Oil-backed growth

In 2022, economic activity will accelerate, supported by an average oil price higher than the previous year and an increase in oil production. All components of the economy will contribute. Investments (31% of GDP in 2020), mainly of domestic origin, will be primarily directed towards services, such as financial engineering and audiovisual production. Industry and agriculture will be less well supported, despite subsidies and public guarantees designed to promote these sectors to diversify the economy. In November 2021, the central bank (CBN) launched its 100 for 100 Policy on Production and Productivity, a new initiative to finance 100 selected companies every 100 days. This was the central bank’s 35th sector financing initiative. The CBN’s proactive stance is not preventing commercial banks from expanding their lending activity, spurred on by a 27.5% reserve requirement and a requirement to maintain a loan-to-deposit ratio above 65%. Conversely, foreign exchange and import restrictions will further discourage foreign investment, as well as insecurity and power outages. The long-awaited enactment of the Petroleum Industry Act (16 August 2021), featuring measures such as the transformation of the national oil company NNPC into a joint-stock company, the adoption of tax treatment that reflects operating conditions, 30% of NNPC profits to be allocated to identifying new deposits, and 3% of operating expenses to be expended to local communities, will make little difference. Exports (10% of GDP), of which oil accounts for 80%, will benefit from the boom in oil sales. At the same time, imports (17% of GDP) will continue to be constrained, so the contribution of foreign trade to growth will be positive. Household consumption (65% of GDP) will benefit from the oil spillover and the excellent performance of agriculture and services, which comprise the bulk of GDP. However, households will continue to be confronted with high unemployment and inflation. Inflation is fueled by import restrictions that domestic production, which the limits are supposed to encourage, cannot offset fully.

Domestic debt, less pressure on foreign exchange reserves

The 2022 budget (9% of GDP) projects an unlikely deficit of 3.4%. This figure is based on a barrel price of USD 57, oil production of 1.88 million b/d (1.6 in 2021), inflation of 13%, growth of 4.2%, and an official exchange rate of 410 nairas to the dollar (379 to the dollar in 2021). The last two assumptions are optimistic. Even if moderate, the debt will generate interest payments that absorb 40% of the country’s scarce resources, while security and defense will account for 20% of non-interest expenditures. It is unlikely that the removal of costly fuel subsidies, or any budget reform, will occur before the 2023 elections. Financing will still be provided mainly by the domestic market, which is both very liquid and inexpensive because of the negative interest rate on naira debt. The central bank could participate. Its holdings of government securities amounted to NGN 35.5 trillion (USD 38 billion) as of October 2021. A plan is to convert these liabilities into 30-year securities placed with commercial banks, which could cause private credit to dry up.

The current account deficit will narrow as the country returns to a trade surplus driven by higher oil revenues. In addition, the start-up of the Dangote refinery in July 2022 will reduce purchases of refined oil products (10% of imports). Finally, the compression of imports will continue. Conversely, the services and investment income deficits are set to widen due to the higher cost of oil freight and increased profits of foreign companies. Expatriate remittances will continue to make a positive contribution. In the absence of an agreement with the IMF, particularly on subsidies and the exchange rate regime, and with foreign investors put off by the difficulty of repatriating revenues and the low yield on domestic securities, financing will rely on the issuance of securities on international markets. The external debt will nevertheless remain modest (15% of GDP). At the end of October 2021, foreign exchange reserves represented the equivalent of nine months of imports after issuing USD 4 billion in bonds (30-yr at 8.25%). The smaller current account deficit should ease pressure on the naira, allowing the central bank to reduce its interventions to limit the gap (37% in October 2021) between the quasi-official exchange rate (NAFEX) and the parallel market.

Security challenges

President Buhari, who was re-elected in 2019, faces a myriad of security challenges, starting with the activities of the Islamic State in West Africa Province (ISWAP) and Boko Haram in the northeast of the country, banditry further west, deadly clashes between herders and farmers in the center, and separatism in the southwest and southeast, all against the backdrop of disputes over the distribution of oil wealth. Widespread poverty (45% in 2020), corruption, mass unemployment, and double-digit inflation fuel a tense social climate. General elections will be held in February 2023. Suppose the North-South rotation of power is respected. Given the disenchantment with the incumbent president and his APC party, the presidency is expected to go to a southerner, most likely from the PDP.