is 3.64 percent of estimated GDP, above the 3 percent threshold set by the Fiscal Responsibility Act of 2007. Key assumptions of the proposed budget include: $40 per barrel oil benchmark, crude oil production of 1.86 million barrel per day, an exchange rate of ₦379 per US$, GDP growth rate of 3 percent and inflation rate of 11.95 percent. The high fiscal deficit increases the likelihood of a default in the near term as the government is unlikely to considerably raise tax or cut back on government programmes. The overtly expansionary macroeconomic policies and explicitly unsustainable public debt dynamics calls for reforms capable of increasing the share of domestic savings to finance domestic capital stock rather than external debt.