Nigeria’s economy shows a cheering performance but the overall growth was driven by narrow base, underlining the need for further reforms in many sectors of the economy. In this report, Deputy Group Business Editor, Taofik Salako, examines the macroeconomic performance and its outlook.
The National Bureau of Statistics (NBS) has just released its latest data on the economy with the Gross Domestic Product (GDP) rising by five per cent in the second quarter of 2021.
This represents the third quarter of consecutive growth and the highest growth since fourth quarter of 2014 when the economy grew by 5.9 per cent. It is also a major pointer to the continuing economic recovery since Nigeria exited COVID-19 pandemic-induced recession last year.
But the overall economic performance was boosted partly by the high base-year effect of second quarter 2020 when the pandemic disruptions pressured GDP to a decline of 6.1 per cent. Without the base effect, a quarter-on-quarter analysis showed that the GDP actually contracted by 0.8 per cent in second quarter 2021 compared with the first quarter.
Beside the base effect, the 5.0 per cent overall performance in second quarter 2021, when compared with second quarter 2020, was also driven largely by non-oil sector. A breakdown however showed that while several segments of the non-oil sector recorded appreciable growths, the largest segments of agriculture, information and communication technology (ICT) and finance and insurance as well as mining and quarrying contracted during the period.
The oil sector contracted sharply by 12.7 per cent in second quarter 2021 compared with a decline of 2.2 per cent in second quarter 2020 and 6.6 per cent drop in first quarter 2021. The contraction in second quarter 2021 was mainly driven by weaker oil production levels, as average daily production declined by 11 per cent to 1.6 million barrels per day (mbpd) from 1.8 mbpd in second quarter 2020. Average crude oil production was 1.7 mbpd in first quarter 2021. The decline in crude oil production was partly due to production cuts by OPEC+ and decline in production activities in the Nigerian upstream sector. Many analysts have also blamed the parlous state of Nigeria’s refineries for the slow sectoral performance, with the oil refining segment dropping by 46.8 per cent in second quarter 2021. With these, the oil sector’s contribution to real GDP dropped from 8.9 per cent in second quarter 2020 to 7.4 per cent in second quarter 2021. Oil sector’s contribution to the GDP stood at 9.3 per cent in first quarter 2021.
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But the non-oil sector showed a generally positive performance, underscoring the catalytic effect of continuing opening up of the economy after the COVID-19 restrictions. Despite the fears about the new Delta variant, COVID-19 cautionary measures remained subdued compared to the lockdowns that characterised 2020. The non-oil sector grew by 6.7 per cent, when compared with second quarter 2020, underlining widespread improvements in several segments of the sector. Even on quarter-on-quarter basis, non-oil sector grew by 5.95 per cent in second quarter 2021 when compared with first quarter 2021, which grew by 0.8 per cent when compared with fourth quarter 2020. Breakdown of the growing segments showed trade, 22.5 per cent; transportation and storage, 76.8 per cent; manufacturing, 3.5 per cent; construction, 3.70 per cent; entertainment, 1.22 per cent; accommodation, 76.81 per cent while electricity posted 78.2 per cent growth as commercial activities picked up.
Challenges in main sectors
However, agriculture, a major economic theme of the government’s development agenda, underperformed several indices as the country’s insecurity and violence remained impediments to agricultural growth. Agriculture performance also belied the Central Bank of Nigeria (CBN)’s interventions, which many analysts had criticised for their lack of clarity and accountability.
Agriculture sector grew by 1.3 per cent in second quarter 2021, when compared with second quarter 2020. This was below 1.6 per cent recorded in first quarter 2021 and the segment’s five-year average growth of 2.1 per cent. The ICT segment of the non-oil sector lowed to 5.5 per cent growth in second quarter 2021 compared with 16.5 per cent recorded in comparable period of 2020.
In spite of 15.7 per cent growth in the insurance sub-segment, the finance and insurance segment also contracted by 2.5 per cent when compared with 18.5 recorded in second quarter 2020, a period that saw the locked economy depending more on online banking. The insurance segment remains significantly low relative to the dominant banking sub-segment.
Analysts agreed that the second-quarter 2021 economic performance, though encouraging, leaves Nigeria with many gaps to fill. Bismarck Rewane’s Financial Derivatives Company (FDC) at the weekend drew a major imagery of the challenge facing Nigeria as a competitive hub.
“Interestingly, the release of the second quarter 2021 GDP data coincided with the rebasing of the South African economy, the second largest in SSA. The (South Africa) GDP size increased by 11 per cent to $369 billion, bringing it neck and neck with Nigeria,” FDC stated.
Analysts at FDC noted that with the average growth for the half-year 2021 now at 2.70 per cent, Nigerian economy would need to grow at an average of 2.5 per cent in the second half of the year to achieve the target growth of between 2.5 per cent and 3.0 per cent for 2021.
“While this seems possible, it will be a tall order when the level of activity is compared with third quarter 2020 – the period when re-opening and relaxation started and the Economic Sustainability Plan (ESP) and palliative stimulants were in play,” FDC stated. Analysts at United Capital expected the economy to grow by 3.0 per cent in third quarter 2021, compared with third quarter 2020. Cordros Capital expects GDP growth of 3.76 per cent in third quarter 2021.
Most analysts agreed the economic outlook remained tepid with many expecting the third quarter 2021 performance below previous levels. While maintaining a positive outlook, analysts at United Capital at the weekend reviewed their full-year GDP growth projection downward to 2.4 per cent. But analysts at Afrinvest Securities retained their growth projection of 2.5 per cent for 2021.
“Evidently, the strong recovery in private consumption in second quarter 2021 was a result of Nigeria being largely free of high COVID-19 caseloads during the period. However, as seen with the recent surge in COVID-19 cases and the threat of the Delta variant, we note that COVID-19 remains a downside risk and could slightly impact consumer spending if authorities are forced to re-impose some restrictions. That said, we expect any possible restrictions to be mild and as such, we do not expect the impact on consumer spending to be anything close to the previous two waves of infections,” United Capital stated.
According to analysts, the non-oil sector is expected to continue to recover as the rebound in economic activities will continue to bolster recovery in the key subsectors such as trade, transportation and storage while the manufacturing and construction subsectors will benefit significantly from a re-opened economy and removal of movement restrictions.
Also, the low base from third quarter 2020 would further magnify recovery in third quarter 2021.
However, while the agriculture sub-sector is expected to rebound in fourth quarter 2021, the negative impact of insecurity on the sector remains a major concern.
Analysts also expected improvement in the oil sector, given the low-base of crude oil production in second half of last year and expected relaxation of OPEC output cap through the year as oil demand recovers.
“Also, the classification of Agbami oil grade, as condensate, implies Nigeria’s condensate production would improve while giving it further room to pump more crude since Agbami grade will be removed from its quota calculation. Lastly, we recall that Nigeria’s production quota was increased by OPEC+ at its last meeting implying oil production for the rest of the year should pick up albeit below pre-pandemic levels,” United Capital stated.
According to analysts at Afrinvest, the non-oil sector will continue on its recent mixed trajectory. Agriculture is expected to improve in the third and fourth quarters of the year, supported by improved harvest, although protracted chaos in the planting regions remains major downside risk.
“Hence, we expect the agriculture sector growth for the full year to settle around 2.4 per cent. We project that the services and industries sector growth would settle around 4.8 per cent and 2.1 per cent, supported by high-base year impact and improved economic activities.
“For the oil GDP, we expect the gradual increase in Nigeria’s oil production towards the new cap of 1.83 mbpd, from 1.45 mbpd, by the OPEC+ to boost the sector performance in second half 2021. Besides, we see the recently signed Petroleum Industry Act (PIA) attracting new investments to the oil and gas industry in the near term, and by extension, improving the oil GDP performance,” Afrinvest stated at the weekend.
Analysts at Cowry Asset Management Limited said they expected “moderate growth in third quarter 2021” citing “constraints to agricultural output partly due to insecurity”.
“Although we believe terminal shut-ins will continue to constrain oil production, we expect the oil sector to grow by 3.59 per cent in third quarter 2021, driven by the base effect from the prior year. Similarly, we expect the non-oil sector to grow by 3.78 per cent as the low base effect magnifies the impact of sustained economic reopening,” Cordros Capital stated.
According to FDC, to sustain the positive growth trajectory, the economy needs strategic investments and increased stimulus in the job elastic sectors while reducing leakages emanating from misaligned exchange rates and subsidies.
“While the continued expansion in economic growth is a positive development, it is yet to have a significant impact on socio-economic conditions. More people are living below the poverty line. According to the World Bank, seven million people fell into extreme poverty in 2020, bringing the total number of people living below the poverty line to approximately 96 million.
Also, unemployment is projected to increase towards 40 per cent from 33.3 per cent in fourth quarter 2020. According to Okun’s law, to achieve a one per cent decline in unemployment, real GDP must grow two per cent faster than the growth of potential GDP. The Economic Intelligence Unit (EIU) estimates Nigeria’s potential growth at 8.3 per cent for 2021,” FDC stated.
Nigeria needs a more coordinated and constrictive approach in the implementation of its economic development blueprint, to achieve desired growth, according to analysts. While economists believe that investment is a catalyst for growth and countercyclical fiscal policy of increased government spending will stimulate growth during downturns, the impact of these on the economy largely depends on the multiplier effect.
“It is important that these investments and stimulus packages are targeted at the productive sector of the economy to unlock idle resources and spur output growth whilst eliminating leakages emanating from misaligned exchange rates and subsidies. It is also important that the major challenges to investment are addressed – policy inconsistency and uncertainty, insecurity and regulatory bottlenecks,” FDC stated.
FDC noted that with the moderation in inflation to 17.38 per cent and the spike in GDP growth to 5.01 per cent, there is increased probability that the CBN may cut its benchmark Monetary Policy Rate (MPR) by 50 basis points to 11 per cent at the next Monetary Policy Committee (MPC) meeting in September 2021.
The GDP growth in the second quarter 2021 is encouraging but Nigeria needs a stronger focus on sustainable economic development to unlock its economic potential, relative to its size and yearnings of the average Nigerians.
This calls for continuation and improvement of the reforms and additional targeted reforms to block loopholes across the sectors and accelerate growth. The government’s handling of the COVID-19 pandemic remains a major factor, alongside security concerns and intense politicking as Nigeria’s political season draws near.