Economics

6 March 2009

Nigeria: Annual economic outlook

The need to diversify the export base away from oil Victor Munyama

Despite Nigeria’
s domestic economic challenges (the unrest in the oil- second half of 2008, the average crude oil production declined
producing Niger Delta region, poor electricity supply and major averaged 1.90 mbd. During 2008, crude oil production declined from a
infrastructural constraints), the economy maintained its growth high of 2 mbd in March to 1.85 mbd in December. The bonny light spot
momentum in 2008. The country continues to show signs of a pro- price averaged about US$87.4 per barrel in the second half of 2008.
reform, pro-investment environment, which attracted a lot of interest The poor performance of the oil sector also led Angola to surpass
from the regional and international investor community. The policy Nigeria as the leading oil producer in Africa during April 2008. Overall,
framework continues to improve. Despite being an emerging economy the Nigerian economy was left to depend on the performance of the
characterised by traditional sectors such as agriculture, manufacturing non-oil sector as the oil sector continued to contract.
and trade, the country is still seen through its oil sector (being the
Figure 1: Real GDP growth (%)
largest oil producing nation in Sub-Saharan Africa – SSA), with an
estimated 32 billion barrels of oil reserves located along the coast and 30
25
shores of the Niger River Delta. It is also estimated that the country has
20
about 100 million cubic feet of natural gas reserves. However, the non- 15
oil sector (agriculture, services, telecommunications and construction) 10
5
has been the primary driver of growth, following a continued contraction 0
in the oil sector in the past few years. -5
-10
Projections for 2009: 2003 2004 2005 2006 2007 2008e

• Real GDP growth is expected to slow down to 3% Oil GDP Non-oil GDP Real GDP
• Oil production is expected to average 1.89 million barrels per day
Source: National Bureau of Statistics
(mbd)
It was still evident in 2008 that the non-oil sector, which contributes
• Naira exchange rate should depreciate to an annual average of
about 80% to total GDP, remains the overall driver of growth in the
NGN151.50/USD
Nigerian economy. In the first half of 2008, real GDP growth slowed
• Average annual inflation to increase to 13%
to an average of 6.1% from an average of 7.2% in the second half
• Current account deficit expected to be 0.2% of GDP
of 2007. The growth in the non-oil sector also softened to 8.7% in
• Fiscal deficit expected to be 3% of GDP
the first half of 2008 compared with 10.3% in the second half of
Recent trends 2007. The oil sector continued to disappoint as it contracted by
3.3% in the first half of 2008 compared with a 4.7% contraction in
Production
the second half of 2007. Overall, the economy is estimated to have
The unrest in the Niger Delta region, which intensified in the first half of
grown by 6.8% y/y in 2008 compared with 6.2% y/y in 2007. The
2008, disrupted crude oil production throughout 2008. Including
non-oil sector (particularly agriculture) is estimated to have grown
condensates, crude oil production declined by 0.2 million barrels per
by 9.5% y/y in 2008 while the oil sector contracted by 4.5% y/y over
day (mbd) to average 1.94 mbd in the first half of 2008 compared with
the same period.
the same period in the previous year. Over the same period, the
Nigerian reference spot price for crude (Bonny light) averaged US$114 Even though the agriculture sector (which constituted about 42% of
per barrel compared with an average of about US$70 per barrel. In the GDP in 2007 and accounted for over 60% of employment) remains
 the dominant sector in terms of its contribution to non-oil GDP, real
growth was more broad-based in the first half of 2008. The agriculture
sector grew by 6.3% in the first half of 2008, accounting for about
39.8% of GDP. Other sectors, building and construction, wholesale
and retail trade, and services, grew by 13.1%, 12%, and 10.3%,
respectively. Industrial output (which constituted about 22.1% of non-
oil GDP) declined by 1.9% in the first half of 2008 mostly due to poor
infrastructure, especially poor electricity supply.
Figure 2: Gross domestic product by activity (2007)
infrastructure, and low water level at the hydro power stations
severely affected electricity generation. Also, high power outages and
emergency load shedding led to significant decline in electricity
consumption to about 1,900 Mw/h in the first half of 2008. This was a
10.4% decline compared with the first half of 2007.
Nigeria’
s crude oil production continues on its declining path since a
production peak of 2.5 mbd recorded in 2005. In the first half of 2008
production averaged 1.98 mbd compared with an average of 2.16
mbd in the second half of 2007.

Telecommu Figure 3: Oil production and price

nication, 2.3 Others, 10.3
Agriculture,
Manufacturi million bpd US$/barrel
42.0
ng, 4.0 3.5 160
Wholesale &
retail trade, 3.0 140
16.2 2.5 120
2.0 100
1.5 80
1.0 60
Finance & Building &
insurance, construction, Oil & gas, 0.5 40
3.9 1.7 19.6 - 20
2005 2006 2007 2008
Source: National Bureau of Statistics
Total production Bonny Light spot price (RHS)
The slowdown in the agriculture sector was due to, among other
factors, poor infrastructure, the global food crisis, and increases in Source: Central Bank of Nigeria
prices. Responding to the crisis, the government undertook certain
The continued decline in production was due to instability in the Niger
measures aimed at boosting either production or supply of agricultural
Delta region. Oil exports averaged about 1.49 mbd in the first half of
products. Some measures included: approving a tax holiday for
2008 compared with 1.71 mbd in the second half of 2007. However,
importers of rice between May and October 2008, approving the
owing to the rise in the gas/oil ratio in the wells, gas production
rehabilitation of dilapidated irrigation infrastructure and expansion of
increased by 17.1% to an estimated 30.09 million cubic metres
the irrigation schemes, and also constructing 25 new silos to improve
3 3
(MMm ) in the first half of 2008 from 25.70 MMm in the second half
the storage capacity of the National Food Reserve. The government
of 2007. Of the total gas produced, only 67.7% was utilised while
also implemented the Guaranteed Minimum Price for the buyer of last
32.3% was flared.
resort scheme. Overall, the agricultural production index slowed down
to 4.8% in the first half of 2008 from 7.4% in the second half of 2007. Figure 4: Gas production and utilisation (million cubic metres)
Even though the agricultural output was slower in the first half of 2008
35
compared with the second half of 2007, growth was still recorded
30
across all sub-sectors. Average world prices of Nigeria’
s major
25
agricultural export commodities at the London Commodities Market
20
(cocoa, coffee, cotton, palm oil, copra, and soya bean) also trended
15
upwards, increasing by 18.8% in the first half of 2008 compared with
10
36.1% in the corresponding period in 2007. This was mainly due to
5
supply shortages in the international markets.
0
The decline in the index for industrial production by 1.6% in the first 1H2006 2H2006 1H2007 2H2007 1H2008
half of 2008 was due to a decline in both manufacturing production
Gas produced Gas utilised Gas flared
and electricity consumption. Performance in manufacturing production
continued to be constrained by poor infrastructure, especially poor Source: Central Bank of Nigeria

electricity supply, poor road networks, and a high pump price of
diesel. Also, most locally produced goods continued to fare poorly
due to unfair competition from imported finished products.
In the first half of 2008 electricity generation fell by 8.1% to about
2,600 mega-watts per hour (MW/h) compared with the corresponding
period in 2007. The continued disruption of gas supply, attacks on
Monetary policy
Owing to mounting international and domestic pressures, headline
inflation, which had remained subdued and in the single digits since
June 2006, surged into double digits beginning June 2008. A
combination of high food and energy prices and fiscal expansion saw
inflation increasing significantly from 6.6% y/y in December 2007 to

2
9.7% y/y in May 2008. Overall, headline inflation averaged 11.5% in
2008 compared with 5.4% in 2007. Even though the energy prices,
which constitute about 18.1% of the consumer price index (CPI) basket,
averaged 6.2% in 2008 compared with 10.2% in 2007, the second
round effect of high energy prices in the first half of 2008 became more
evident throughout the year. That is, despite being Africa’
s largest oil
producer, the country continues to import about 90% of its petrol
requirements because of a lack of sufficient refinery capacity. The
energy prices increased from an average low of 1.7% y/y in May to
average 11.7% y/y in December 2008.
Figure 5: CPI inflation (%)
50
40
30
20
average low of negative 1.3% y/y in March to an average of 15.3% y/y
in December 2008. Most of the increase in these ‘
core’measures of
inflation was also the result of expansionary fiscal policy and high
export revenues that drove up domestic liquidity in most of 2008. The
disbursement of about US$8.2 billion from the Excess Crude Account
(to be disbursed in naira) in 2008 and a further allocation of US$10.24
billion to address the major shortfall in the energy sector led to
significant increase in domestic liquidity, thereby also exerting high
inflationary pressures.
The continued rise in headline inflation during 2008 can also be
attributed to a significant increase in money supply growth. Higher fiscal
expenditure in the budget as the country continued to tackle its
infrastructure deficits, and the disbursements of oil savings from the
Excess Crude Account to state governments led to a significant
increase in domestic money supply. Broad money supply (M2) recorded
some of its highest levels ever, increasing by 100.1% y/y in March

10 2008. However, following the increased global financial crisis, broad

money growth began slowing down in the second half of 2008. On
0
average, M2 increased by an average of 55.7% in the second half of
-10
2008 compared with an average of 87.4% in the first half. Overall, M2
2005 2006 2007 2008 2009
increased by an average of 71.6% in 2008 compared with an average
CPI inflation Food Non-food
of 33.7% in 2007.

Source: National Bureau of Statistics Figure 7: Money supply and credit growth (%)

Food prices were the primary driver of inflation in 2008. The global
120
shortages of food drove the food component (which constitutes about
100
64% of the CPI basket) into double digits throughout 2008. Food
80
inflation increased from an average of 8.7% y/y in February to an 60
average of 17.9% y/y in December 2008 also due to high importation 40
costs. Food imports constitute about 5% of GDP. Overall, food inflation 20
averaged 15.8% in 2008 compared with 1.9% in 2007. Despite controls 0
on domestic fuel and electricity prices aimed at insulating the core -20
inflation (headline inflation excluding food), non-food inflation increased Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
from an average low of 0.5% y/y in March to an average of 10.4% y/y in M2 Private sector credit extension
December 2008. Overall, core inflation averaged 5.6% in 2008 Source: Central Bank of Nigeria
compared with 9.4% in 2007.
The surge in broad money growth was due to significant increase in
Figure 6: CPI weights domestic credit and net foreign assets of the banking sector. The
banking sector reforms coupled with the positive business environment
18% 4% and sharp decline in credit extended to government led to an increase
4% in private sector credit lending. Credit extended to the private sector

64% (PSCE) reached record levels, increasing by as much as 103.7% in

3%
2%
5%
Food & non-alcoholic bev. Hse water, elec, gas & other fuel
Transport Furn & hshld equip maint
Clothing & footwear Alcohol, tobacco & kola
Other
Source: National Bureau of Statistics
The broad-based increase in prices was also evident in the increase in
headline inflation excluding energy and food, which increased from an
April 2008. The global financial crisis led to credit contraction globally as
financial institutions tightened their lending criteria. The banking sector
came under severe pressure as confidence in the financial markets took
its toll. Banks were forced to stop or reduce lending and also recalled
some of their loans. PSCE grew by 70.4% in the second half compared
with 100.1% in the first half of 2008. Overall, PSCE increased by an
average of 85.2% in 2008 compared with an average of 59.2% in 2007.
Net foreign assets increased by an average of 13% in 2008 compared
with an average of 30.7% in 2007.

3
In the first half of 2008, the Central Bank of Nigeria (CBN) came under Figure 9: Exchange rate
pressure to fight the looming inflation stemming from high global food
and energy prices, excess liquidity due to high oil prices, and fiscal 160
expansion. As the stable inflation environment evident in 2007 began to 155
150
show signs of dissipating, the CBN was forced to tighten monetary
145
policy in the first half of 2008. By June 2008, the Monetary Policy Rate
140
(MPR) had been increased by 75 basis points from 9.5% to 10.25%. 135
Following the worsening state of global financial markets, the CBN 130
instituted several measures in an attempt to address the liquidity 125
pressures in the system. In an emergency Monetary Policy Committee 120
115
(MPC) meeting on 18 September 2008, the MPC decided to reduce the
2006 2007 2008 2009
MPR by 50 basis points from 10.25% to 9.75%. The Cash Reserve
Naira/US$ Budget exchange rate (Naira/US$)
Requirement (CRR), having been increased from 3% to 4% in June
2008, was reduced from 4% to 2%. Liquidity requirement for banks was Source: Bloomberg and the Federal Ministry of Finance

reduced from 40% to 20%. The CBN’

s lending facilities to the banks The sustained stability of the naira exchange rate waned in the second
was expanded from overnight to 360 days. These measures injected a
half of 2008 mainly due to further negative developments in the global
significant amount of liquidity into the system. economy. The decline in the private capital inflows, and continued

Figure 8: Interest rate (%) decline in the oil prices led to a significant increase in the demand for
foreign exchange in the Wholesale Dutch Auction System (WDAS),
20 beginning October 2008. In the second half of 2008 the naira exchange
rate averaged NGN120.07/USD, having depreciated by about 18%
16
between November and December 2008. The CBN’
s intervention in the
12
foreign exchange (forex) market did not stop the naira’
s depreciation as
8 the currency depreciated to about NGN156/USD at some point in
January 2009. Heavy intervention also led to a significant decline in the
4
country’
s foreign exchange reserves, which declined from about US$64
0
billion in October 2008 to about US$52 billion in December 2008.
2005 2006 2007 2008
Various measures were undertaken in an attempt to arrest the negative
Policy rate Prime 91-day TB developments around the naira exchange rate.
Source: Central Bank of Nigeria
Financial markets
The commercial bank’
s average prime lending rate, which had declined
Even with the evidence of the Nigerian financial market rapidly
to 13.5% in December 2007, increased to 16.1% in December 2008.
integrating into the global markets and high growth performance, the
The prime lending rate averaged 16% in 2008 compared with an
financial sector remains relatively shallow by international standards.
average of 15.7% in 2007. The 91-day Treasury bill (T-bill) rate, which
Foreign investors’interest in naira assets amid strong global liquidity
remains the reference rate on which other rates are based, declined
and the continued search for yield in global markets experienced in
from a high of 9.2% in July to 6.9% in December 2008. We expect
2007 seems to have disappeared in the first half of 2008. The Nigerian
monetary policy to remain accommodative in 2009. The CBN will have
Stock Exchange (NSE) experienced some bearish performance in the
to balance the challenges posed by excess liquidity in a high interest
first half of 2008. Activities in both the primary and secondary market
rate environment and fighting double-digit inflation.
declined. The market capitalisation of all listed securities declined by
As Nigeria is a highly import-dependent country, the naira exchange 9% in the first half of 2008 compared with the second half of 2007. The
rate remains a yardstick by which Nigerians measure the standard of NSE All-Share Index declined by 3.5% at end-June 2008 compared to
living. Also, the Nigerians continue to measure government’
s end-December 2007.
performance in terms of the currency’
s performance in the international
The declining trend in the stock exchange continued during 2008 mostly
markets. Thus, maintaining a stable exchange rate is not just important
due to the global financial crisis. The meltdown in the world financial
for preserving the purchasing power of the naira but it is also part of the
systems and continued negative sentiments and lack of confidence in
monetary policy strategy. One of the CBN’
s statutory mandates is to
the banking sector led to sharp drop in the NSE All-Share Index that is
“safeguard the international value of the legal tender currency”. The
heavily dominated by the banking stocks. The NSE All-Share Index was
execution of this mandate has been evident in the sustained stability of
also affected by significant outflow of portfolio as foreign investors seek
the naira exchange rate, which has fluctuated around the budget set
safe haven for their investment. The NSE All-Share Index declined by
exchange rate in the past two years. In the first half of 2008, the naira
exchange rate averaged NGN117.55/USD.

4
about 66% from a high of 65,000 points in February 2008 to 21,000 Figure 11: Foreign exchange reserves (US$ million)
points in January 2009.
70000
Figure 10: Nigeria stock exchange 60000
50000
All share index 40000
70000
30000
60000 20000
50000 10000
0
40000
2003 2004 2005 2006 2007 2008
30000
20000
Source: Bloomberg
10000
2003 2004 2005 2006 2007 2008 2009 Owing to the high levels of imports, the first half of 2008 saw the trade
Source: Bloomberg balance decline by 25.6% to N1,552.0 billion (US$13.3 billion)
compared with the second half of 2007. The continued disruptions in oil
External sector
production in the Niger Delta region led to a decline in oil exports (which
Even with the strong performance of the non-energy sector and accounted for about 99% of the total exports in the first half of 2008).
government’
s efforts to diversify away from the oil, the country’
s Due to the high cost of the business environment caused by poor
external sector performance continues to rely heavily on the oil sector. infrastructure, non-oil exports (accounting for about 1% of total exports)
Crude oil exports account for about 90% of the total exports volume declined by 57.2% in the first half of 2008 compared with the second
while generating about 95% of export earnings. Significant disruption in half of 2007. Of the non-oil exports, agricultural produce constituted
oil production was well compensated for by the high oil price such that about 66% of the total in the first half of 2008 while minerals, semi-
the country continued to record a strong current account surplus. During manufactured, manufactured, and others constituted about 9.6%,
the first half of 2008, Nigeria recorded a balance of payments surplus of 12.1%, 11.5%, and 0.2% over the same period, respectively. Overall,
N999.0 billion (US$8.5 billion), which was slightly lower than the aggregate exports declined by 10.7% in the first half of 2008 compared
N1,073.3 billion (US$9.2 billion) surplus recorded in the second half of with the second half of 2007.
2007. This positive development continued to show a favourable trade
Figure 12: International trade (US$ billion)
balance, which was mainly driven by high crude oil prices, significant
inflows of foreign direct and portfolio investments, and high capital 50
inflows in the form of remittances. 40
30
The current account surplus narrowed slightly to N2,355.9 billion
20
(US$20.1 billion) in the first half of 2008 compared with N2,371.4 billion
10
(US$20.3 billion) in the second half of 2007. The first half of 2008 also
0
saw pressures on the capital and financial account moderating as the
-10
deficit narrowed by 70.1% to N153.3 billion (US$1.3 billion), which was -20
1.1% of GDP, from N512.7 billion (US$4.4 billion) in the second half of -30
2007. High crude oil prices also led to a significant increase in the 1H2007 2H2007 1H2008
external reserves, which increased to an average of about US$58 billion
Exports Imports Trade balance
(about 16.6 months of import cover) in the first half of 2008 compared
with an average of US$48 billion (about 15.2 months of import cover) in Source: Central Bank of Nigeria

the second half of 2007. By the third quarter of 2008, gross external
reserves had increased to about US$64 billion (about 17.3 months of
import cover).
The import bill continued to rise as import increased by an average of
1.8% in the first half of 2008 compared with the second half of 2007.
Non-oil imports constituted about 81.2% while oil imports constituted
about 18.8% of the total imports. Of the non-oil imports, the industrial
sector accounted for about 41.1% of the total imports. Finished goods
(food and manufactured goods), transport, minerals, agriculture, and
others accounted for 36.6%, 6.1%, 0.9%, 1%, and 14.3% of the total
import, respectively.

The slump in the oil price in the second half of 2008 is expected to have
significantly reduced Nigeria’
s total exports. We expect import growth to
have slowed in the second half of 2008 due to slowdown in domestic

5
demand. Overall, the falling import costs coupled with a weak naira
should help Nigeria sustain a small current account surplus.
Public finances
The fiscal responsibility bill continues to be the cornerstone of
government’
s fiscal management. The federal government has also
shown its commitment to prudent fiscal management by adhering to the
medium-term expenditure framework (MTEF) aimed at maintaining
prudent and responsible expenditure processes. In preparing the 2008
budget, the medium-term fiscal strategy (MTFS) 2008-2010 acted as
government’
s positioning system. The budget was aimed at addressing
the “need to accelerate physical and human infrastructure for wealth
and poverty reduction”. The 2008 budget was also aimed at creating an
enabling environment for the private sector.
Table 1: Budget assumptions
During the first half of 2008, a total of N3,723.8 billion (US$31.8 billion) in
federal government revenue was collected. This was 24.4% higher than
the budget estimate. Though government showed some improvement in
non-oil revenue receipts, it was the sustained increase in the
international oil price that averaged US$114 per barrel in the first half of
2008 that bolstered the increase in revenue. Total government
expenditure (N1,380.58 billion or US$11.8 billion) was 0.5% higher than
the budget estimate (N1,374.01 billion or US$11.7 billion) in the first half
of 2008. This resulted in an overall notional deficit of N9 billion (US$0.1
billion), which amounted to 0.1% of GDP. Of the total government
expenditure in the first half of 2008, recurrent expenditure was 68.4%
while the rest was transfers (5.1%) and capital expenditure and net
lending (26.5%).
Figure 14: Government finances (% of GDP)
30

2008 Budget assumptions

20

Crude oil production 2.45 million bpd 10

Benchmark oil price US$59 per barrel
0
GDP growth rate 11.0%
Inflation 8.5%
-10
Exchange rate NGN117.00/US$ 2003 2004 2005 2006 2007 2008e
Total revenue N1.986 trillion
Overall balance (cash basis) Revenue Expenditure
Expenditure N2.47 trillion
Source: Federal Ministry of Finance
Joint venture cash call US$4.97 billion
Deficit N0.56 trillion Debt profile
% of GDP 2.5
During 2008, the country’
s total debt profile continued to increase. By the
Source: Federal Ministry of Finance end of June 2008, the total government debt was estimated at

An assessment of the 2008 budget performance reveals mixed results. N2,781.4 billion (US$23.8 billion), which represented about 23% of GDP.

The major drawback was the late passage of the budget that rendered Of the total debt, 84% (N2,339.0 billion or US$20 billion) was domestic

completion of some major projects difficult. Also, the government did not debt while the balance (N442.4 billion or US$3.7 billion) was external

fully realise the benefits of record-high international oil prices as debt.

domestic oil production was characterised by frequent disruptions Table 2: Total debt stock (% of GDP)
throughout 2008. Crude oil production averaged 1.92 million barrels per
End-June End- End-June
day (bpd) in 2008 against a budget set assumption of 2.45 million bpd.
2007 December 2008
Overall, the oil revenue, which constitutes about 85% of the total 2007
government revenue and about 90% of the total foreign exchange Total debt 25.9 23.5 23.0
earnings, has been disappointing. Domestic debt 21.4 19.6 19.3
External debt 4.4 3.9 3.7
Total debt
Figure 13: Federal Government revenue (Naira billion) service 1.9 1.3 1.2
Source: Central Bank of Nigeria
4000

3000 Between June 2007 and June 2008, the outstanding domestic debt

2000 increased by 13.7% as the Federal Government increased its borrowing

to meet its financial needs. Federal government bonds amounting to
1000
N175.1 billion (US$1.5 billion) were issued over the same period. About
0 76% of the total outstanding domestic debt, which amounted to 170.5%
1H2004 1H2005 1H2006 1H2007 1H2008 of the government’
s total retained revenue, was held by the banking
Oil Revenue Non-oil Revenue
sector. About 84% of the total external debt stock was owed to the
multilateral creditors. Owing to the oil revenue windfall, the government
Source: Federal Ministry of Finance

6
was able to improve its external debt sustainability position as reflected
by continued improvement in the total external debt stock as a
percentage of total export earnings. This ratio improved to 10.8% in the
first half of 2008 compared with 12% in the first half of 2007.
National policy assumptions and the international
environment
The country remains politically stable. However, President Umaru
Yar’
Adua’
s administration faces some difficult challenges going forward.
The impact of the global financial crisis compounded by the sharp
• The Retail Dutch Auction system (currently using the Wholesale
Dutch Auction System) should be reintroduced with effect from 19
January 2009.
• Bids for purchase of foreign exchange must be cash based.
• Funds purchased by banks at the Auction should be used for
eligible transactions only and may not be transferred into the
inter-bank foreign exchange market.
• Authorised dealers should return unused funds to the central

decline in the oil price will make it difficult for the administration to fully bank within five business days.

meet its commitments as laid out in the ‘

home-grown’ national • Foreign exchange Net Open Position of banks will be reduced
strategies, the National Economic Empowerment and Development from 10% to 5% from 19 January 2009.
Strategy (NEEDS), NEEDSII, and the president’
s Seven-Point Agenda,
Further signs of strong forex demand and the CBN’
s failure to meet
which are rooted in the pillars of poverty reduction, wealth creation and
market demand continued to render the currency weak. In an attempt to
employment generation through the development of an enabling
continue to address the currency weakness, the MPC decided on 9
environment for growth. These frameworks have been laid out to guide
February 2009 to:
the government in its task of aligning public policy with the basic needs
of the economy. Thus, in a country with relatively high levels of poverty • Continue managing the exchange rate within a band of +-3% until
and a diverse ethnic and religious mix, the present administration will further notice; and
have to not only expedite reforms but also improve the domestic
• Maintain the difference between the CBN buying and selling rates
economic performance.
within one per cent, and that of the banks within one per cent.
The current global economic recession, coupled with the low oil price,
On the international front, the global economic outlook for 2009 has
poses challenges that directly affect the implementation of government
weakened and this should negatively impact Nigeria’
s government
policies. The government’
s guiding vision, which is captured by the
programmes. The world economy is now expected to grow by a mere
president’
s Seven-Point Agenda, focuses on the following aspects:
0.5%, which is the slowest growth recorded in the recent past. The Sub-
investing in the energy and power infrastructure that will enhance both
Saharan Africa is also expected to grow by about 3.7% in 2009 from an
generation and distribution of electricity; diversifying the economy by
estimated 5.5% in 2008. We expect the oil price to average US$45 per
enhancing the non-oil sectors such as agriculture and manufacturing;
barrel in 2009 before rising again to about US$65 per barrel in 2010.
improving the transport infrastructure; contributing to more sustainable
The slowdown in oil prices and other commodities and the overall slump
and enduring economic growth and performance that will increase
in global demand for commodities should negatively impact Nigeria’
s
employment opportunities; investing in human capital development
fiscal space.
through better education and health systems; investing in and improving
national security, especially in response to the Niger Delta unrest; and Table 3: Global economic outlook
addressing the issue of land ownership.
Real GDP growth (year-on-year)
The Seven-Point Agenda has provided a foundation upon which both 2006 2007 2008F 2009F
monetary and fiscal policies are advanced. The adoption of the fiscal World 5.1 5.0 3.3 0.5
responsibility bill has helped not only in stipulating that the budget Advanced
Economies 3.0 2.6 1.4 -0.8
should be accompanied by a three-year plan that outlines the medium-
United States 2.8 2.0 1.2 -1.0
term fiscal strategy but also in ensuring that a fiscal rule is adopted that
Euro-zone 2.8 2.6 1.0 -1.5
will force government to save the oil revenues. The US$45 per barrel United Kingdom 2.8 3.0 0.8 -1.8
benchmark oil price and the forecasted oil production of 2.292 mbd for Japan 2.4 2.1 0.3 -0.5
2009 might be optimistic, such that realised revenues might be lower Emerging
economies 7.9 8.0 6.6 4.0
than forecast. Despite a significant slowdown in oil revenue,
China 11.6 13.0 9.6 7.0
infrastructure spending will remain government’
s main area of focus.
India 9.8 9.3 6.5 3.5
Monetary policy challenges remain that of managing excess liquidity in
Brazil 3.8 5.4 5.0 2.0
a high interest rate environment. We expect monetary policy stance to Russia 7.4 8.1 7.0 3.0
be accommodative in 2009. Africa 6.1 6.3 5.2 3.6
Sub-Saharan Africa 6.6 6.9 5.5 3.7
In addressing the negative developments in the naira exchange rate,
Developing Asia 9.9 10.0 8.4 5.0
the CBN adopted the following (temporary?) measures (on 14 January Source: IMF (2008), Bloomberg, Standard Bank est.
2009) aimed at stabilising the currency:

7
Forecast summary Consumer demand should weaken in 2009. Nigeria’
s public sector
accounts for about 50% of the national economy. In the recent past,
Production government fiscal expansion led to an increase in government

There has not been any positive solution to the Niger Delta unrest, employees’ salaries (both federal and state). That led to buoyant

which continues to disrupt crude oil production. As the rebel militias activities in the consumer market. However, high interest rates coupled

continue to target oil production facilities, we expect these disruptions to with double-digit inflation and a weaker exchange rate should dampen

continue hampering oil production in 2009 such that the country might activities in the consumer markets. Thus, we expect final consumption

not achieve its full production capability. The depressed international expenditure by household to slow down to 3.2% in 2009 compared with

price of oil has also led the Organisation for the Petroleum Exporting an estimated real growth of 6.5% in 2008.

Countries (OPEC) to reduce Nigeria oil quota to about 1.6 mbd. Thus, Monetary Policy
Nigeria’
s oil production will be hampered throughout the forecast period
As the global economy continues to slow down, we expect credit
and growth will continue to be driven by the non-oil sector (e.g.
conditions to be tighter. Domestic banks might find it difficult to renew or
agriculture, manufacturing, construction, and telecommunications).
extend credit lines and this should also impact negatively on domestic
Growth in the non-oil sector has been driven by strong gross fixed
private sector credit extension. In the recent past, the banking sector
capital formation as government continued with its infrastructure
reforms and a positive business environment contributed significantly to
investment drive. However, the slump in international oil price will put a
a rapid increase in credit lending, which led to strong surge in broad
severe strain on government fiscal space such that infrastructure
money supply. We expect the tighter market conditions to weigh heavily
spending should slow down in 2009.
on the domestic banks’ability to lend to the private sector. Thus, private
Figure 15: Total oil production (million barrels per day) sector credit extension should decline significantly, which should also

3.00 lead to a slowdown in broad money growth throughout the forecast

period. We expect M2 to increase by an average of 5% in 2009
2.50
compared with an average of 71.6% in 2008.
2.00
1.50 The slowdown in broad money growth (M2) should be positive for
inflation in the medium term. However, food prices should continue to
1.00
exert upward pressure on headline inflation. Thus, headline inflation
0.50
should average 13% in 2009 but decline gradually to single digits during
-
the forecast period. Monetary policy should stay accommodative in
2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f
2009. Thus, we expect the MPR to be 9.5% by the end of 2009.
However, due to declining oil revenue, government might be forced to
Source: Central Bank of Nigeria & Standard Bank est.
borrow domestically to fund infrastructure investment. This should drive
Nigeria will also face tighter international credit conditions that will limit yields higher in 2009. We do not expect government borrowing to
access to finance. During 2007, Nigeria’
s foreign direct investment crowd-out the private sector as there is no vibrant corporate bond
(FDI) inflows amounted to about US$12.5 billion (6.6% of GDP). The market. The recent shortage of T-bill notes lead to a significant collapse
bulk of these inflows targeted the oil and gas sector. However, the of the rates. However, this is not sustainable in the long term, such that
current global financial crisis will dictate that FDI inflows should slow T-bill rates should start increasing to around 8% by the end of 2009.
down in 2009. We are forecasting a global growth of about 0,5% in
Figure 17: CPI inflation (%)
2009. Gross fixed capital formation should only grow by an estimated
2.2% in 2009 compared with an estimated growth of 12.3% in 2008. 14
12
Figure 16: Real GDP growth (%)
10
8 6.9 8
6.8
6.3
6.0 6.2 5.9 5.8 6
6
4

4 3.0 2
0
2
2006 2007 2008 2009f 2010f 2011f 2012f 2013f

0 Source: National Bureau of Statistics & Standard Bank est.

2006 2007 2008e 2009f 2010f 2011f 2012f 2013f
These measures taken to stabilise the naira exchange rate have not

Source: National Bureau of Statistics & Standard Bank est. only paralysed the foreign exchange market but have also reversed
some of the exchange rate liberalisation the country has implemented

8
since the mid-1990s. For example, the measure that funds purchased in 2010 and throughout the rest of the forecast period as oil prices
at the Auction cannot be sold on the inter-bank market effectively shuts recover.
down the inter-bank market and runs the risk of encouraging a parallel
Figure 19: Current account balance (% of GDP)
and illegal exchange rate market. Depending on the recovery of the oil
prices, we expect these measures to be in place throughout 2009 and 25
into 2010. The sign of a reversal of a market-determined exchange rate
20
might also dampen the confidence gained with the international
investors since the liberalisation of the exchange rate. We expect the 15

naira to continue trading at around its current levels in the short term. 10
Thus, the naira should average NGN151.5 per US dollar in 2009.
5
Figure 18: Naira/USD exchange rate
0
160
-5
150 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f

Source: Central Bank of Nigeria & Standard Bank est.

140
130
120
110
2006 2007 2008 2009f 2010f 2011f 2012f 2013f
Source: Bloomberg
External sector
The decline in the price of Brent crude oil should affect the country’
s
external sector performance. Crude oil exports account for about 90%
of the country’
s total exports. Continued unrest in the Niger Delta region
and OPEC oil production cuts should severely impact Nigeria’
s current
account balance. Thus, we expect total exports to decline from an
estimated US$95.2 billion in 2008 to US$48.7 billion in 2009. However,
as new oil fields come online in 2009, we expect a slight increase in oil
exports’ volume. Despite the country being Sub-Saharan Africa’
s estimated at NGN757 billion ((US$5.1 billion). That is 3% of GDP.
largest oil producer, Nigeria still imports about 90% of its petrol
requirements because of a lack of refining capabilities. We expect the
import costs to decline significantly following the sharp drop in the
international price of oil. The recent currency depreciation should also
lead to a significant drop in imports. As the economy slows down
certain sectors might reduce their imports of raw materials. Therefore,
imports should decline in nominal terms from an estimated US$48.7
billion in 2008 to US$35.5 billion. Thus, the trade balance is forecast to
decline from US$46.5 billion in 2008 to US$3.5 billion in 2009 (2% of
GDP)
Public Finances
The depressed international price of oil should put severe pressure on
government fiscal space in 2009 and this should lead to significant
expenditure cuts. The projected aggregate expenditure in the 2009
budget is 2.87 trillion naira compared with 3.3 trillion naira in 2008. We
expect the crude oil price to average US$45 per barrel in 2009. Thus,
revenue collection will decline significantly and that should dampen
overall government consumption expenditure, which should record a
real growth of 2.9% in 2009 compared with an estimated real growth of
10.5% in 2008.
The 2009 budget was also based on the conservative benchmark oil
price of US$45 per barrel compared with the US$69 per barrel initially
proposed. Oil production is estimated at 2.3 million barrels per day. This
appears too optimistic as further attacks on oil facilities and
infrastructure would disrupt oil production. Thus, budget deficit is
Figure 20: Non-oil primary balance (% of GDP)
0
-5
-10
-15
-20
-25
-30
-35

The decline in oil prices coupled with lower profit remittances from oil 2006 2007 2008e 2009f 2010f 2011f 2012f 2013f

companies operating in Nigeria should lead to shrinkage of the income

deficit of the services and income accounts. However, we expect the Source: Federal Ministry of Finance & Standard Bank est.

income and services accounts to remain in deficit. The slowdown in
global economic growth should put a dent in the inflows of remittances
from Nigerian diaspora. Thus, private capital inflows should decline.
However, the current transfer account should remain in surplus.
Therefore, we forecast a slight deficit of 0.2% of GDP in the current
account in 2009. The current account balance should return to surplus
We expect fiscal policy to remain expansionary during 2009. The 2009
budget is aimed at delivering the president’
s Seven-Point Agenda by
“enhancing investment in physical infrastructure and human capital
development, implementing socio-economic reforms and consolidating
democracy”. Depressed oil prices pose a significant challenge to

9
government’
s ability to meet its revenue target for 2009. Thus,
government might be forced to increase its domestic borrowing to cover
the shortfall in revenues. As the yields in domestic bonds increased in
2008, domestic borrowing should be expensive. The continued
depressed state of the international financial markets will also make it
difficult for the country to borrow internationally. For these reasons,
government might be forced to tap into the Excess Crude Account to
cover for the revenue shortfall. Another major threat to stable
government finances is the disruptions in crude oil production. The
referenced 2009 budget oil production of 2.292 mbd might still be difficult
to achieve as the country struggled to produce 2.0 mbd in 2008.

Economic outlook

The weak global economy and developments in the oil markets will
dictate the country’
s outlook going forward. If oil prices remain at these
depressed levels, we expect government revenue to decline. This
should negatively impact government’
s infrastructure spending, which
has been driving growth in the non-oil sector. Thus, growth should slow
down significantly. The unresolved political instability around the Niger
Delta region might also continue to disrupt oil production, thereby
further impacting negatively on real economic growth in the medium
term. Government’
s commitment to prudent macroeconomic policies
should boost real growth. The current economic conditions pose a
significant challenge for government to further diversify its export base
away from oil and into other sectors of the economy.

10
Nigeria
Standard Bank forecasts of selected indicators

2006 2007 2008 2009 2010 2011 2012 2013

National Accounts
Gross Domestic Product (USD billion) 146.5 155.6 166.2 171.2 181.2 192.7 206.0 218.0
Real GDP growth (%) 6.0 6.2 6.8 3.0 5.9 6.3 6.9 5.8
Final Consumption Expenditure of

Households (NGN billion) 425.7 459.3 489.2 504.9 525.1 552.9 588.3 622.4
% change 7.6 7.9 6.5 3.2 4.0 5.3 6.4 5.8

Final Consumption Expenditure of

Government (NGN billion) 12.3 13.3 14.7 15.1 15.7 16.5 17.8 19.1
% change 7.7 8.1 10.5 2.9 3.8 5.0 7.8 7.2
Gross Fixed Capital Formation (NGN
billion) 114.0 131.3 147.5 150.7 159.6 171.1 184.6 198.5
% change 17.9 15.2 12.3 2.2 5.9 7.2 7.9 7.5

Oil production (million barrels per day) 2.22 2.12 1.92 1.89 1.9 2.2 2.3 2.4

Monetary sector

Money supply (M2) NGN trillion 3.5 4.7 8.1 8.5 9.1 9.9 10.9 12.1
% change 34.9 34.3 71.6 5.0 7.8 8.5 10.1 11.0
Policy interest rate (%) end period 14.00 9.50 9.75 9.50 10.00 9.75 9.00 8.5
Exchange rate (NGN/USD) average 128.5 125.7 119.0 151.5 140.3 135.6 130.3 125.2
Inflation (%) 8.4 5.4 11.5 13.0 11.5 10.3 9.8 8.5

External sector
Exports: goods and services (USD
billion) 62.51 63.12 95.26 40.71 65.35 70.33 85.14 93.45
% change 1.0 50.9 -57.3 60.5 7.6 21.1 9.8
Imports: goods and services (USD
billion) 30.91 38.89 48.73 37.21 38.81 41.34 45.78 49.37
% change 25.82 25.30 -23.64 4.30 6.52 10.74 7.84

Trade balance (USD billion) 31.60 24.23 46.53 3.5 26.54 29.00 39.36 44.08
% of GDP 21.6 15.6 28.0 2.0 14.7 15.1 19.1 20.2
Current account (% of GDP) 10.0 1.6 9.9 -0.2 5.2 10.3 19.8 18.5
Foreign exchange reserves (USD) end
period 42.3 52.0 68.1 50.0 75.2 80.5 83.7 87.6
Import cover (months) end period 16.4 15.9 18.3 16.8 18.5 19.0 19.6 19.9

Public and external solvency

indicators

Gross external debt (USD billion) 5.1 3.7 4.1 4.8 3.6 4.2 4.2 5.7
% of GDP 3.5 2.3 2.5 2.8 2.0 2.2 2.0 2.6
Non-oil Primary balance (% of GDP) -26.5 -24.5 -30.6 -21.7 -27.5 -29.3 -26.5 -28.7

11
Group Economics
Goolam Ballim – Group Economist
+27-11-636-2910 goolam.ballim@standardbank.co.za
South Africa

Johan Botha Shireen Darmalingam Jeremy Stevens Danelee van Dyk

+27-11-636-2463 +27-11-636-2905 +27-11-631-7855 +27-11-636-6242
Johan.botha@standardbank.co.za Shireen.darmalingam@standardbank.co.za Jeremy.Stevens@standardbank.co.za Danelee.vanDyk@standardbank.co.za

Rest of Africa

Jan Duvenage Anita Last Yvonne Mhango Victor Munyama

+27-11-636-4557 +27-11-631-5990 +27-11-631-2190 +27 11-631-1279
Jan.duvenage@standardbank.co.za Anita.last@standardbank.co.za Yvonne.Mhango@standardbank.co.za Victor.Munyama@standardbank.co.za
Botswana Angola Kenya DRC
Lesotho Ghana Mozambique Nigeria
Namibia Malawi Uganda Tanzania
Swaziland Mauritius Zambia Zimbabwe

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