West Africa in Focus /

The struggles of West African giants Nigeria and Ghana continue to mount

  • Nigeria's debt sustainability concerns heighten and naira collapses in the parallel market

  • Ghana lowers 2022 deficit forecast but we caution against reading too much into it; much still rides on IMF's assessment

  • Both Nigeria and Ghana are also on a watch list of high inflation countries that should adopt hyperinflation accounting

The struggles of West African giants Nigeria and Ghana continue to mount
Janet Ogunkoya
Janet Ogunkoya

Senior Research Analyst

Tellimer Research
28 July 2022
Published byTellimer Research

In the past few months, Nigeria and Ghana – two of the biggest West African economies – have been in the news for less than satisfactory reasons and this week is no exception for both countries.

In Nigeria, the federal government spending 119% of actual revenue on debt service has raised debt sustainability concerns, while the naira has been in freefall in the parallel market. We doubt anything meaningful will be done about it, at least until a new government is elected in 2023.

Ghana's government has lowered its 2022 deficit forecast, but the improvement is coming entirely from higher nominal GDP due to inflation rather than fiscal cuts. Our fixed income team cautions against reading too much into the lower deficit target.

Both Nigeria and Ghana are also on a watchlist of high inflation countries that should adopt hyperinflation accounting.

More debt sustainability concerns for Nigeria

Last week, Nigeria's Minister of finance presented the medium-term expenditure framework for 2023-2025. The presentation included the revenue and expenditure performance of the federal government for January-April 2022. One noteworthy development is that the federal government spent 119% of actual revenue on debt service, raising concerns about Nigeria's debt sustainability.

We have previously highlighted that Nigeria's debt service problem stems from its weak revenue collection, with total government revenue reaching just 5.2% of GDP in 2021 and federally retained revenue reaching a meagre 2.5% of GDP, so the key to preserving debt sustainability is to boost revenue collection.

Gross public debt stock (% of GDP)

But, while the government aims to triple revenue collection to 15% of GDP by 2025, which doesn't stand out as being exceptionally high relative to EM or African peers, there are only a few concrete measures to achieve such a target, and non-oil revenue will likely remain subdued absent significant reforms. It is also important to note that corruption and some irresponsible spending contribute to the state of the government account as it is.

The factors driving the naira's collapse on the parallel market

The naira (NGN) has recently been in freefall in the parallel market. After breaching 500/US$ last July and 600/US$ in mid-May, the NGN ballooned to 700/US$ yesterday after opening the day at 675/US$. It now trades at a premium of 65% to the official "NAFEX" rate of 425/US$, a level that was only breached during the May 2016 sell-off when the NGN was pegged at c200/US$.

Naira exchange rates (NGN/US$)

Explanations include higher FX demand for school fees and campaigning, rising money supply, and panic buying. Of course, it is difficult to say where the parallel exchange rate will go in the coming months. Perhaps the market dislocations will finally force the Central Bank of Nigeria (CBN)'s hand and prompt them to move towards a more flexible exchange rate. Still, we have little confidence that the CBN is willing to do what it takes to balance the market and, against this backdrop, think more parallel market volatility is in store. Click here for the full report.

Ghana inflates fiscal deficit away

Ghana presented its much-anticipated mid-year budget review this week, delayed from earlier this month after the authorities announced their intention to seek an IMF programme. However, as we noted before, although it is another milestone, we struggled to see what it could usefully add after barely three weeks of talks with the Fund.

Ghana's 2022 budget revisions

The main headline is that the government has lowered its 2022 deficit forecast to 6.6% of GDP from 7.4% in its mid-year budget review. However, the improvement comes entirely from higher nominal GDP due to inflation rather than fiscal cuts. Hence, we caution against reading too much into the lower deficit target; much still depends on the IMF's assessment. Click here for the full report.

Hyperinflation accounting comes to West Africa – Ghana and Nigeria are on the watchlist

High inflation poses a risk to investors because it heightens currency risk and impacts the leverage and profitability of businesses. Therefore, to have a meaningful understanding of a business' financial position in a highly inflationary environment, IAS29 recommends hyperinflation accounting.

The inflation rate exceeds 20% in around 20% of countries

So far this year, the IPTF (International Practices Task Force) of the Centre for Audit Quality (CAQ) has indicated that Ethiopia and Turkey should adopt hyperinflation accounting. Looking at the current crop of high inflation countries, in West Africa, Ghana and Nigeria require some monitoring – both countries have recorded inflation rates of 29.8% and 18.6%, respectively.

Read more about hyperinflation accounting in emerging markets here.

Nigeria's NNPC gets commercialised

In line with provisions in the Petroleum Industry Act, Nigeria's state oil firm, the Nigerian National Petroleum Company (NNPC), has been commercialised to NNPC Limited. The company explores, produces, refines oil, and markets and retails petroleum products. With the recent commercialisation, the NNPC will now operate as a business entity and not just a government agency. While the government remains the sole owner of the entity, the business will run as a profit organisation. NNPCL plans to go private by listing on the stock exchange eventually.

NNPC declared a rare profit in its 2020 financials (the latest one available), but a closer look revealed that the profit was not driven by sustainable fundamentals, rather by factors such as impairment loss reversals, among other things. That said, the NNPC's Group Chief Executive Officer expects to have more profit-driven measures for the firm including charges for services offered to the government.

Nigeria fuel marketers hike petrol price

Last week, fuel distributors in Nigeria hiked petrol prices after a dispute over unpaid funds by the government was not settled. Prices were increased at petrol pumps from the nameplate NGN165/litre that was fixed by the regulator to around NGN170-NGN190 across the country.

Interestingly, the regulators appear to have given a silent nod to the price hike, as there have been no punitive measures so far. And perhaps understandably so as fuel distributors have struggled with thin margins on petrol sale.

Fuel distributors are calling for the deregulation of the sector and the removal of subsidies, but the government has not budged – we think the government is clearly making more socio-friendly policies ahead of the 2023 elections. This comes despite the heaping costs of subsidies on the government's purse.


Senegal's parliamentary election – 31 July

Senegal's parliamentary elections are scheduled to be held on 31 July 2022, six months after local polls, which saw the ruling party defeated by the opposition. 

Recent West African research

  • We assess the main investment themes through the first half of the year. Spiralling inflation, Ukraine/Russia and rising rates pose major problems for external funding conditions for emerging markets.

  • The Central Bank of Nigeria hiked by 100bps to 14% as it tackles rising inflation, which reached 18.6% yoy in June. The hike is largely symbolic, with the structural impediments to monetary policymaking still largely unaddressed.

  • Fixed Income Strategy: Top picks for H2 2022: Our revised Top 5 comprises Buys on hard currency bonds in Ghana, Mozambique, Nigeria, Pakistan and Uzbekistan. With a third of EM sovereigns priced in distress there are concerns over a new wave of defaults, but these countries represent pockets of value.

  • Amid the ongoing Russia oil ban by the EU, producers in Africa are some of the largest suppliers of crude to the bloc, behind Russia and Europe's own producers. But oil supply from Africa has been weak and erratic, and the withdrawal of IOCs is making the situation worse. Africa is set to miss out on the chance to replace Russia's oil supply to the EU, but there could be hope on the horizon.

  • Stripe has cut its internal valuation by 28%, to US$74bn, well below the US$95bn valuation at the time of its previous fundraising. Listed EM fintechs have been hit by the broad tech rout. Shares have declined 32% ytd, with Brazilian names down heavily, but shares in Indian and African fintechs have been less affected by the downturn.


The Nigerian market recorded a loss in the last week, with the all share index declining by 3.83%. As we have previously predicted, the increasing fixed income yield has triggered some sell-off in the equities market. In addition, the recent rapid devaluation of the naira on the parallel market might have spurred the sell down of Nigerian equities.

Looking ahead, we believe that higher yields in the fixed income market will dampen the case for investment in Nigerian equities.

Market indicators

Tellimer's West Africa Equities Coverage

Nigeria's yield curve (%)

Ghana's yield curve (%)