The near-term economic outlook of Nigeria will be characterised by a cloud of high inflation, mass unemployment and rampant instability, according to the recently released Economist Intelligence Unit (EIU) report.
The report also expressed worries over the policy choices of the country’s apex bank, saying that the policy choices by the central bank will continue to create macro-imbalances which will make government unable to get a handle on multiple security crises bubbling-away across Nigeria.
The EIU report however stated that should the currency stabilise in the medium-term as oil exports continue to recover, the outlook is slightly brighter, but insisted However, the current growth profile falls well behind the nation’s potential.
According to the report, “Nigeria’s government and the Central Bank of Nigeria (CBN) will aggressively promote local industry, but some elements of policy are contradictory and will contribute to macroeconomic imbalances.
“A notable example will be management of the naira. Bans on foreign-exchange access for imports of certain manufactures and agricultural goods (covering some 50 items) are being enforced to protect local industry and support the currency, but have some important flaws. Most notably, restrictions are elevating inflation and undermining the managed currency regime through sustained real effective exchange-rate (REER) appreciation.
“Despite this, currency restrictions are expected to last throughout the forecast period, with import substitution (and compression) being central to the CBN’s exchange-rate strategy, as opposed to balancing the external account by encouraging non-oil exports.
The report recalled that “Faced with hard-currency shortages in 2020, the CBN allowed a backlog of foreign-exchange orders from investors and importers to accumulate. Because of currency controls and these de-facto capital controls, there is a wide spread between the official (NAFEX) and parallel-market exchange rates. As currency restrictions are expected to remain for the long-term, the shift towards a market-clearing official exchange rate is not expected in 2021-25, and the CBN is adamant that a fully flexible naira would lead to an overshoot and an inflationary spiral.
“ A pattern of rigidity by the CBN when encountering hard-currency shortages (as in 2020) will have a long- term impact on confidence, and partly explains our pour projection that foreign direct investment (FDI) will equal 1% of GDP or less throughout 2021-25.”
However, the report scored Nigeria high on its international relations policies, forecasting that the she will still remain a dominant force within the politics of the African continent even though it highlighted that her policies on trade in the region may adversely affect the nation.
“Nigeria will remain a major player in Africa, given its size, but its economic policy choices will skew towards protectionism and, for reasons of incompatibility, will lean away from internationalism. Land borders that were closed to goods since late 2019 have reopened, but Nigeria’s approach to encouraging regional trade will be minimalist, beyond its obligations under the African Continental Free Trade Agreement (AfCTFA).
“ The trade pact compels Nigeria to eliminate 97% of tariff lines over the next five to ten years. This deadline will not be met zealously, given high prices in Nigeria and declining external competitiveness for industries that could otherwise benefit from regional market access.” The report said.