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AMR: Nigeria

AMR: Nigeria

We expect the economy to contract by 4.4% in 2020, with economic growth recovering to 0.6% in 2021. We expect the C/A balance to reach -3.8% in 2020 and -3.1% in 2021. We expect USD/NGN at 390.0 by the end of 2020.

Nominal GDP
Real GDP growth

GDP growth - recovery will be slow and painful

Nigeria therefore would be unlikely to stage a swift economic recovery such as we might see in some other African economies. An economic recession in 2020 now seems certain. The disruption in economic activity from the pandemic had already led to a contraction of 6.1% y/y in Q2:20. The agricultural, ICT and the financial services sectors were the only ones to record positive growth in Q2:20. We now however expect the economy to contract by 4.4% y/y in 2020, then slowly recover to grow by 0.6% y/y in 2021.

Balance of payments – C/A deficit to persist

In addition to longstanding poor growth, the persistent BOP deterioration is a challenge. In contrast to the C/A dynamics in 2019, both exports and imports will decline materially in 2020. Of course, the material decline in exports is largely attributable to lower oil prices and production during the period. We expect the C/A deficit at 3.8% of GDP in 2020, before narrowing to 3.1% of GDP in 2021 as exports recover.

Monetary policy - liquidity management

The CBN’s monetary policy techniques have been geared towards liquidity management mostly through its unorthodox excess cash reserve ratio regime. Notably monetary policy techniques have proven quite ineffective in fighting headline inflation in Nigeria because it is more affected by supply-side and cost-push factors.

FX outlook – CBN set on FX stability

After the initial adjustment in Mar 20 where the USD/NGN depreciated by some 7% in the IEFX segment, the pair has since ranged around 385-390. Notably, liquidity has been very thin. As such, there has been a significant accumulation of FX demand in the market, particularly for foreign portfolio investors. However, the CBN at the beginning of Sep resumed sales to FPI (offering spots and forwards) at the IEFX segment and also to BDCs as international travel resumed.