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How is the Nigerian economy doing?

You can’t say the Nigerian economy is boring.

This is a country where borders are closed a few months after a continent-wide free trade agreement is signed. A country hosting the world’s largest number of poor people and one of the most innovative technology ecosystems. A country with one of Africa’s most stable currencies on paper, yet one on the verge of devaluation, if you believe your last WhatsApp broadcast.

With so much happening, it’s sometimes hard to tell how things are going. Is the economy in good or bad shape? Should you flee to Canada?

Lucky for us, a lot of useful economic data has been released in the last few weeks. So, today’s newsletter achieves something simple: it looks at the data that tells you how the Nigerian economy is doing.  

First of all, let’s look at the big picture. The Nigerian economy grew by 2.3% year-on-year in the third quarter of 2019. That number doesn’t tell us much though, so let’s dig into the different parts of the economy to see what we learn.

Oil & Gas

The oil & gas sector grew by over 6% compared to the previous year, driven by a rise in oil production from 2.02 million barrels a day (mb/d) in Q2’2019 to 2.04 mb/d in Q3’2019.

At 2.04 mb/d, oil production is at its highest point since militant activity reignited way back in 2016. The boost in production is also due to Total Nigeria’s EGINA project. Oil started flowing from the EGINA field in early-2019, and when it hit its peak, it should contribute another 200,000 barrels a day, about 10% of Nigeria’s current production. In short, oil production may have room to grow.

There are two concerns though, and the first is urgent.

Nigeria is part of OPEC, a global cartel of oil-producing nations informally led by Saudi Arabia, and the group has been trying to restrict global oil supplies to prop oil prices. It does this by giving each member country a production cap, and Nigeria is currently exceeding its limit by about 100,000 barrels a day.

Nigeria’s oil ministry disputes OPEC’s calculations, arguing that the cartel is counting oil condensates, a lighter form of crude oil exempted from the quota. OPEC has refused to buy this line of argument so far and could put pressure on the petroleum ministry to comply with the quota, thereby restricting oil production growth.

The longer term concern for oil & gas in Nigeria is what happens after EGINA. Investment in drilling & exploration has been low in recent years and it is unclear where new capacity is going to come from. In fact, with the government raising royalty rates on offshore deep-water fields (about 40% of current production), investment is likely to stall further.

All of this means that oil & gas in Nigeria may be approaching its peak, at least for a while. Even the government recognises this in a way; in the 2017 Economic Recovery & Growth Plan, it predicted oil production of 2.5 mb/d by 2020. In more recent forecasts, it projects production of just 2.36 mb/d in 2022.

Agriculture

If few people are surprised that the oil & gas prognosis is not encouraging, how about agriculture, the government’s favourite sector?

Things here are… ordinary.

Nigeria’s agriculture sector is still growing somewhere between 2% and 3%. That’s appalling for a sector the government sees as a major growth driver. To see what a growth driver should look like, we can look at China. Between 1978 and 2006, the manufacturing sector grew by 11.6% on average each year. 

During this period, people were moving from agriculture to manufacturing. So, how did the declining agriculture industry grow in that period? 4.5%. In short, the declining agriculture industry in China grew faster for 30 years than Nigeria’s star agriculture sector has managed since 2012.

Everything else

Nonetheless, agriculture is still doing better than the other sectors. The manufacturing sector is growing by 1% while the services sector (60% of the economy) is around 2% growth.

Most of this growth in services is coming from one industry: telecoms. Telecoms account for 18% of services, 9% of the entire economy, and grew by over 12% in this past quarter.

What this means is that the only thing doing really well in Nigeria is the digital economy. You would hope that government policy would then move in this direction, then you remember the Senate mulling a 9% tax on all communication services in Nigeria and the Central Bank of Nigeria considering capital requirements as high as ₦5 billion for Fintech companies.

Finally, here’s a tip: A crude way of assessing the health of an economy is looking at how Trade and Real Estate are doing. In Nigeria, both of those shrank in the most recent quarter.

What’s the verdict?

The good news is that the Nigerian economy has stabilised since the 2016 recession and there should be little fear of another one. The bad news is that the economy has stabilised at an abysmal growth rate between 2% and 2.5%.

What other countries have a medium-term growth rate of 2%? Canada and Russia stand out. How big are their economies? $1.7 trillion and $1.6 trillion. How big is the Nigerian economy? $440 billion.

In essence, Nigeria is a developing nation with the economic growth rate of a developed nation. Countries at Nigeria’s stage of development should be growing much faster than we are. If things continue as they are, there is only one likely ending.

Consumer prices

There are other important things to consider before we can give a full verdict on the Nigerian economy, and the first is inflation.

Nigeria’s annual inflation rose to 11.6% in October 2019, the highest since May 2018. Inflation is split into two main categories: core (energy prices, things like education, clothing, etc.) and food (domestic and imported food). While core inflation is dropping, food prices are accelerating.

How come? You guessed it: Border closure.

How do we know? Let’s look at the data. The first thing that stands out is that prices rose faster between September and October this year than they have done since the National Bureau of Statistics began its recent records in 2009. By comparing the same months across different years, we can tease out seasonal effects. In this case, something unusual between September and October to push up prices more than usual.

The second piece of evidence is that imported food inflation is higher than domestic food inflation, exactly what you would expect from the border closure as imported items will be hit harder.

There are some good reasons for closing the border, but it’s important we agree that it’s pushing up food prices. And the longer it continues, the faster prices will rise, and the more your naira will lose its value in the supermarket.

The exchange rate game

Before we finish, let’s look at two things that you may not hear about often, but are important for understanding where Nigeria is.

The first is capital imports, which is the amount of foreign investment coming into the country. It can come in three main forms (loans, FDI and FPI). Foreign direct investment (FDI) and foreign portfolio investments (FPI) are the main indicators and the difference between the two is commitment.

FDI is like when a foreigner buys a factory while FPI is like when they buy shares in a company—it is much easier to sell your shares and leave than it is to shut down your factory. So, FDI is a sign of trust in the economy.

The story from the release of Q3’2019 capital imports data is the same as it has been for a long time. FDI in Nigeria is very small. Like really small. In Q3, Nigeria received $200 million in FDI, which was less than 4% of all capital that came in. Meanwhile, FPI is huge, representing 56% ($3 billion) of capital imported in Q3’2019.

What’s going on here? Well, foreigners are taking advantage of the high interest rates on short term fixed income instruments in Nigeria. So far, foreigners have invested $12 billion in treasury and OMO bills in 2019, as much as the total FDI they have brought over the last eight years.

Hang on. These foreigners are not exploiting Nigeria. In fact, they have been encouraged by the central bank, who knows that the easiest way to get them to bring in their dollars is to promise foreign investors a large reward they can cash out on very soon. Like a 90-day treasury bill earning 12% interest.

External reserves

The second thing to look at along with capital imports is external (dollar) reserves. Nigeria’s reserves fell below $40 billion for the first time since December 2017. To be honest, the effect of that is more psychological than anything.

More worrying is that FPI holdings account for about $15 billion of these reserves. So, once CBN stops issuing those juicy treasury bills to foreigners and they take out their dollars, Nigeria’s reserves will crash. A similar effect will happen if foreigners decide to exit for other reasons.

When reserves get too low, the central bank loses its ability and credibility to keep the naira stable as everyone would know it does not have the dollars to do so. That’s what happened in 2016—with reserves under $25 billion, the CBN bowed to pressure to devalue.

What this means is that the only thing keeping the naira stable is the central bank’s ability to keep these foreign portfolio investors in the country. 

One rate to rule them all

So to recap, The economy is not growing fast enough. The borders have been closed and that has caused a spike in inflation. Meanwhile, Nigeria’s external reserves—and by extension, the naira—are being supported by fickle foreign investors. None of this sounds good.

How did the central bank respond when they met for the monetary policy committee meeting held every two months to determine interest rates in the economy? They did nothing and held interest rates constant.

At first, that seems a bit bizarre. This is the same central bank desperate to lower interest rates and get banks to lend to the real economy. Why won’t they just use their main policy tool to achieve that?

Well. The CBN claimed it did not reduce interest rates because it does not want to stoke inflation. But that’s hard to believe. The inflationary pressures have been caused by the border closure, a condition that neither the CBN nor interest rates can change. Moreover, the central bank itself said that the increase in inflation was “expected and temporary” due to the border closure, which means it should have been able to cut interest rates.

So, what is really going on?

Somehow, we come back again to the exchange rate and the game the CBN is playing with foreign investors. You see, it can’t cut interest rates because that may send the wrong signal to foreign investors, who are only here for the high interest rates. And God forbid they leave with their dollars.

Man was made for the exchange rate

To conclude, take this away, at least. When it comes down to it, all these things—border closure and inflation, reserves and capital imports, and the other CBN decisions—come down to one thing. The exchange rate.

The entire economy has come to serve the exchange rate, rather than the other way around. And that is why the Nigerian economy sits in an uncomfortable place right now, and there doesn’t seem to be a clear way out. The central bank has tied its hands by prioritising the naira above all else.

The economy may be sleepwalking into oblivion, but at least the naira is still at 360, right?

We are hiring. If you are in Nigeria and looking to work in a brilliant team of economists, journalists, data scientists & engineers, take a look at some of our open roles here

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