Nigeria’s external shocks raise economic vulnerabilities

Merrill Lynch projected Nigeria’s real GDP growth to decelerate to 3.5% in 2015 from an average annual growth rate of 5% between 2011 and 2014, due to the large terms of trade shock that has resulted from lower global oil prices. It said that the depreciation of the Nigerian naira would increase inflationary pressure and would weigh on domestic consumption that is heavily dependent on imports.

In addition, it forecast the inflation rate to average 11.5% in 2015 relative to an average rate of 8.1% in 2014. Likewise, it noted that the hydrocarbon sector would be directly affected by lower oil prices, and that the non-hydrocarbon sectors would be impacted by the depreciation of the naira as the cost of imports would increase.

Merrill Lynch said that lower oil prices are weighing on the naira, which was trading at an average rate of NGN182 against the US dollar in 2014 relative to NGN160.3 per dollar in 2013. Also, it noted that the Central Bank of Nigeria (CBN) took several measures to stop the depreciation of the currency and considered these measures to be positive. But it expected the naira to remain under pressure due to lower oil prices and to political risks. Furthermore, it forecast the naira to trade at an average rate of NGN204 per dollar in 2015. Therefore, it anticipated that the CBN’s foreign currency reserves would continue to decline from $42.8bn in 2013 and $35.4bn in 2014 to $26bn at the end of 2015. It said that the CBN’s foreign currency reserves are currently 25% below the minimum adequacy level, which means that Nigeria remains highly vulnerable to sudden capital outflows from further drops in oil prices or from political instability.

More so, Merrill Lynch projected Nigeria’s fiscal deficit to widen from 1.9% of GDP in 2014 to 3.5% of GDP in 2015. It expected the current account balance to shift from a surplus of 1.3% of GDP in 2014 to a deficit of 1.4% of GDP in 2015.