VENTURES AFRICA – Nigeria may have become Africa’s largest economy after it rebased its Gross Domestic Product (GDP) but dependence on oil continues to place it on shaky grounds. This is evident in the impact of low oil prices–which dropped to $55.91 per barrel as of Tuesday, from a peak of $107.89 per barrel in June 2014–on its economic regression over the past year. The naira has lost more 30 percent of its value, its stock exchange remains in tatters, and its annual budget has been trimmed three times already, leaving little or nothing for capital expenditure.
The latest casualty is Nigeria’s annual growth rate. Expected to average 6.4 percent in 2015 prior to the oil crisis, it has now been revised to 4 percent, and it could get worse. “When we consider the impact of low oil prices and paralysing polls on GDP by expenditure (consumption, fixed investment, net exports) in 2015, we see greater potential downside to Nigeria’s growth than our GDP-by-production derived forecast suggests,” read an analysis on Nigeria’s GDP growth by leading investment banking firm, Renaissance Capital (RenCap). The country’s GDP growth could fall to 3.4 percent from a previous prediction of 4.5 percent.
While low oil prices are stimulating faster growth in the US and other advanced economies, it has slowed the growth of Nigeria’s oil-dependent economy, forcing budget cuts among other measures to ensure economic stabilization. “The proposed cut in the FY15 budget oil price to NGN53/bl, vs NGN77.5/bl in FY14, means government consumption, which accounts for 8 percent of GDP, could be slashed by one-third (assuming oil output and non-oil revenue remain flat),” writes Mhango.
One measure the government may introduce to tame the effect of lower oil revenues is a temporary wage freeze. If this happens in the midst of rising inflation, negative real wage growth could deepen. Households could find it difficult to keep up with rising inflation and therefore spending will reduce as consumers cut their spending. Nigerian consumers may also be hit with a hike in Value-added tax (VAT) to 10 percent (as against the current 5 percent), further discouraging spending. This is in addition to a drop in the demand for imported goods due to naira weakness. Between 2010 and 2014, household consumption was responsible for 72.1 percent of Nigeria’s GDP, a drop in consumption will, therefore, affect GDP growth.