Falling oil prices and increased instability in the north impacted Nigeria’s economic growth in 2014, though a rebasing of GDP means that whoever wins the forthcoming presidential elections in 2015 will take the helm of Africa’s largest economy.
For the latter half of 2014, the headline story was the fall in global oil prices. Like many hydrocarbons-producing economies, Nigeria has been impacted by the sharp drop in oil prices with earnings from oil accounting for 80% of government revenue according to the IMF. Nigeria revised its budget late last year on the assumption that oil will hover around $65 a barrel, although that figure is still higher than the current price, which slipped below $50 in early January.
Though the government may face shortfalls in income, the finance minister, Ngozi Okonjo-Iweala, said in December that the government would be looking for a revenue boost through higher receipts from income tax and a stronger performance from the private sector to lift earnings.
Unsurprisingly, the slowdown in oil revenues has had broader macro impacts beyond the government’s balance sheet. The economy is now expected to grow 5.5% in 2015, rather than the 6.4% previously forecast – although the rate of expansion is still far stronger than in advanced economies.
The outlook for one of Africa’s biggest oil producers has also darkened with the currency falling by 13% during 2014 according to Thomson Reuters data, risking an increase in inflationary pressures. Inflation stood at 7.9% in November, though the figure for the full year could rise with the falling value of the naira pushing up the cost of imports, especially food and petroleum products.
Despite being a major oil producer, Nigeria’s limited refining capacity means it has to import much of its fuel needs, adding to pressure on its current account. The fall in global oil prices will ease some of this pressure, though losses in export earnings will far outweigh any savings in lower prices for refined products.
With the possibility of inflation heating up in 2015, the Central Bank has moved to cool local demand and try to halt a flow of funds out of the economy, pushing up its key interest rate to 13% – a rise of 100 basis points – in late November. Further pressure on the naira could see rates move even higher, which would slow consumer demand and inflation, but could also restrict bank lending and credit access for the private sector.
However, while the second half of the year was dominated by the drop in oil revenue, the focus in the first half was on the rebasing of GDP. That exercise in April moved the base year for assessment from 1990 to 2010 constant prices, giving greater weighting to sectors that had little input into the economy 25 years ago, such at ICT, entertainment and services.
The share of agriculture declined from 33% to 22%, services increased from 26% to 51%, while manufacturing increased from 2% to 7%. These suggest that the economy is reflecting a structural shift toward a higher phase of growth where the share of agriculture declines while services increase – a key change given the importance of encouraging further diversification.
The rebasing saw Nigeria’s GDP for 2013 reassessed as $509.9bn, up from the $285.5bn under the old measure, propelling Nigeria to the top of the continent’s charts and moving past South Africa, whose GDP is closer to $350bn.
In early December the stock market dipped to levels not seen in almost two years. Amid concerns over falling commodity prices and ongoing security issues, the index dropped below 34,000 points.
Investors are also eyeing next year’s general and presidential elections, awaiting clarity on the future political climate. While the conclusion of the election cycle by the end of February should provide some insight, the market will still face uncertainty over the economy’s prospects deep into 2015, including lingering concerns over violence from Boko Haram in the populous north of the country.
The elections should bring greater stability in the political sphere late in the first quarter. With many analysts forecasting oil prices beginning to flatten during the year at or near their present levels, there could also be more stability, if not increasing prosperity, for Nigeria’s rebased economy later in 2015.
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