Economics

Nigeria: Annual economic outlook

The need to diversify the export base away from oil

6 March 2009

Victor Munyama

Despite Nigeria’s domestic economic challenges (the unrest in the oil-producing Niger Delta region, poor electricity supply and majorinfrastructural constraints), the economy maintained its growthmomentum in 2008. The country continues to show signs of a pro-reform, pro-investment environment, which attracted a lot of interestfrom the regional and international investor community. The policyframework continues to improve. Despite being an emerging economycharacterised by traditional sectors such as agriculture, manufacturingand trade, the country is still seen through its oil sector (being thelargest oil producing nation in Sub-Saharan Africa – SSA), with anestimated 32 billion barrels of oil reserves located along the coast andshores of the Niger River Delta. It is also estimated that the country hasabout 100 million cubic feet of natural gas reserves. However, the non-oil sector (agriculture, services, telecommunications and construction)has been the primary driver of growth, following a continued contractionin the oil sector in the past few years.

Projections for 2009:

•

Real GDP growth is expected to slow down to 3%

•

Oil production is expected to average 1.89 million barrels per day(mbd)

•

Naira exchange rate should depreciate to an annual average ofNGN151.50/USD

•

Average annual inflation to increase to 13%

•

Current account deficit expected to be 0.2% of GDP

•

Fiscal deficit expected to be 3% of GDP

Recent trends

Production

The unrest in the Niger Delta region, which intensified in the first half of2008, disrupted crude oil production throughout 2008. Includingcondensates, crude oil production declined by 0.2 million barrels perday (mbd) to average 1.94 mbd in the first half of 2008 compared withthe same period in the previous year. Over the same period, theNigerian reference spot price for crude (Bonny light) averaged US$114per barrel compared with an average of about US$70 per barrel. In thesecond half of 2008, the average crude oil production declinedaveraged 1.90 mbd. During 2008, crude oil production declined from ahigh of 2 mbd in March to 1.85 mbd in December. The bonny light spotprice averaged about US$87.4 per barrel in the second half of 2008.The poor performance of the oil sector also led Angola to surpassNigeria as the leading oil producer in Africa during April 2008. Overall,the Nigerian economy was left to depend on the performance of thenon-oil sector as the oil sector continued to contract.

Figure 1: Real GDP growth (%)

Source: National Bureau of Statistics

It was still evident in 2008 that the non-oil sector, which contributesabout 80% to total GDP, remains the overall driver of growth in theNigerian economy. In the first half of 2008, real GDP growth slowedto an average of 6.1% from an average of 7.2% in the second halfof 2007. The growth in the non-oil sector also softened to 8.7% inthe first half of 2008 compared with 10.3% in the second half of2007. The oil sector continued to disappoint as it contracted by3.3% in the first half of 2008 compared with a 4.7% contraction inthe second half of 2007. Overall, the economy is estimated to havegrown by 6.8% y/y in 2008 compared with 6.2% y/y in 2007. Thenon-oil sector (particularly agriculture) is estimated to have grownby 9.5% y/y in 2008 while the oil sector contracted by 4.5% y/y overthe same period.Even though the agriculture sector (which constituted about 42% ofGDP in 2007 and accounted for over 60% of employment) remains

-10-50510152025302003 2004 2005 2006 2007 2008eOil GDP Non-oil GDP Real GDP

2the dominant sector in terms of its contribution to non-oil GDP, realgrowth was more broad-based in the first half of 2008. The agriculturesector grew by 6.3% in the first half of 2008, accounting for about39.8% of GDP. Other sectors, building and construction, wholesaleand retail trade, and services, grew by 13.1%, 12%, and 10.3%,respectively. Industrial output (which constituted about 22.1% of non-oil GDP) declined by 1.9% in the first half of 2008 mostly due to poorinfrastructure, especially poor electricity supply.

Figure 2: Gross domestic product by activity (2007)

Source: National Bureau of Statistics

The slowdown in the agriculture sector was due to, among otherfactors, poor infrastructure, the global food crisis, and increases inprices. Responding to the crisis, the government undertook certainmeasures aimed at boosting either production or supply of agriculturalproducts. Some measures included: approving a tax holiday forimporters of rice between May and October 2008, approving therehabilitation of dilapidated irrigation infrastructure and expansion ofthe irrigation schemes, and also constructing 25 new silos to improvethe storage capacity of the National Food Reserve. The governmentalso implemented the Guaranteed Minimum Price for the buyer of lastresort scheme. Overall, the agricultural production index slowed downto 4.8% in the first half of 2008 from 7.4% in the second half of 2007.Even though the agricultural output was slower in the first half of 2008compared with the second half of 2007, growth was still recordedacross all sub-sectors. Average world prices of Nigeria’s majoragricultural export commodities at the London Commodities Market(cocoa, coffee, cotton, palm oil, copra, and soya bean) also trendedupwards, increasing by 18.8% in the first half of 2008 compared with36.1% in the corresponding period in 2007. This was mainly due tosupply shortages in the international markets.The decline in the index for industrial production by 1.6% in the firsthalf of 2008 was due to a decline in both manufacturing productionand electricity consumption. Performance in manufacturing productioncontinued to be constrained by poor infrastructure, especially poorelectricity supply, poor road networks, and a high pump price ofdiesel. Also, most locally produced goods continued to fare poorlydue to unfair competition from imported finished products.In the first half of 2008 electricity generation fell by 8.1% to about2,600 mega-watts per hour (MW/h) compared with the correspondingperiod in 2007. The continued disruption of gas supply, attacks oninfrastructure, and low water level at the hydro power stationsseverely affected electricity generation. Also, high power outages andemergency load shedding led to significant decline in electricityconsumption to about 1,900 Mw/h in the first half of 2008. This was a10.4% decline compared with the first half of 2007.Nigeria’s crude oil production continues on its declining path since aproduction peak of 2.5 mbd recorded in 2005. In the first half of 2008production averaged 1.98 mbd compared with an average of 2.16mbd in the second half of 2007.

Figure 3: Oil production and price

Source: Central Bank of Nigeria

The continued decline in production was due to instability in the NigerDelta region. Oil exports averaged about 1.49 mbd in the first half of2008 compared with 1.71 mbd in the second half of 2007. However,owing to the rise in the gas/oil ratio in the wells, gas productionincreased by 17.1% to an estimated 30.09 million cubic metres(MMm

) in the first half of 2008 from 25.70 MMm

in the second halfof 2007. Of the total gas produced, only 67.7% was utilised while32.3% was flared.

Figure 4: Gas production and utilisation (million cubic metres)

Source: Central Bank of Nigeria

Monetary policy

Owing to mounting international and domestic pressures, headlineinflation, which had remained subdued and in the single digits sinceJune 2006, surged into double digits beginning June 2008. Acombination of high food and energy prices and fiscal expansion sawinflation increasing significantly from 6.6% y/y in December 2007 to

Agriculture,42.0Oil & gas,19.6Building &construction,1.7Finance &insurance,3.9Wholesale &retail trade,16.2Manufacturing, 4.0Telecommunication, 2.3Others, 10.3

20406080100120140160-0.51.01.52.02.53.03.52005 2006 2007 2008US$/barrelmillion bpdTotal production Bonny Light spot price (RHS)051015202530351H2006 2H2006 1H2007 2H2007 1H2008Gas produced Gas utilised Gas flared

39.7% y/y in May 2008. Overall, headline inflation averaged 11.5% in2008 compared with 5.4% in 2007. Even though the energy prices,which constitute about 18.1% of the consumer price index (CPI) basket,averaged 6.2% in 2008 compared with 10.2% in 2007, the secondround effect of high energy prices in the first half of 2008 became moreevident throughout the year. That is, despite being Africa’s largest oilproducer, the country continues to import about 90% of its petrolrequirements because of a lack of sufficient refinery capacity. Theenergy prices increased from an average low of 1.7% y/y in May toaverage 11.7% y/y in December 2008.

Figure 5: CPI inflation (%)

Source: National Bureau of Statistics

Food prices were the primary driver of inflation in 2008. The globalshortages of food drove the food component (which constitutes about64% of the CPI basket) into double digits throughout 2008. Foodinflation increased from an average of 8.7% y/y in February to anaverage of 17.9% y/y in December 2008 also due to high importationcosts. Food imports constitute about 5% of GDP. Overall, food inflationaveraged 15.8% in 2008 compared with 1.9% in 2007. Despite controlson domestic fuel and electricity prices aimed at insulating the coreinflation (headline inflation excluding food), non-food inflation increasedfrom an average low of 0.5% y/y in March to an average of 10.4% y/y inDecember 2008. Overall, core inflation averaged 5.6% in 2008compared with 9.4% in 2007.

Figure 6: CPI weights

Source: National Bureau of Statistics

The broad-based increase in prices was also evident in the increase inheadline inflation excluding energy and food, which increased from anaverage low of negative 1.3% y/y in March to an average of 15.3% y/yin December 2008. Most of the increase in these ‘core’ measures ofinflation was also the result of expansionary fiscal policy and highexport revenues that drove up domestic liquidity in most of 2008. Thedisbursement of about US$8.2 billion from the Excess Crude Account(to be disbursed in naira) in 2008 and a further allocation of US$10.24billion to address the major shortfall in the energy sector led tosignificant increase in domestic liquidity, thereby also exerting highinflationary pressures.The continued rise in headline inflation during 2008 can also beattributed to a significant increase in money supply growth. Higher fiscalexpenditure in the budget as the country continued to tackle itsinfrastructure deficits, and the disbursements of oil savings from theExcess Crude Account to state governments led to a significantincrease in domestic money supply. Broad money supply (M2) recordedsome of its highest levels ever, increasing by 100.1% y/y in March2008. However, following the increased global financial crisis, broadmoney growth began slowing down in the second half of 2008. Onaverage, M2 increased by an average of 55.7% in the second half of2008 compared with an average of 87.4% in the first half. Overall, M2increased by an average of 71.6% in 2008 compared with an averageof 33.7% in 2007.

Figure 7: Money supply and credit growth (%)

Source: Central Bank of Nigeria

The surge in broad money growth was due to significant increase indomestic credit and net foreign assets of the banking sector. Thebanking sector reforms coupled with the positive business environmentand sharp decline in credit extended to government led to an increasein private sector credit lending. Credit extended to the private sector(PSCE) reached record levels, increasing by as much as 103.7% inApril 2008. The global financial crisis led to credit contraction globally asfinancial institutions tightened their lending criteria. The banking sectorcame under severe pressure as confidence in the financial markets tookits toll. Banks were forced to stop or reduce lending and also recalledsome of their loans. PSCE grew by 70.4% in the second half comparedwith 100.1% in the first half of 2008. Overall, PSCE increased by anaverage of 85.2% in 2008 compared with an average of 59.2% in 2007.Net foreign assets increased by an average of 13% in 2008 comparedwith an average of 30.7% in 2007.

-10010203040502005 2006 2007 2008 2009CPI inflation Food Non-food

64%18%4%4%3%2%5%

Food & non-alcoholic bev. Hse water, elec, gas & other fuelTransport Furn & hshld equip maintClothing & footwear Alcohol, tobacco & kolaOther-20020406080100120Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08M2 Private sector credit extension