Quite a valid curiosity! To get a view of the outturn of the Nigerian economy, it is good to get a sense of how the economy performed in 2021. Broadly, it was quite an improvement over 2020 on most metrics, however, we are still not at the pre-pandemic levels yet. The economy grew by 0.51% yoy, 5.01% yoy, and 4.03% yoy in the first three consecutive quarters of 2021. Compared to the economic slowdown in 2020, this was quite an improvement. Inflation trod down steadily since April 2021 as business and economic activities opened up fully, supporting production and the race to match the fast-growing household consumption. The government had to spend more in 2021, after it added a supplementary budget of N982.7bn to the original N13.65tn, 2021 budget. Indeed, the government spent a lot of money last year trying to resuscitate the ailing economy, and their well-meaning attempt yielded some impressive result, particularly in the area of boosting non-oil revenue and financing COVID-19 vaccination.
On monetary policy, the CBN retained the MPR of 11.5% throughout 2021, signaling its commitment to spur economic growth through monetary variables. However, banks in Nigeria are still fraught with the high CRR which limits the ability to create credit. Moreover, the CBN still compels the same bank to maintain a loan-to-deposit ratio of 65%. So 2021 pointed to some conflicting policies in the banking space while the CBN fosters growth through the dovish monetary policy environment.
The FX landscape was really interesting in 2021 that I have dedicated a sole paragraph to it. After two episodes of devaluation in 2020 that saw the official exchange rate leap from N306.9/$ to N379.0/$, the CBN pushed the price of the Naira to N410/$ levels, describing this as a convergence with the I&E market. This was partly an attempt to satisfy the lords – the International Monetary Fund (IMF), which continues to pressure the CBN and the government to float the Naira. Then, the CBN would later discontinue the sale of FX to BDCs, who were described as excessively greedy with arbitrage, agencies of hoarding and complicit in money laundering. By the third quarter of the year, the publication of parallel market rate by AbokiFX was stopped after a faceoff with the CBN Governor. 2021 was a battle ground for FX.
Beneath the glam in 2021 lies its challenges. For Nigeria, foreign investment into the economy failed to transition to pre-pandemic levels. In the first three quarters of 2019, 2020 and 2021, the NBS total capital importation to the economy at $20.2bn, $8.6bn and $4.5bn respectively. I believe the picture is clear. Domestic investment seemed to have upheld the overall investment front judging by participation in the financial market. On trade, the economy did not fare too well, but this should not be surprising, considering that diversification of our export base is still a major concern. To understand this, trade balance in the first three quarters of 2019, 2020 and 2021 stood at N2.8tn, (N4.6tn), and (8.8tn) respectively. It is not that export is not growing; rather, the growth in export is far behind imports.
Overall in 2021, my view is that the economy performed better relative to 2020, but there is a significant economic gap that is yet to be bridged.
I will summarize my thoughts on 2022 in ten major themes and these are based on historical precedence, global developments and some insightful views that I have studied before now. Let’s make a start then!
One, COVID-19 is likely here to stay. I don’t mean to be a predictor of doom or display a lack of religious faith, but I think this virus has a strong mutating potency; hence, there may be more variants to come. Their severity will differ albeit, but they will all rear their heads. Therefore, countries need to move past the fear of the virus and the habitual practice of closing borders and restricting flights. More focus should be on further research and development in vaccines that provide periodical immunity against this deadly virus. The WHO already proposed describing the virus as a flu, and really, that is what it is.
Two, global monetary policy will take a full hawkish turn. Let me state this for the record. It has been extremely expensive to maintain a low interest rate environment. There are forgone gains from monetary policy accommodation, which if monetized, comes at a record Dollar value. Central bankers are literally tired and their arsenals are near depleted. So, it’s time to move on! Expect the CBN to raise the MPR in 2022.
Three, you can expect to see some interesting permutations in the political space. 2022 is a pre-election year in Nigeria and potential contenders for the Aso Rock are coming up. The geographical and religious arguments on the choice of candidates in the two biggest political parties are a must watch. But we should all expect some surprises.
Four, there will be a mass orientation switch by banks to the fintech space. With the granting of PSB licenses to MTN and Airtel in 2021, the market is really hot. Product and customer cannibalization will likely take place as MTN and Airtel attempts to sit big in the fintech space. Lagging commercial banks may be acquired by other smarter banks.
Five, it’s a year of taxes! The Strategic Revenue Growth Initiative of the federal government is now being effected. The taxes are everywhere; from financial instruments to wages and salaries, even soft drinks. Taxes on cigarettes will come up soon. Expect to see more taxes and your strategy should be to earn more by investing your income in a smarter way, else the taxes will consume a wholesome chunk of your salary.
Six, the FX landscape will remain an interesting space to watch. I will tell you why. The CBN and the government is not ready to let go of managing the exchange rate in the economy. However, foreign investors and the IMF wants them to float the Naira. If they float the currency, you and I will pay dearly since our consumption is about 70% imported products and 30% domestic products. Even still, the CBN reserve has disconnected from oil price. Why do you think the reserves didn’t grow so well in 2021 despite the Bull Run on oil price? There is officially a disconnection between both variables. Is a devaluation possible? I will say it is likely.
Seven, expect increase in the price of fuel and electricity. This is because both commodities have been subsidized since forever. The subsidies are now an excruciating pain for the government as they could use the subsidies for some productive uses. Hence, subsidies may be gradually scrapped and Nigerians must brace up for this.
Eight, foreign investment to Nigeria may not see a double-digit growth. Investors are still gloomy about Nigeria’s FX structure, weak infrastructural development to support the economy, the challenge of doing business in Nigeria, and policy uncertainty from the CBN and the federal government. More so, since 2022 is a pre-election year, it would not sit too right to stay heavy in liquidity terms in Nigeria.
Nine, human capital flight in Nigeria may likely grow worse. Countries that have suffered significant loss in their working population will likely open their borders to immigrants. You know the rest of the outcome; Nigerians with arms wide open will swing at these opportunities and a mass exodus will likely surface. My prediction is that the health, technology and financial service sectors will experience the biggest loss of employees.
Ten, and my last thought for the new year, is that it will likely be more challenging to invest as a retail investor as returns will likely decline on an inflation-adjusted, tax-adjusted and risk-adjusted returns. The rule that you need wealth to create wealth will be a reality. In other words, most of the compelling investments will continue to be in the investment circumference of the rich. My advice is to endeavor to have a portfolio of investment products instead of crowding into a single one.
Wishing you all a fruitful new year
Written by Michael Ogunremi
Picture credit: UnSplash