Government needs to brace up for tough policy decisions including the defence of the Nigerian economy against external and fiscal instabilities in order to restore growth and achieve recovery, Sigma Pensions Limited said on Monday in a report.
The firm observed in the document titled Nigeria 2021 Outlook: A Return to Normalcy, but Tough Policy Choices Lie ahead that Africa’s largest economy had been facing vulnerabilities from the recession, with external shocks and fiscal uncertainties causing upset in its exchange rates and inflationary pressures.
According to the commentary, definite policy settings are needed to turn the macroeconomic turbulence of the Nigerian economy around, meaning the impact of policy actions will play a significant role more at this time than in the past.
“As with the global environment, we expect Nigeria’s economy to experience a V-shaped bounce back from a recession in 2020 as the removal of most COVID-19 restrictions should benefit the non-oil sector where the restrictions hurt activities badly.
“That said, oil output is likely to remain in recession as compliance with OPEC+ curbs restrains oil production to 1.7-1.8mbpd, a development likely to remain in place until H2 2021,” the document said.
“The recovery in growth is where the good news ends. We view the combination of still weak oil exports and a resurgence in import demand pointing to large external imbalances over 2021.”
It is anticipated that there will be limited chances of funding the imminent current account deficit and possible weakening of the naira in 2021, considering the present policy structure guiding the exchange rate.
“Alongside these FX pressures, we see soaring food prices, occasioned by an underwhelming 2020 crop harvest, border closures, higher electricity tariffs and petrol prices (following the move to remove gasoline subsidies) as fuelling a surge in inflation towards 16 per cent levels in 2021 (2020e: Avg. 13.2 per cent).
“Though the CBN has ignored inflationary pressures and muddled through the FX situation over 2020, we think the Nigerian economy’s return to growth and the need to stem the widening parallel market premiums will drive a shift to monetary tightening at some point over 2021.”
The report envisaged a surge in fiscal imbalances in the Nigerian economy this year as government planned to fund a deficit of N5.2 trillion through local and foreign debts.
It stated that naira assets recorded a rebound last year as a result of the CBN’s move to diversify the domestic treasury bill markets.
Analysts at Sigma Pensions forecasted that the expected fiscal deficit as well as the newly issued CBN special bills could enable the apex bank mop up excess liquidity in the Nigerian economy.
“Accordingly, we expect the rebalancing across Nigeria’s financial markets to run its course over 2021, implying less-liquid conditions.
“Against this backdrop, we think the current bullish run across fixed income and equity markets will top out in the first half of the year, giving way for the emergence of bearish sentiments over the second half of 2021,” the report noted.