Nigeria has slipped into recession for the first time in more than two decades as growth in Africa’s top oil producer shrank for the second consecutive quarter.
The economy contracted 2.1 per cent in the three months to the end of June, worse than analysts expected, while inflation hit an 11-year high of 17.1 per cent, underlining the depth of the west African nation’s crisis.
“What strikes me is the breadth of sectors where things have gone terribly wrong,” said John Ashbourne, Africa economist at Capital Economics, citing contractions in construction, manufacturing and trade. “Across the board, it is popping up red. This is a wake-up sign that a lot of the non-oil sector policies, like foreign exchange controls, have not worked.”
Nigeria, which depends on petrodollars for 70 per cent of state revenues and 90 per cent of export earnings, has been battered by the slump in oil prices. The economy shrank 0.4 per cent in the first three months of the year and the International Monetary Fund is forecasting that growth in 2016 will contract 1.8 per cent.
The crisis is heaping pressure on President Muhammadu Buhari, who took office last year. His government is also grappling with a severe foreign currency shortage and a fresh bout of militant attacks in the oil-producing Delta that have hit crude output.
It has pledged to revive the economy through heavy spending on infrastructure, but the revenue squeeze caused by low oil output is hindering Mr Buhari’s plans.
“The hole is much deeper than we thought so the struggle to get out of it is going to be much more difficult,” said Bismarck Rewane, chief executive of Financial Derivatives, a Lagos consultancy. “The major issues are how to get back to growth and reduce unemployment urgently.”
The negative impact of the oil industry’s woes has become increasingly evident on inflation, employment and foreign investor sentiment. In the second quarter, non-oil growth contracted 0.4 per cent with manufacturing shrinking 3.4 per cent.
The continent’s most populous nation was one of the world’s fastest growing economies during the oil boom, but Mr Buhari said this month that Nigeria “suddenly appears to be a poor country.”
The vice-president’s office said in a statement that the latest growth figures confirmed a “temporary decline”, but added that there were indications economic activity could pick up in the second half of the year.
Critics accuse the government of aggravating the country’s problems with accusations that it reacted too slowly to the crisis and that it has pursued policies that have deepened the turmoil.
The central bank’s decisions to restrict access to dollars for certain imports and not allow a flexible exchange rate for the naira have been blamed for stymieing businesses and investment, while pushing up prices of everything from fuel to rice and soap.
In the official market, the naira is trading below N300 to the dollar, having lost more than 40 per cent of its value since its peg was lifted in June, but on the black market the currency is far weaker — it has been trading at below N400 to the dollar this week.
The central bank increased the main interest rate by 200 basis points last month in an attempt to combat inflation, but it rose for the ninth consecutive month in July.
Razia Khan, chief Africa economist at Standard Chartered, said she expected a further rate increase at the next monetary policy meeting in September.
She said the weakness of the naira had boosted the government’s ability to make its payments to state administrations.
“Implementation of the budget will also help,” Ms Khan added. “The question is whether these factors alone will drive sufficient momentum for a recovery in the second half of the year. With banks unlikely to be driving lending growth much higher, recovery could be more drawn out.”
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