Nigeria has continued its economic recovery in 2018 on the back of an increase in oil revenue; however, fluctuating energy prices, increasing debt and an election in early 2019 could pose challenges moving forward.

The IMF has forecast the GDP to grow 1.9% in 2018, with the Central Bank of Nigeria (CBN) predicting a slightly lower rate of expansion of 1.75%.

Although up on 2017’s growth of 0.8%, which followed a recession in 2016, the rate of expansion is still below the fund’s prediction of 2.8% for sub-Saharan Africa, with fluctuating energy prices late in the year, disruptions to agricultural production due to flooding and social unrest taking some of the wind out of Nigeria’s economic recovery.

Higher oil revenues driving growth

The growth has been driven primarily by the energy sector, with oil revenues increasing by 37.2% year-on-year between January and October, according to CBN statistics.

The bank cited increased output and higher oil prices, which rose from opening-2018 rates of around $65 per barrel to highs of $85 per barrel in early October, as factors behind the rise in revenue.

However, a late-year drop in prices that saw the value of oil drop to just over $60 per barrel could impact year-end GDP growth, as well as the economic performance in the coming year.

Despite the drop in prices, in mid-November the Nigerian National Petroleum Corporation announced plans to boost crude output from October levels of 1.6m barrels per day (bpd) to 1.8m bpd in the new year.

The country is also looking to lift condensate production by 25% in 2019, increasing output from 400,000 bpd to 500,000 bpd, with the gains to come through improving efficiencies in infrastructure and bringing new reserves on-line.

Debt to rise in 2019 as inflation eases

Elsewhere, the World Bank has warned that 2019 could pose some economic hurdles for Nigeria, with fiscal deficits forecast to widen.

In a report released on November 21, the bank estimated that public debt levels were likely to rise to around 25% of GDP as state spending is expected to increase ahead of the February 16 presidential election, while revenue flows are expected to experience only limited growth.

While still relatively low, it is a considerable increase on the 15.5% rate recorded at the beginning of 2018.

The report also said Nigeria’s capital account could face significant uncertainty, as external portfolio investors may look elsewhere during the upcoming elections, despite rising domestic security rates.

A tight monetary policy helped control inflation throughout 2018, which dropped from year-opening levels of 15.1% to two-year lows of 11.1% in July, before edging up to 11.3% in October on the back of higher food costs.

Despite a moderate fluctuation in inflation, the CBN held its benchmark rate at 14% throughout the year, the same rate since mid-2016.

Reforms aim to improve business environment

To stimulate greater investment, Nigeria implemented a series of reforms to improve the country’s business climate throughout 2018.

The World Bank’s “Doing Business 2018” report, released in October, found that measures implemented in 29 of Nigeria’s 36 states, along with the Federal Capital Territory of Abuja, resulted in significant improvements to business registration processes, while some states also enacted reforms reducing the cost and time required to acquire building permissions.

While the regulatory environment has improved, credit availability for the private sector remained tight, with banks exercising a high level of risk aversion.

Credit growth remained flat in the first six months of the year, only picking up marginally in the second half of the year, expanding by 1.9% to October, the CBN reported in November. This was well below the 7.4% growth in lending to the public sector, the bank said, indicating that lenders continued to prefer to fund state borrowings compared to the private sector.

This information was originally published by Oxford Business Group (OBG), the global publishing, research and consultancy firm. Copyright Oxford Business Group 2017. Published under permission by OBG. For economic news about Nigeria and other countries covered by OBG, please visit: http://www.oxfordbusinessgroup.com/economic-news-updates