Hang in there… IMF Projects Early Rebound in Nigeria’s GDP Growth

Ahead of the 2016 Annual Meetings of the International Monetary Fund (IMF) and World Bank Group currently ongoing, the IMF (the Fund) released its  October 2016 World Economic Outlook earlier this week with new sets of revised growth estimates and highlight of risks to the global economy. The Annual Meetings came at a period of growth challenges in commodity-dependent Developing and Emerging Economies, rise of policy populism and extraordinary use of unconventional monetary policy in the Advanced Economies, concerns of a growth slowdown in China and risk of a contagion arising from the U.K’s vote in favour of leaving the European Union amid weaker global trade growth. Whilst the IMF confirmed most of the aforementioned factors as key downside risks to global growth, it downplayed the threats posed by China - noting the impact of policy supports from authorities to growth - but still sees an uncertain impact of BREXIT despite the orderly market reaction to the vote.

Accordingly, the Fund trimmed its growth forecast for the Advanced Economies by 0.2% to 1.6%, lower than 2.1% recorded in 2015, with the U.S (1.6% forecast relative to actual 2.1% in 2015) and U.K (1.8% projection from 2.2% 2015) being major drags. Emerging and Developing Countries are projected to grow 4.2% (a 20bps improvement over 2015 growth) driven by Asian economic giants – China (6.6%) and India (7.6%) – as well as slower contraction in Eastern Europe. However, Sub-Saharan Africa (SSA) growth projection was slashed 20bps and now expected at 1.4% - the slowest pace in 21 years. This is a fallout of weaker performance expected from large economies in the region, with Nigeria expected to record a contraction of 1.7% from 2.7% growth in 2015 while South Africa was projected at 0.1% from 1.3%. The Fund also slashed 2017 SSA growth forecast by 40bps to 2.9%, but sees a rebound in both Nigeria (0.6%) and South Africa (0.8%).

We view the IMF’s projection of an early rebound in economic activities in Nigeria plausible, although its 0.6% forecast is conservative relative to our estimate of 1.5%. We think that recent moves to restore crude oil production above 2.0mb/d would provide a one-off boost to growth in 2017 due to low 2016 base, while increase in oil prices is also positive for fiscal and terms of trade balance hence a support for consumption spending. Yet, sub-5.0% growth is hardly enough to improve economic welfare/per-capita income given high population growth rate. Thus, long term structural reforms, infrastructural spending and short term efforts to buoy confidence level and FX liquidity would be required to unlock growth potential and improve welfare.