Nigeria: Risk Assessment
Country Risk Rating
Business Climate Rating
- Leading African power in GDP terms; most populous country in Africa
- Significant hydrocarbon resources and considerable agricultural and mining potential
- Relatively low public and external debt
- At the crossroads of West and Central Africa; access to the sea
- Highly dependent on oil revenues (90% of exports, two-thirds of tax revenues)
- Pollution related to oil development
- Insufficient production and refining capacity/electricity distribution
- Ethnic and religious tensions
- Insecurity and corruption putting pressure on the business environment
Growth is expected to stall in 2020, hampered by the oil sector. In a context of low oil prices, flat or declining oil production – due to capacity constraints resulting from under-investment in new projects in recent years – will severely impact the contribution of the trade balance. Low oil revenues and the growing burden of debt service are likely to restrict the government’s ability to stimulate activity through public investment. While central bank measures to encourage commercial banks to lend more to the private sector may support investment and consumption, the unattractive business environment, including limited access to foreign exchange for importers and a complex multiple exchange rate system, is expected to continue to hamper private sector participation. Additionally, public borrowing will probably continue to crowd out credit to the private sector, limiting the impact of central bank measures. Despite the support that may also come from the (possible) application of the new minimum wage, private consumption will continue to be inhibited by high unemployment and endemic poverty. Household incomes are expected to continue to be eroded by high inflation. It is expected to increase, driven by food prices, as a result of import restrictions and the closure of land borders with neighboring countries since August 2019, but also because of the unstable security situation, which is hindering agricultural production.
Debt puts pressure on the budget
In 2020, despite budgetary consolidation efforts, the budget deficit will remain high. Unfavorable movements in oil prices and production are set to hamper the growth of oil revenues. Notwithstanding the goals set out in the budget forecasts, poor performances in terms of non-oil revenue growth are likely to be repeated in 2020. The increase in the VAT rate from 5% to 7.5% may help to boost this category of revenue, but the planned exemptions will mitigate its impact. In the face of revenue collection constraints, current expenditure is expected to rise in line with changes in the wage bill, which is poised to go up due to the minimum wage hike. Moreover, although the level of debt – which is mainly domestic and denominated in local currency – is low, servicing it will continue to absorb a significant share of budgetary resources. Since 2015, debt service payments have accounted for more than 60% of federal revenues. As a result, hopes of increasing capital investment spending will once again come up against these budgetary constraints. The deficit will be financed by new domestic and external borrowing. The latter should be favored, as loans from the local banking sector are already having a crowding-out effect on the private sector.
The current account, which has shifted to a slight deficit due in particular to the increased import bill, is likely to remain in deficit. The trade surplus will be eroded by the decline in oil export revenues. The country’s dependence on foreign services, particularly oil freight services, and profit repatriations by foreign companies will ensure continued deficits in the services and income accounts respectively. The less favorable European and American economic situation could have an impact on remittances, which maintain the surplus in the balance of transfers. Although low, FDI and portfolio flows should finance this deficit. Foreign exchange reserves, which cover more than 6 months of imports of goods and services, could also be used to finance the deficit and enable the central bank to intervene in the foreign exchange market.
Muhammadu Buhari: new mandate, old challenges
President Muhammadu Buhari was re-elected as leader in the February 2019 elections. Legislative and senatorial elections held on the same day were won by his party, the All Progressive Congress (APC). Although upheld by Nigeria’s constitutional court, the results were rejected by President Buhari’s leading rival, Atiku Abubakar of the People’s Democratic Party (PDP). Reported cases of post-election violence point to significant political, security and social tensions. The President, who was criticized for the slow pace of reform during his first term in office, still faces a myriad of security challenges that are destabilizing the country, starting with the activities of the Islamist terrorist group Boko Haram in the northeast of the country. Deadly clashes between herders and farmers continue to affect the central part of the country, while there is a renewed threat of attacks on oil infrastructure in the Gulf of Guinea. Back in 2016, such attacks caused oil production to fall to its lowest level in 30 years. The President will also have to respond to expectations among his citizens by acting to halt the decline in living standards that began with the 2014-2016 oil counter-shock. Widespread poverty, mass unemployment and persistent double-digit inflation are expected to continue to fuel a tense social climate. While the President’s focus on improving the business climate has enabled the country to move up 39 places in the Doing Business ranking since 2016, including a 15-place gain in the most recent edition (131st out of 190 countries), the operating environment remains challenging.