Dear Subscriber,

Since July 2021, the oscillation of the naira in the forex market has confounded investors and analysts. What was more amazing is the plunge of the naira at a time of cheery economic news on GDP growth (5.01%) and sliding inflation (17.01%). It thus begs the question as to why this loss of investor confidence at a time of improving fundamentals. In all, the price of oil is up 61.59% this year and the currency lost 21.91% in the parallel market. Again, the question is why?

The 2022 Budget of Economic Growth & Sustainability (Keynesian Approach)

This week, the FGN presented an aggressive budget with a nominal increase of 17.24% in expenditure (N16.39trn). It adopted the Keynesian model of countercyclical spending with a huge fiscal deficit of N6.26trn. Again, the question arises as to how do you pay for it without fuelling inflation with interest rates being kept artificially low? This would appear like another policy contradiction. However, Nigeria seems to be running a theoretical deficit and an actual surplus. This is because the average budget benchmark price of oil in the last 5 years has been 25.78% above the market price. The question is where is the surplus money? The possible answers include – excess crude account, extra budgetary spending (subsidies) and leakages. The jury is out as to what is happening. The 2022 budget if discounted for inflation (17.01%) translates to zero growth and in dollar terms, it actually declined.

What Next for the Economy – How Will Things Look Like at Christmas?

The World Bank has revised upwards its projection of Nigerian GDP growth from 1.8% to 2.4% for 2021. Great news but it is 6.0% below potential GDP growth (8.4%) and will increase the unhappiness index to 50.5% (according to Okuns law). So what next for the economy and how will things look like at Christmas? Here is a peek review. Inflation will climb marginally (17.2%) due to the pass through effect of the exchange rate. Please remember that the marginal propensity to import in Nigeria is 24%. The naira will appreciate at the parallel market from N580/$ towards N560/$ whilst at the I&E window, it will creep up to N420/$. The deviation between the two rates will drop from its peak of N165/$ to N140/$. The stock market will sustain its current rally for a while before a correction.

In this edition of the LBS Breakfast Session, Bismarck Rewane and the FDC Think Tank demystify the reasons for investor concerns and provide an outlook of the economy for the last quarter of 2021.

Enjoy your read!