Nigeria: Economic activity to pick up in second half of 2019

LAGOS (Capital Markets in Africa) – Citi Research expected the Nigerian economy and the naira to remain stable in the first half of 2019. It said that most politicians and policymakers are seeking to maintain macroeconomic stability in the country amid potential political uncertainty around the national elections that are scheduled in February 2019. It estimated that real GDP growth could have slightly increased in the fourth quarter of 2018, and expected it to further improve in the first half of 2019, despite the elections, in line with the gradual pickup that started in the first quarter of 2017. It attributed the anticipated steady state of the economy to better agricultural output, as well as to an increase in consumption amid higher election-related spending. It considered that a sustained expansion in economic activity is more likely in the second half of the year, in case the elections take place peacefully and business confidence strengthens afterwards.

Further, it expected the inflation rate at around 12% to 12.5% in the second half of 2019, mostly due to elevated food prices in the country. It noted that the slowdown in agricultural sector growth in 2018 has kept food prices high and has weighed on domestic consumption, as the sector is the main source of employment in the country. It added that food represents 51% of the consumer price index basket, which means that continuous elevated food prices in the country would keep inflation at high levels, with implications on monetary policy and bond yields. Given current inflation expectations and the tight fiscal position, it projected interest rates to remain elevated in the first half of 2019.

In parallel, Citi expected monetary policy to remain focused on maintaining the stability of the naira in the first half of 2019, despite the decline in oil prices. It anticipated that the Central Bank of Nigeria would continue to use open-market operations and cash reserve requirements to ensure tight monetary policy conditions in the first half of 2019. However, it considered that the main challenge facing policymakers is related to the direction of the exchange rate policy in the second half of the year, especially if the new administration allows a more flexible exchange rate.