Nigeria: Economy remains in recession in Q1, but green shoots of recovery are slowly emerging
May 23, 2017
Nigeria’s economy contracted 0.5% year-on-year in Q1, according to data released by the National Bureau of Statistics on 23 May. This was a significant improvement from the revised 1.7% drop recorded in Q4 (previously reported: -1.3% yoy), but still marked the fifth consecutive quarterly decline, with the economy once more hampered by the oil sector. This comes after a dismal performance last year, when the economy shrank for the first time in over two decades on the back of lower oil production and a non-oil sector hobbled by power supply constraints and foreign exchange restrictions.
In Q1, economic activity was dragged down by significantly lower oil production compared to the same period last year. Oil output stood at 1.83 million barrels per day (mbpd) in the first quarter, in contrast with 2.05 mbpd in Q1 2016. As a result, the oil sector shrank 11.6% yoy (Q4: -17.7% yoy). The industry has taken a battering over the last twelve months due to militant attacks in the key oil-producing Niger Delta region, which has had a detrimental knock-on effect on the government finances and the country’s external sector. However, the industry is showing signs of recovery, with oil output up significantly since the start of the year thanks to an improved security situation. Another encouraging sign came from the non-oil sector, which returned to growth in Q1 after contracting in the final quarter of last year (Q1: +0.7% yoy; Q4: -0.3% yoy). The expansion came on the back of growth in the agricultural, information and communication, manufacturing and transportation sectors. However, with such a marked decline in the oil sector, this wasn’t enough to drag the economy out of its slumber.
Looking ahead, the all-important hydrocarbon sector should pick up steam as oil production continues to rise back towards pre-conflict levels. However, despite a respite in recent months, the threat of violence continues to linger, with a permanent ceasefire yet to be reached. In addition, although Nigeria was exempted from OPEC production cuts agreed in November, it might not be so fortunate the second time around, in the likely event that the deal is extended beyond June. This could curtail the country’s efforts to ramp up output. Regarding the non-oil sector, the government recently announced an Economic Recovery and Growth Plan in a bid to industrialize the nation and diversify the economy, with a specific plan for the shaky energy sector; power supply problems are a key gripe of companies operating in the country. If implemented in full, this should be a boon to firms and boost private sector activity. However, exchange rate distortions have yet to be addressed, with a significant gap between the official and parallel exchange rates and limited access to foreign exchange, which continues to sow uncertainty and act as a deterrent to businesses.
Author: Oliver Reynolds, Economist