Nigeria will return to growth path in 2021 but external and fiscal imbalances will pose downside risks to the economy.
Sigma Pensions Limited stated this in its report released on Monday titled ‘Nigeria 2021 outlook: A return to normalcy, but tough policy choices lie ahead’.
It noted that Nigeria continued to grapple with the aftershocks of the coronavirus recession as external and fiscal imbalances propagate negative shocks across the exchange rate and inflation channel.
The report said resulting macroeconomic turmoil would require a return to credible policy settings, implying that more than ever before, the direction of policy responses would be crucial.
It said, “As with the global environment, we expect Nigeria’s economy to experience a V-shaped bounce back from a recession in 2020 as the removal of most COVID-19 restrictions should benefit the non-oil sector where the restrictions hurt activities badly.
“That said, oil output is likely to remain in recession as compliance with OPEC+ curbs restrains oil production to 1.7-1.8mbpd, a development likely to remain in place until H2 2021.
“The recovery in growth is where the good news ends. We view the combination of still weak oil exports and a resurgence in import demand pointing to large external imbalances over 2021.”
Given current policy settings around the exchange rate, the report saw limited options for financing the looming current account deficit and expected naira weakness over the year.
It said, “Alongside these FX pressures, we see soaring food prices, occasioned by an underwhelming 2020 crop harvest, border closures, higher electricity tariffs and petrol prices (following the move to remove gasoline subsidies) as fuelling a surge in inflation towards 16 per cent levels in 2021 (2020e: Avg. 13.2 per cent).
“Though the CBN has ignored inflationary pressures and muddled through the FX situation over 2020, we think the economy’s return to growth and the need to stem the widening parallel market premiums will drive a shift to monetary tightening at some point over 2021.”
According to the report, fiscal imbalances loom large for the second consecutive year with the Federal Government proposing another record deficit (N5.2tn) to be financed via large foreign and domestic borrowings.
It said in 2020, the liquidity fallout from CBN’s decision to bifurcate domestic Treasury bill markets spurred a rally across naira assets.
It said “In 2021, we think financing the projected fiscal deficit alongside CBN’s recently introduced CBN special bills could help drain the remaining portion of the large liquidity overhang.
“Accordingly, we expect the rebalancing across Nigeria’s financial markets to run its course over 2021, implying less-liquid conditions.
“Against this backdrop, we think the current bullish run across fixed income and equity markets will top out in the first half of the year, giving way for the emergence of bearish sentiments over the second half of 2021.”
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