Sovereign Analysis /

Nigeria: How to wake the sleeping giant?

  • The oil price impact is mixed, with improved growth and BOP outlooks alongside higher inflation and budget deficits

  • Exchange rate mismanagement and fuel subsidies remain constraints, with little chance of reform prior to the election

  • Nigeria’s potential remains vast, but the prognosis is for a continued muddle through absent major structural reforms

Nigeria: How to wake the sleeping giant?
Patrick Curran
Tellimer Research
9 May 2022
Published by

Based on our discussions over the course of the IMF/WB Spring Meetings, as well as the Fund's recent World Economic Outlook, we present our key takeaways on Nigeria. For more details, read our in-depth "IMF/WB Spring Meetings, April 2022 – country notes and global themes" report.

The rise in oil prices has boosted Nigeria’s near-term growth outlook, but it has also pushed up inflation and the prognosis is still for barely positive per capita growth over the medium term. Further, while oil has boosted Nigeria’s balance of payments (BOP), this has been offset by a wider budget deficit due to higher fuel subsidies and the BOP impact has been muted by weak production and an inflexible exchange rate.

Overall, the IMF’s forecast revisions are largely neutral despite the oil boom. Nigeria’s overvalued exchange rate peg still lies at the heart of its economic problems, and few people seem to think there is any prospect for meaningful liberalisation. The IMF estimated that NGN was 15% overvalued in 2021, with further REER appreciation balanced by a lower current account deficit since. That said, the currency is trading at more than a 40% premium on the parallel market, hinting at severe FX constraints.

Nigeria WEO

Besides exchange rate liberalisation and fuel subsidy removal, the key macro policy reform for Nigeria is revenue mobilisation. While the government aims to double revenue collection to 15% of GDP over the medium term, the IMF sees it settling at current levels by 2027 after a temporary oil-induced boost, showing that it does not see these plans as credible without concrete new tax measures. As such, there will continue to be little room for pro-growth spending on physical and human capital.

The overall outlook for Nigeria continues to be a prolonged muddle through, with few people expecting meaningful reform ahead of the February 2023 elections. Nigeria’s vast economic potential is not in question, but it will remain latent without ambitious structural reforms.

That said, the risk of debt distress remains low and oil prices will continue to provide support, so we retain our Hold recommendation on Nigerian eurobonds.

The naira and local government debt, meanwhile, will remain uninvestable for foreign portfolio investors amid an overvalued naira, sharply negative real rates and repatriation challenges, and we retain our Sell recommendation.