Fitch Ratings Inc. has revised Nigeria’s forecast downwards from an expansion of 1.5 percent to a contraction of 1 percent. This downgrade reflects continued pressure on the economy during the first half of the year. With Nigeria’s second quarter growth lower than expected at -2.06 percent, positive yearly growth is almost certainly out of the picture, rendering a revision inevitable. Fitch Ratings, the agency that downgraded Nigeria’s sovereign rating to ‘B+’/Stable from ‘BB-’/Negative in June 2016, echoed the sentiments of the International Monetary Fund (IMF) earlier this year. The IMF, similarly, slashed their growth forecast from an expansion of 2.5 percent to a grim outlook of -1.8 percent growth.

Africa’s most populous nation has failed to absorb in its stride the oil price shock that began in 2014 and the situation has only been exacerbated by the militancy in the nation’s oil-producing region. Below are some of the reasons why Fitch reduced its Nigerian growth forecast.

Subdued recovery prospects

Fitch stated, “We expect a limited bounce back and forecast a recovery to 2.6 percent next year, with downside risks if dollar liquidity remains tight. The medium-term growth outlook remains significantly lower than the 5.6 percent growth seen in 2010-14. Our revisions incorporate a weaker-than-anticipated first half performance. Much of the contraction was due to fall in oil production levels, which shrank from an average of 2.1 million barrels per day (bpd) in 1Q to 1.7 million bpd in 2Q.”

Underperformance of the non-oil sector

The non-oil sector shrank, by 0.4 percent, for the second consecutive quarter, as a result of the knock-on effect of the oil sector, continued energy shortages, and the scarcity of foreign exchange for domestic industry. Data from the Central Bank of Nigeria (CBN) shows that August marked the eighth straight month of declining production and new orders.

Inflation and dollar scarcity

Fitch explained that despite the official floating of the naira in June, dollar liquidity remained low and investors remained skeptical about the sustainability of the exchange rate level. As long as the spread between the official and parallel markets remains wide, the true value of the naira would remain unknown and foreign investments would be delayed.

Fitch said, “While FX depreciation will push up inflation further, increased dollar liquidity would partially offset this as FX rationing has created shortages in the supply of imported goods. Headline inflation rose to 17.6 percent in August, and we have increased our average CPI forecast for 2016 to 14 percent from 11 percent. High inflation limits the scope for monetary easing (the CBN held its key rate at 14 percent in September, following a 200 bp hike in July).”

Delayed policy effects

Nigeria’s 2016 budget provides for an unprecedented increase in capital expenditure to stimulate the economy and an extra 180 million was even announced in August by the finance minister. However, the late adoption of the budget and the slow pace of securing external financing have delayed the bulk of these disbursements. As the bureaucratic process in procurement and infrastructures estimated to take well over six months, the effects of these policies may not begin to crystallise until 2017. There has been an improvement on the attacks on oil pipelines in the Niger Delta. Attacks have been limited in recent months, but while further production loss will be mitigated, production levels are not likely to reach 1Q levels this year.

Both the forecasts of Fitch and the IMF suggest that growth this year may no longer be feasible but Nigerians have reasons to be optimistic about 2017. Fitch Ratings projects a 2.6 percent growth in Nigeria’s Gross Domestic Product (GDP) for 2017.The reconstruction of damaged pipelines have already begun in the around the country and with the pipeline destruction coming to a near halt there is a chance the Nigeria would be producing near capacity by the end of 2017. Inflation has continued to rise month on month but the magnitude of the increase has fallen in recent months. Dollar liquidity may increase as Travelex continues to sell forex to Bureau de change operators and travelers alike. The naira has already begun to appreciate against the dollar, recording a 2.17 percent increase last month amidst Travelex foreign currency sales. All these pave the way for a 2017 recovery.

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