10 trends that will shape Nigeria in 2021

The Nigerian economy is “officially” in a recession, the worst in more than 33 years, after the economy contracted by 3.6 percent in the third quarter of this year.

It had earlier slumped 6 percent in the second quarter, no thanks to the coronavirus pandemic and a lack of reforms by both the fiscal and monetary authorities to boost confidence

and attract private investments to the economy.

With the country in recession, more Nigerians have become poorer and are unable to meet up with the basic necessities of life.

But that is just an official number. In an actual sense, Africa’s biggest economy may probably had been in recession since 2015, when the economy suffered from a collapse in global oil price and an oil production cut due to agitation in the Niger Delta region, crippling economic growth to fall below population growth.

Since then the economy has been battered by rising unemployment, ballooning debt profile, rising commodity prices, deepening poverty, widening inequality and a fall in the general standard of living of Nigerians.

Although, the country’s Q3 recession appears to be the worst, mainly caused by the pandemic, the country was yet to recover from the maladies of its last recession before the pandemic struck.

Depending on how well both the fiscal and monetary authorities swing into action, would determine how fast and shape recovery in Africa’s most populous nation.

As the country hopes for a rebound to growth, there are 10 trends policy makers must take note that that would shape recovery in 2021, according to report by audit firm, KPMG.

These macroeconomic trends encompass both developments in the domestic and international economy; and they are highlighted below.

Global dynamics

According to KPMG, global economic prospect still remains largely subdued as hopes for a modest recovery expected in 2021 is still threatened by the risk of a second wave of the COVID-19

Key pressures expected to emanate from the global economy includes the democratic government in the U.S, oil price dynamics, capital outflows, and trade

In the US, the report noted that the recently concluded elections that saw the emergence of a new democratic president will have implications on the global economy, including Nigeria.

Major implications includes Bigger fiscal stimulus package totalling $2.5 trillion from 2021 to 2024 to drive recovery, bilateralism with possible easing of trade tensions between the US and China, and a possible catalyst for distortion in oil prices given strong advocacy for shift away from fossil fuels.

There is also the oil price dynamics in the global market.

Crude oil prices, Nigeria’s biggest foreign exchange earner by 60 percent between February and April 2020 as the pandemic led to a collapse in global oil demand and concerns about storage capacity.

The International Energy Agency expects global oil demand growth to rise by 5.8mb/d in 2021 and oil price to moderate at $46. To lift price, members of the Organisation of Petroleum Exporting Countries (OPEC) are considering a deepening of oil production cuts. But this might face fresh obstacle with rising Covid-19 cases and fresh economic lockdown in Europe.

According to KPMG, outflows from Sub Saharan African (SSA) between February and March totalled $5 billion. However, these inflows are expected to slow as 47 percent of investors think emerging market economic activity will slow over the next 12 months, compared with 37 percent who think it will accelerate. Borrowing costs are still high and financial conditions remain difficult

On trade, KPMG said WTO expects a significant downturn in global trade in 2020 of between 13 percent and 32 percent, and some recovery in 2021 at 8 percent. Risks to the outlook include a second wave of COVID-19 with then results being very sensitive to the length of time that the Covid-19 threat remains in place or trade restrictions.

Fiscal sustainability

Nigeria’s proposed 2021 budgetary spend of N13 trillion while a budgeted revenue of N7.89 trillion, provides indications of tight spending and worsening debt.

The audit firm noted that in line with current reality, the 2021 budget implementation will likely underperform in line with historical trends including huge fiscal deficit, constrained fiscal space, and non-oil revenues potential limited in the short-term as well as funding.

Uncertain FX environment

With the second wave of the pandemic inducing lockdowns in most advanced countries, Nigeria’s foreign exchange environment will still remain under pressure, the report notes.

This outlook appears with lingering issues of fair value overvaluation, liquidity challenge, exchange rate multiplicity as well as access to FX

KPMG estimates the fair value of the naira at N421/$1, 9 percent overvaluation of real effective exchange rate. Even although the fair value of the naira may improve may improve but rates will still be misaligned in 2021.

Similarly, liquidity will remain challenged given oil price outlook and capital flows, while multiple exchanges would subsist considering the spread of ~N80 between BDC, government intervention rate and official rate“the CBN may not likely close the Multiple Exchange rate window,” KPMG notes.

There will also be increased demand for FX as the global economy completely lifts trade restrictions in 2021.

Pending unmet demand - backlog of dollar-denominated letters of credit valued at $729 million