Friday, Oct 8, 2021 / 8:23 p.m. / By FDC Ltd / Header image credit: BNN

Since July 2021, the oscillation of the naira on the foreign exchange market has baffled investors and analysts. What was more astonishing was the fall of the naira at a time of good economic news on GDP growth (5.01%) and falling inflation (17.01%). This therefore raises the question of why this loss of investor confidence at a time when fundamentals are improving. In total, the price of oil is up 61.59% this year and the currency has lost 21.91% in the parallel market. Again, the question is why?

The 2022 economic growth and sustainability budget (Keynesian approach)

This week, the FGN presented an aggressive budget with a nominal 17.24% increase in spending (16.39 trn N). He adopted the Keynesian model of countercyclical spending with a huge budget deficit of 6.26 billion naira. Again, the question arises as to how to pay for this without fueling inflation with interest rates kept artificially low? This would appear to be another political contradiction. However, Nigeria appears to have a theoretical deficit and a real surplus. Indeed, the average budgetary reference price of oil over the last 5 years has been 25.78% higher than the market price. The question is where is the excess money? Possible responses include – excess crude, extra-budgetary spending (grants), and leaks. The jury doesn’t know what’s going on. The 2022 budget, if discounted for inflation (17.01%), results in zero growth and in dollars, it has actually decreased.

What Future for the Economy – What Will Things Look Like at Christmas?

The World Bank has revised upward its Nigerian GDP growth projection from 1.8% to 2.4% for 2021. Excellent news but it is 6.0% lower than potential GDP growth (8.4% ) and will increase the dissatisfaction index to 50.5% (according to the Okuns law). So what future for the economy and what will things be like at Christmas? Here is a little preview. Inflation will increase marginally (17.2%) due to the pass-through effect of the exchange rate. Remember that the marginal propensity to import into Nigeria is 24%. The naira will appreciate on the parallel market from N580 / $ towards N560 / $ while at the I&E window it will rise to N420 / $. The spread between the two rates will drop from its peak of N165 / $ to N140 / $. The stock market will maintain its current rally for some time before a correction.

In this edition of the LBS Breakfast Session, Bismarck Rewane and the FDC Think Tank demystify the reasons for investor concerns and provide an overview of the economy for the last quarter of 2021.

Please download – LBS Executive Breakfast – October 2021

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