Plunge in Crude Prices Drag Down Nigeria’s GDP

Africa’s largest economy contracted 0.36% in Q1of FY2016

Nigeria is wading through troubled waters and staring at a recession after its gross domestic product (GDP) shrunk 0.36% in Q1 FY16 compared with a growth of 2.11% in the previous quarter, as per data released by the National Bureau of Statistics (NBS) and reported by Bloomberg. Nigeria is indeed highly vulnerable to global oil prices since it is dependent on oil and gas for 95% of its export earnings, 35% of its GDP, and up to 70% of government revenues. The Oil sector accounted for 10.29% of total real GDP in Q1.

The country’s heavy dependence on oil as well as nose-diving oil prices has caused its currency to weaken, government revenue to drop substantially, and growth prospects to weaken. With global oil prices falling by more than 50% since June 2015, crude production has fallen to 2.11 million barrels per day from 2.18 million in the key oil-producing Niger River delta region.

Source: National Bureau of Statistics, Bloomberg
Source: National Bureau of Statistics, Bloomberg

Among other sectors, NBS data showed that declines in Manufacturing, Financial Institutions, and Real Estate were laggards to growth during Q1. As a result, the Non-oil sector slowed down to 0.18% in Q1, which was 3.32% lower than that seen in the previous quarter.

Fall in value of naira

Nigeria’s national currency, the naira, valued at 197-199 per dollar for over a year, has witnessed one of the steepest declines in recent times, losing 17% of its value against the greenback over the past six months. On Friday, May 20th, 2016, the naira fell to a record closing low of 193.90 against the U.S. dollar. In a bid to stall the free-fall of the naira, Nigeria’s central bank has hiked interest rates to a record 13%, which is eating into precious foreign exchange reserves. As a result, the central bank’s reserves have steadily dropped each month, falling to $34 billion in May 2016, down about 20% from a year ago.

Government increases borrowing

In a bid to kickstart growth, the Nigerian government has increased borrowing. President Muhammadu Buhari signed a record budget of 6.1 trillion naira ($30.6 billion) on May 6th, 2016, with a deficit of 2.2 trillion, or 2.14% of the GDP.

To add to its woes, Nigeria imports at least 70% of refined fuel because of insufficient refining capacity despite being one of Africa’s biggest oil producers. The country is facing fuel shortages due to an 8% drop in labor productivity in the fourth quarter. According to the NBS, unemployment rose to 12.1% in Q1 from 10.4% in the previous quarter. Even as the government increased gasoline prices to combat fuel shortages, inflation rate climbed to an almost six-year high of 13.7% in April 2016.

Will diversification bode well for Nigeria?

Reducing Nigeria’s dependence on oil and diversifying into other sectors are seen as the short-term remedies to tackle the recent crisis in the country. Adding to the plunge in global oil prices, the U.S., one of Nigeria’s biggest customers, has stopped importing oil because of the shale boom. As a countermeasure, Nigeria has delayed or stalled several deep-water oil projects.

The Government of Nigeria is looking to generate revenues from new taxes on luxury products such as yachts, private jets, luxury cars, and sparkling wine. Also, diversifying heavily in agriculture and food processing, among others, is being seen as a means to reduce dependence on oil. To prevent further slide of its currency, Nigeria’s central bank is considering limiting the purchase of foreign currency by importers of non-essential products. Let us hope that all these austerity measures work in combination to save Nigeria from sliding into recession in the second quarter.

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