IMF Says Nigeria’s Economy May Contract by 1.8% This Year

Updated on
  • Currency adjustments, oil, power generation to weigh on GDP
  • Sub-Saharan Africa 2016 growth forecast cut to 1.6% from 3%

Africa’s largest economy will probably contract by 1.8 percent this year and curb growth in the entire region, according to the International Monetary Fund.

The Washington-based lender cut its 2016 growth forecast for Nigeria from 2.3 percent projected in April, according to its World Economic Outlook update released on Tuesday. The projection for next year was reduced to 1.1 percent from 3.5 percent.

The Nigerian economy will contract for the first time in more than two decades as it “adjusts to foreign-currency shortages as a result of lower oil receipts, lower power generation and weaker investor confidence,” the IMF said.

Gross domestic product shrank by 0.4 percent in the three months through March as oil output and prices slumped and the approval of spending plans for 2016 were delayed. A currency peg and foreign-exchange trading restrictions, which were removed last month after more than a year, led to shortages of goods from gasoline to milk and contributed to the contraction in the first quarter.

“Very Little Done”

President Muhammadu Buhari signed a record budget of 6.1 trillion naira ($21.35 billion) in May, more than four months into the fiscal year. “It’s half way through 2016 and very little has been done in terms of spending,” Pabina Yinkere, head of research at Lagos-based Vetiva Capital Management Ltd., said by phone. "The revenue challenge facing the government will continue to constrain its ability to reflate the economy this year."

While the economy should look better in the second half of the year, growth will probably not be sufficient to negate the outcome of the first and second quarters, Gene Leon, the fund’s resident representative in Nigeria, said in an interview two weeks ago.

“The forecast of 1.8 percent probably assumes a downturn in the second half” Nema Ramkhelawan-Bhana Johannesburg-based Africa Analyst at Rand Merchant Bank, said by phone on Tuesday. “I think there will be sustained pressure from the oil economy, and its ripple effects to other sectors of the economy.”

Inflation in Nigeria accelerated to 16.5 percent in June, the highest in almost 11 years. The Central Bank of Nigeria, which kept its benchmark rate at 12 percent in May, will announce its next policy decision on July 26. Six of nine analysts in a Bloomberg survey forecast borrowing costs will stay unchanged.

Africa Slowing

The IMF almost halved its 2016 growth forecast for sub-Saharan Africa to 1.6 percent and cut its 2017 projection to 3.3 percent from 4 percent. The “substantial” downgrade of the region’s forecast reflects “challenging macroeconomic conditions in its largest economies, which are adjusting to lower commodity revenues,” according to the lender.

Africa’s second largest economy, South Africa, will expand 0.1 percent this year and 1 percent next year, the lender said.

— With assistance by Ony Nwaohuocha

(Updates with analyst’s comment in fifth paragraph.)
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