There is a likelihood of 4 per cent economic growth in 2015, which could improve by 2016, if political leaders encourage an economic model that harnesses service and agricultural sectors to insulate the real economy from low oil price.
However, a deterioration of the political and security landscape amid a severe drop in oil price could unnerve investors and tip the country into recession, leading to zero growth or even contraction this year and the next.
This grim outlook of the economy is contained in the latest Nigeria Economy Watch report by PricewaterhouseCoopers (PwC) titled “What next for Nigeria’s economy: Navigating the rocky road ahead”.
The report draws on three possible scenarios for the country, which economic analysts said are instructive for President Muhammadu Buhari and his All Progressives Congress (APC).
According to the report, the economy will continue to grow even if oil prices fall to $35 per barrel (pb) and average just $45 pb in 2015, provided there is no deterioration of the political and security landscape.
The firm based its final assessments on three major scenarios that it thought could pan out this year in Nigeria.
Scenario 1
The price bottoms out of $50 pb in the second quarter (Q2) 2015 before recovering to $60 pb by Q4 2015, averaging $55 pb over the year as a whole. Oil price recovers to a new equilibrium level of $70 pb in 2016.
Political stability is maintained as the new administration takes office.
Scenario 2
The re-emergence of Iranian oil production in Q2 2015 sees the oil price hit low point of $35 pb, slowly recovering to average $45 pb in 2015.
A slow recovery takes hold and a new equilibrium level of $60 pb is reached in 2016, consistent with the most bearish forecasts from analysis.
Political stability is maintained.
Scenario 3
Oil price follows the same profile as Scenario 2: severely undershooting the 2015 budget benchmark, hitting a low point of $35 pb and averaging $45 pb in 2015, with a slow recovery in 2016.
In addition, a severe political or security shock occurs, which could result from a resurgence of violence in the Niger Delta; or insurgency attacks in the South from Boko Haram.
Andrew Nevin, partner and chief economist at PwC Nigeria, said “we explored two types of shocks in the report: an oil price shock and a political shock, and projected what could happen should either of them materialise.
“Our modelling and forecasts show that while the economy will continue to struggle, even under the most benign scenario, it will be able to realise growth averaging 4.0 per cent for the period.
“These scenarios present important issues to consider for all organisations exposed to Nigeria.
“We are already supporting several public and private clients across a range of sectors to help them understand what these scenarios could mean for them and how they can build preparedness through their business planning processes.”
GDP
PwC in all scenarios expects Gross Domestic Product (GDP) to continue to grow even if oil prices fall to $35 pb and average just $45 pb this year.
It believes the rapid growth of the agricultural and service sectors will be key to growth in Nigeria, unlike the oil sector.
Exchange rate
The report said if oil prices continue to stabilise, then the adjustment of the exchange rate by the Central Bank of Nigeria (CBN) will be sufficient to ease pressure on the naira in 2015.
However, if oil prices deteriorate, a further 10 per cent devaluation of the naira will be necessary this year.
If deterioration of oil prices is combined with capital flight from a political or security shock, depreciation could even drop by a whopping one-third.
This scenario will effectively match the extent of the devaluation expected by the futures market at the height of the pre-election volatility in February.
Inflation
PWC said Nigeria’s heavy reliance on imports will see inflation accelerate as the naira depreciates.
It projected inflation rate to be at least 3 percentage points higher than in 2014. In scenario 3, consumer prices are likely to rise by 20 per cent in 2015 and 2016.
Oil revenues
The report suggested that gross government oil revenues are likely to fall in each of the three scenarios mentioned. It projected that oil revenue would drop from their 2013 levels by $21 billion under scenario 1. Oil revenues will also drop.
If recent oil production trends continue, gross oil revenues will fall dramatically from their 2013 level: by $21 billion alone in scenario 1 (equivalent to a 50 per cent decline). In this case, about $5 billion revenue shortfall is likely to emerge in 2015 compared with the budget calculations of the previous administration.
This financing hole could widen to about $10 billion in scenario 2, where significant debt issuance and cuts to recurrent expenditure will be needed.
State governments could struggle to borrow from financial markets to pay workers. Some highly-indebted states may miss planned interest payments on debt.
In scenario 3, we assume that oil production would fall 15 per cent through bunkering and other supply disruptions. Gross oil revenues would fall to a third of their 2013 level.
Combined with difficulties administering tax collection from unstable parts of the country, the federal government may fall over three months behind on paying employee wages and government bond yields on dollar-debt could approach 20 per cent.