Fitch Solutions, an affiliate of global rating agency, Fitch, has predicted that Nigeria’s weak performance in the oil and gas sector may continue to slow down the country’s economy in the coming years. In its latest report on the state of the Nigerian economy, the rating agency stated that from its analysis, the new Petroleum Industry Act (PIA) might not markedly impact the country in the near term.
Forecasting an average annual decline of 0.5 per cent in the next four years, the group added that given the rapid pace of population growth in Nigeria, it expected that average incomes would continue to stagnate in the country.
Fitch stated, “While the Petroleum Industry Bill (PIB), which was finally signed in 2021, will create a more stable operating environment, we doubt that it will have a significant effect on investment this year. It will take time for foreign firms to launch any new projects.
“Indeed, despite the new bill, our oil and gas team expects that oil production will gradually fall over the coming years. We predict an average annual decline of 0.5 per cent between 2023 and 2026. All told, fixed investment spending will contribute just 0.6 per cent to headline growth in 2022.”
The report projected that the poor performance of the oil sector, which is Nigeria’s key foreign exchange earner, would keep headline growth weak over the coming years.
The rating agency said, “We expect that real GDP growth will average just 2.9 per cent between 2023 and 2026. Headline growth will be even weaker in per capita terms. Given the rapid pace of population growth in Nigeria, we expect that average incomes will continue to stagnate.”
However, despite the slowdowns, Fitch predicted that economic growth in Nigeria would pick up slightly from an estimated 3.1 per cent in 2021, to 3.5 per cent in 2022, primarily driven by increased oil production, which will boost export growth. But the firm stated that it expected that growth would slow to 2.9 per cent in 2023, and over the medium term, that the combination of poor economic performance and rapid population growth per capita income would essentially stagnate.
It said, “We at Fitch Solutions expect Nigeria’s economy will expand by 3.5 per cent in 2022. This would be the eighth consecutive year in which Nigeria has underperformed the aggregate growth figure for Emerging Markets (EM). We expect growth of 4.8 per cent across EMs as a whole.
“Even so, 3.5 per cent growth would represent an acceleration compared to the 3.1 per cent growth for 2021, and be Nigeria’s best performance since 2014.”
Accordingly, Fitch solutions predicted that the volume of Nigeria’s oil production would rise by 4.1 per cent in 2022, which would be a significant improvement compared to 2021, when it estimated that output fell by 8.1 per cent as a result of low investment and OPEC+ cuts.
The report said, “But with the OPEC+ agreement now ending, we think that output will rise, though it will remain below the recent peak recorded in 2020.
“Since oil makes up almost 90 per cent of Nigeria’s exports, increased production will boost the country’s export earnings. Indeed, given rising agricultural exports, we expect that exports will rise by 11.6 per cent in real terms in 2022.
“Whereas net exports subtracted 1.0 percentage points (pps) from headline growth in 2021, we think that the component will add 1.8pps to headline growth in 2022.”
According to the agency, the slow but rising oil production would also fuel strong private consumption growth, spurring private consumption spending to rise by 3.5 per cent in 2022, in line with the outturn in 2021.
The report explained, “This will contribute 2.2pps to headline growth. Continued FX shortages and slow productivity growth in the agricultural sector – which employs almost 35.0 per cent of the workforce – will prevent a sharper acceleration. Indeed, over the past seven years, private consumption growth has averaged just 0.7 per cent.
“We expect that government consumption will rise by 3.0 per cent in 2022. The government passed an ambitious budget in late 2021, but recent experience suggests that implementation will be very weak.
“We are, therefore, sceptical about plans to significantly increase public infrastructure spending.
Indeed, some projects were probably included in the budget for political reasons before the 2023 election, and we expect that very little real progress will be made. Given the small scale of Nigeria’s federal government, public spending will contribute just 0.4pp to headline growth.”
It emphasised that the government’s failure to raise living standards would probably result in increased social tensions over the coming years, projecting that the febrile political environment can result in violence surrounding presidential elections scheduled for 2023.
“Our current forecasts assume that the vote passes peacefully, but a series of violent clashes – as happened in 2011 – could pose a headwind to real GDP growth,” it projected.
