Photograph — Brookings Institution

The Nigerian government’s decision to keep the country’s land borders closed could lead to a slowdown economic growth in 2020, investment banking firm Renaissance Capital (RenCap) has said in its recent report.

Nigeria recorded economic growth of 2.3 percent in the third quarter of 2019 which, according to the report, was mainly on the back of a recovery in the oil and gas sector, and to a lesser extent financial services. The oil sector grew by 6.5 percent Year-on-Year (YoY) basis.

Financial services also recovered from a four-quarter decline, growing modestly by 0.6 percent YoY in Q3 of 2019. There was a pick-up in credit growth from 4.3 percent a year earlier to 10.9 percent in September, an indication that the Central Bank of Nigeria’s new lending policy played a major role in the recovery.

“We think that the Central Bank’s directive to banks to increase their loan-to-deposit ratios (LDR) to 65 percent, as part of a bid to boost economic growth, partly explains the increase in lending,” the report said.

Although the bank’s new lending directive may have positively impacted on Nigeria’s Gross Domestic Product (GDP) growth rate in the third quarter, the Federal Government’s border closure move continues to drag the country’s GDP.

Nigerian President Muhammadu Buhari on August 19 shut the land borders with both Benin and Niger in a bid to end rampant smuggling activities across the frontiers, which he blamed on the supposed failure of both trade partners to guard their borders properly.

Several businesses, mostly in the agriculture sector, across Nigeria and its neighbouring countries have been hit hard by the blockade, as consumers face notable increases in the prices of basic food items such as rice, frozen foods.

Recent data from the National Bureau of Statistics (NBS) show that the inflation rate in Nigeria rose by 11.61 percent Year-on-Year in October 2019. The 18-month high figure is due to the increased cost of living that followed the closure of the borders to cheaper imported goods.

According to RenCap, the border shutdown contributed to the decline in wholesale and retail trade in Q3 2019 as trade contracted by 1.5 percent compared to a growth of 1.0 percent a year earlier.

The decline in trade also partly explains the slowdown in the non-oil sector’s growth to 1.8 percent in the third quarter, from 2.3 percent a year earlier. Being the second-biggest contributor to Nigeria’s GDP, the performance of trade has material implications on GDP growth, RenCap said.

Growth may remain far-fetched for the trade sector if the borders remain closed next year, the report stated, as cited by Nairametrics. This means keeping the borders closed until January 2020 is expected to slow down Nigeria’s economic recovery.

“We believe the pick-up in inflation, on the back of the border closures, will undermine confidence and demand in subsequent quarters,” the firm said. “This will also counter the positive impact of improving credit growth, resulting in a neutral impact on GDP growth.”

Renaissance Capital (founded in 1995) is an independent investment bank, providing access to over 50 markets across the globe with operations in Africa, Central and Eastern Europe, North America, and the Middle East. Across Africa, the firm has offices in Lagos, Johannesburg, Cape Town, Nairobi, and Cairo, serving as a gateway to emerging and frontier markets for international investors.

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