A recent report by Sigma Pensions titled, ‘Nigeria 2021 Outlook: A return to normalcy, but tough policy choices lie ahead,’ has predicted that the Nigerian economy would experience a V-shaped economic recovery.
A V-shaped recovery is characterised by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
However, it stressed that regardless of the positive sentiments towards the economy, the country would experience a slow recovery unless difficult fiscal and monetary policies are put in place to soften inflation and exchange rate volatilities.
It states: “Following on from a year with so much uncertainty about life, politics and markets, 2021 holds the promise of a return to a semblance of certainty and a vaccine aided V-shaped global economic recovery.
“In 2021, focus will shift to how quickly countries roll-out vaccination programs to immunize populations from COVID-19. Politically, the world also appears to look to the hope that a new American president (Joe Biden) would work to normalise what had become unpredictable trade policies and geo-politics.
“On the home front, amid an improved outlook for oil prices, Nigeria continues to grapple with the aftershocks of the coronavirus recession as external and fiscal imbalances propagate negative shocks across the exchange rate and inflation channel. The resulting macroeconomic turmoil will require a return to credible policy settings, implying that more than ever before, the direction of policy responses will be crucial.”
Furthermore, it stated that returning to the path of growth would be dependent on external and fiscal imbalances pose downside risks.
“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 restrain oil production to 1.7-1.8mbpd, a development likely to remain in place until second half of 2021. 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.
“Given current policy settings around the exchange rate, we see limited options for financing the looming current account deficit and expect naira weakness over the year. Alongside these FX pressures, we see soaring food prices, occasioned by an underwhelming 2020 crop harvest, higher electricity tariffs and petrol prices as fueling a surge in inflation towards 16 per cent levels in 2021.”
It added: “We view the prospect of increased vaccination across the world as helping to draw a line on the disruptive influence of COVID-19 on global economic activities. The return to mobility amid continuing unity among the OPEC+ alliance that helped rebalance global crude oil markets is positive for crude oil prices.
“Despite the improvement in the external environment, Nigeria faces the prospect of twin deficits for another year with attendant implications for the exchange rate, inflation and interest rates.”