Nigeria: Softer contraction in Q4 paves way for faint economic recovery in 2017
February 28, 2017
2016 was a disappointing year for Africa’s most-populous country as shocks in the oil- and non-oil sector caused the economy to contract for the first time in over 20 years. Data released by the National Bureau of Statistics on 28 February showed that the economy contracted 1.3% in Q4, marking the fourth consecutive decline. Q4’s reading, however, marks a notable improvement from the previous quarter sharp 2.2% drop and surprised market analysts who had expected a steeper decline. The print from Q4 suggests that the economy likely hit its trough in Q3 and offers a glimmer of hope that a faint recovery is underway as the economy expanded 4.1% in a quarter-on-quarter basis. Challenges and risks to economic activity, however, remain and stronger growth could be easily derailed by domestic and external forces.
Q4’s print was dragged down by a decline of the oil sector even though the industry is showing tepid signs of a recovery. Output in Q4 rose 8.1% to 1.90 million barrels per day (mbpd) from Q3’s 1.63 mbpd, marking the first quarter increase in output after a streak of four declines. The recovery reflects a lull in militant attacks on oil infrastructure as the government and militant groups are hoping to strike a permanent ceasefire. Compared to the corresponding quarter of the previous year, oil output declined (Q4 2015: 2.16 mbpd) and the oil industry contracted 12.4%. A drop in oil earnings due to the slump in production and low commodity prices caused the size of the oil sector to shrink from 9.6% of GDP in 2015 to 8.4% last year. In turn, this resulted in a sharp drop in government revenue, availability of foreign currency and severely hampered the performance off the non-oil sector.
The non-oil sector, which accounts for over 90% of the economy, performed poorly in the final quarter of 2016 and contracted 0.3% in Q4 (Q3: 0.0% year-on-year). Growth was dented by abysmal performances in the manufacturing, construction, real estate and trades sectors and reflects the challenges plaguing the economy. Non-oil output was hampered by persistent disruptions in energy supply and a lack of foreign currency.
Nigeria’s economy is expected to rebound this year though the pace of the recovery is fragile and under pressure. Oil prices have recovered from the multi-year lows observed at the start of 2015 and stabilized since end 2016 largely due to the output cut deal reached by OPEC and non-OPEC countries late last year. Strong compliance in the first two months of the agreement bodes well for oil-dependent economies and is bringing much-needed relief. However, price gains due to the agreement could easily be erased by renewed hostilities in the Niger Delta region. Likewise, international oil prices could be constrained by the speed at which U.S. oil producers start to produce again. The performance of the non-oil sector is more uncertain since it depends in large part on government policies. In particular, firms are urging a currency devaluation since ongoing controls in the naira and limited access to foreign currency are stifling growth and staving off foreign investment in the economy.