2022 economic outlook: Risks, drivers of growth and a flicker of hope

As the International Monetary Fund retained its 2022 growth forecast for Nigeria at 2.7 per cent and increased 2023 projection by 0.1 per cent to 2.7 per cent, CHIMA NWOKOJI examines key sectors that will propel this growth.

THE year 2021 was a roller coaster of the good, the bad and the ugly. On the good side, headline inflation fell from slightly below 19 per cent at the end of first quarter (Q1) 2021 to slightly over 15 per cent by the end of the year.

On the bad side, the country’s current account balance stayed negative, meaning that there were more external payments (outflows) than there were incomes (inflows). This indicated a negative trade balance, added to the worsened internal security situation, resulting in agricultural supply chain disruptions.

Rising insurgency in the country’s northern food belts led to logistic disruptions between farm gates and cities, thereby pushing up domestic food costs and worsening the national standard of living.

However, a herd of economic and finance experts are unanimous in their assessment of Nigeria’s economic outlook. While identifying sectors that will grow faster than others in 2022, analysts concluded that ooutlook for the Nigerian economy in 2022 is largely positive.

The Chief Executive Officer (CEO) Financial Derivatives Company Bismarck Rewane said there could be a flicker of hope at the end of the tunnel, but the way forward is to ensure that the necessary reforms (fuel subsidy removal, floating exchange rate & cost reflective electricity tariffs) are urgently implemented.

His words, “If successful, these will lead to an increase in fiscal and export revenues. As we look forward to a world without the Omicron variant of the COVID-19 in 2022 and beyond (fingers crossed), we must not forget the health and business lessons learned.”

Chief Executive officer, Centre for the Promotion of Private Enterprise [CPPE] Dr Muda Yusuf in a position paper obtained by Nigerian Tribune said though Gross Domestic Product [GDP] growth would remain fragile and projected at three per cent  threshold, the outlook gives a glimmer of hope.

According to him, the key expected drivers of growth include sustained recovery of global oil price, which he believes; the average in 2022 will exceed the budgeted benchmark of sixty-two dollars ($62) per barrel, offering some fiscal headroom

This he added would be powered by higher energy demand driven by the recovery of economic activities globally. Already, the conflict between Russia and Ukrain has been added to factors that are driving oil prices, which is nearing $104 per barrel.

“This trajectory is expected to impact on our foreign reserve and strengthen the capacity of the Central Bank of Nigeria (CBN) to support the foreign exchange market,” he stated.

According to Yusuf, the shocks of subsequent variant of the COVID-19 pandemic on the global and domestic economies are likely to be less severe than previous ones. Instances of lockdowns of economies are less likely to be prevalent in 2022.

He said the service sector will outgrow the real sector because it is less vulnerable to the structural constraints bedevilling the economy, particularly the real sector. The infrastructure demand in the services sector is much less than that of the real sector of the economy.

“The activation of the Petroleum Industry Act (PIA) in 2022 is expected to impact positively on the economic outlook. We expect to see positive outcomes as investor sentiments in the oil and gas sector improves on account of the reforms anchored on the Petroleum Industry Act (PIA).

“This will however depend on the political will deployed to drive the implementation of the provisions of the Act. It is also expected that the coming on stream of the Dangote refinery in 2022 will also impact positively on the downstream sector of the economy,” Yusuf emphasised.

General Economic outlook

Like the prophets would speak authoritatively, some analysts believe confidently that interest rates will rise in Nigeria as the Federal Government attempts to curb Inflation in 2022.

According them, tight monetary policy will result in a rise in domestic interest rates and a higher inflation rate after subsidy removal and the upward review of energy prices; the inflationary knock-on effects would need monetary policy intervention.

Be that as it may, Yusuf and his team believe that despite downside risks, the economy will continue to present huge opportunities for investors across all sectors. This is on account of the resourcefulness of the Nigerian people, especially the entrepreneurs. Other inherent strengths of the Nigerian economy include the market size, the population, and the demographic characteristics.

The economy will continue to draw its resilience from the activities and creativity of the small businesses and the informal sector of the economy.  The reality is that the policy, structural and regulatory weaknesses will persist in 2022. But investors have a responsibility to construct their business and corporate strategies to manage the inherent risks.

Similarly, after careful analysis, experts from Agusto & Co concluded that Nigeria’s Economic Outlook for 2022 as it concerns Businesses and Households, ‘will fare slightly better.’ According to the rating agency, supply chain problems should ease, and, drawing from the IMF, the real output of the World will grow by about five per cent in 2022 leading to an increase in the demand for crude oil.

At a production rate of 1.8mbpd and an average price of $75 per barrel, oil & gas export revenues will be around $50 billion in 2022 compared to $43 billion in 2021.

They are emphatic that it is unlikely that the CBN will change its exchange rate management strategy in 2022; therefore a parallel market premium of around 40per cent on the official exchange rate will continue to exist.

This means that foreign investors will be wary of bringing in new money at the official rate therefore net foreign investment will not be a sizeable source of USD inflow into Nigeria in 2022.

According to the firm, the CBN may not allow significant currency depreciation in an election year and one in which oil & gas export revenue is likely to rise by about 15 per cent. Therefore, the firm believes that the official NGN/USD exchange rate will be about N430/$1 at the end of 2022.

A close to 10 per cent point difference between the naira inflation and the dollar inflation will continue to put pressure on the parallel market exchange rate. However, the CBN may dampen the impact of this by injecting some dollars into the parallel market.

Analysts at Augusto & Co. expect NGN/USD to be about N610/$1 at the end of 2022 in the parallel market.

Population growth of 2.5 per cent will eat the bulk of the real GDP growth of 3per cent-4per cent we have projected. This means that real GDP per person will still be below the N383,000 for 2015,” experts at Augusto & Co stated.

Real wages of employees who work for the key businesses in the real sector will continue to fall. Unemployment will continue to rise as school leavers join an economy that is weak at creating jobs.

According to the firm, “We believe that the security situation in Nigeria will improve in 2022 as the government moves to stabilise the environment so that elections can take place uninterrupted. Jihadist and bandits are feeling the impact of the Federal Government’s (FGN’s) air power and the government is engaging the leaders of the Niger-Delta and IPOB. What happens after the election?

“In 2022, businesses and households in Nigeria will fare slightly better than they did in 2021 as the World recovers from the COVID-19 pandemic. However, returns delivered by key businesses will still be below the expected return (cost of equity) which we estimate at about 27 per cent for Nigeria.

This, in addition to foreign exchange policies that are unattractive to investors, will impact the valuation of these businesses adversely. Real GDP per person will still be below what was recorded in 2015. Real wages will continue to drop and unemployment will keep rising. Security situation in Nigeria should improve in 2022 but how can this be sustained?”

Augusto & Co estimates that the Federal Government of Nigeria (FGN) spending, as in prior years, will be constrained by the total amount of cash it can muster from various sources. Therefore, the FGN will meet most of her obligatory spending (interest on her loans, statutory transfers and payroll & pensions) amounting to about N10 trillion leaving a balance of about N3 trillion.

“Our most aggressive estimate of FGN revenue in 2022 is about N5 trillion. This means the FGN will need to borrow about N8 trillion in order to finance aggregate spending of N13 trillion.

“We estimate that the FGN will borrow about US$5 billion in foreign currency (FCY) in 2022 (NGN2.1 trillion) and the rest will be local currency (LCY) borrowings. This will increase FCY borrowings to about $44 billion and LCY borrowings to about N43 trillion. LCY borrowings will therefore be about 860 per cent of FGN revenue compared to a median of about 200per cent for the central governments of key economies in sub-Saharan Africa.

“Interest payments will be about N4.7 trillion almost 100 per cent of FGN revenues using our most aggressive revenue estimates,” according to Augusto & Co analysts.

Treasury bill rates will rise as bond prices fall in the year. The rise in Treasury yields will mirror domestic interest rates as the CBN curtails rising domestic Inflation propelled by higher domestic fuel prices and energy costs and higher domestic interest rates in 2022,” it stated.

The CBN is likely to raise the monetary policy rate (MPR) but reduce the banks’ cash reserve ratio (CRR) from 27.5 per cent to 25 per cent and 26 per cent.

The fiscal authorities may be less active in the domestic and foreign debt markets in 2022 than in 2021 as they tighten liquidity to keep Inflation in check and reduce the fiscal debt service burden

Sectoral GDP Growth

Analysts from Proshare listed some sectors that will drive the positive outlook. According to them, Agriculture will grow between 2.2 per cent and 2.6 per cent in 2022, driven mainly by the federal government and Central Bank of Nigeria (CBN) programmes to raise domestic agricultural production of grains and livestock.

The financial services sector has done well regardless of challenges deposit money banks face (DMBs) in recent quarters with negative quarterly since Q4 2020. The industry fell by -2.48 per cent in Q2 2021 and -0.46 per cent in Q1 2021 but the analysts say it would likely see a reversal in 2022 as GDP rises and business activities pick up a few notches.

“The finance industry could rise by at least 15.2 per cent and probably settle at 18.3 per cent by the end of 2022.” The Proshare team said.

The growth of the healthcare sector in 2022 would be between 5.2 per cent and 5.7 per cent, pushed mainly by heavier public expenditure and more significant private spending.

The COVID-induced lockdowns in 2020 hit the entertainment and hospitality sector hard, but this would change in 2022.

The industry had already started to turn an impressive corner in 2021, with the sector growing by 1.22 per cent in Q2 2021 and 3.68 per cent in Q3. The industry will probably grow between 4.5 per cent and 5.6 per cent in 2022 if COVID-19 problems are managed and air travel and hospitality businesses are undisrupted says the analysts.

While other sectors have had patchy performances over the last four quarters, the information and Communication (ICT) sector has held up decently.

The sector expects to grow between 12 per cent and 13.5 per cent in 2022, driven mainly by a rise in data usage. With domestic employment increasingly pivoting towards remote work, data usage would grow year-on-year (Y-o-Y) as corporate managers have to decide whether to operate by total remote work or adopt some hybrid form of work says Proshare analysts.

The hybrid model appears increasingly favoured in corporate Nigeria, as employers and employees have a middle ground between working from home (WFH) and the office (WFO).

Real Estate has seen a significant rise in both value and volume of properties as the economy edged out of the 2020 recession and saw modest growth in 2021. The sector grew by 3.85 per cent in Q1 2021 and 2.32 per cent in Q2 2021.

Analysts expect the growth to settle between 2.8 per cent and 3.2 per cent in 2022 as pre-election years typically see sizeable public sector spending trickling into different sectors at different rates. The real estate sector has traditionally been a significant beneficiary of pre-election expenditures as investors with cash to spare allot a portion to the properties market.

Downside risks to the economy in 2022

According to CPPE, the economic players will grapple with a number of headwinds in the economy in 2022.  These have macroeconomic, policy, regulatory, structural and security dimensions.

The seemingly intractable problem of insecurity remains a significant risk to the economy and the impact on some sectors, especially the Agricultural sector will be profound. Insecurity in Nigeria stems from five main sources: Jihadism including Boko Haram and their successors; Banditry, including kidnapping; Conflict between herders and farmers and Niger-Delta Separatists including Indiginous People of Biafra (IPOB).

There are also concerns about the effect on the perception of Nigeria as an investment destination and implications for Nigeria country risk rating.

Monetary and foreign exchange policy rigidities may also pose a risk to the growth outlook as there are no indications of any significant shift in monetary and foreign exchange policy stance in the near term.

Consequently, the distortions inherent in the foreign exchange market will persist in 2022. The constraining effect of the high Cash Reserve Requirement [CRR] on financial intermediation would also persist in 2022 with a dampening effect on growth outlook.

According to Muda Yusuf, investors will have to grapple with the barriers to international trade experienced in 2021. These are problems relating to the Lagos ports, the traffic gridlock, port congestion, bureaucratic documentation processes, extortions and the prohibitive charges by terminal operators and shipping companies are unlikely to abate in 2022. Investors would have to grapple with these constraints in 2022.

There will be intense electioneering activities in 2022, preparatory to the 2023 elections. This will cause some serious distractions for political office holders at all levels as they struggle to retain power during the elections. This will adversely impact the economy and the investment environment as considerable attention and resources are committed to the electioneering activities in 2022.

The aggressive drive for revenue by agencies of government will put enormous pressures on investors in 2022. Beyond the regular tax authorities, other agencies of government may become more aggressive in their revenue drive.  This will constitute an additional burden to investors in 2022.

The burden of petroleum subsidies on government finances may persist in 2022 despite the PIA. It is doubtful whether the government will be able to exercise the political will to effect the removal of petroleum subsidy given the closeness of the timing to the 2023 elections. Therefore, on account of political exigencies and push back by the ruling party and labour, the economy may have to bear the heavy fiscal burden of subsidy in 2022.   This also signals delays in the full implementation of the PIA and reform of the downstream oil sector.  However, if the Dangote refinery comes on stream in 2022, the fiscal pressure may abate, but not completely eliminated.

The pressure of debt service on government finances will persist in 2022 and beyond. Total public debt as at September 30, 2021 was N38 trillion ($92.6 billion), according to the Debt Management office.

The 2022 budget provided for the sum of N3.88 trillion as debt service. This is a substantial amount when compared with the capital budget provision of N5.46 trillion. Debt service payment is typically a first line charge in budget releases. The ambitious budget size of N17.1 trillion and the unpredictable revenue outlook elevates the risk of higher fiscal deficit than projected.  This has implications for macroeconomic outcomes of high fiscal deficits, a new round of monetisation of the deficit, pressures on the exchange rate and the general price level.