Beyond Nigeria’s GDP numbers: Is it icing on the cake or the cake itself?

According to the National Bureau of Statistics (NBS), Nigeria’s Gross Domestic Product (GDP) rose by 3.54% y/y in real terms in the second quarter of 2022 (Q2-2022). This shows that the economy expanded in Q2-2022 by 0.44% when compared to the 3.11% y/y recorded in the preceding quarter (Q1-2022) as the non-oil sector remains the key driver of growth. Similarly, this outturn represents an economic expansion on a year-on-year basis, albeit at a slower rate when compared to Q1-2021 (5.01% y/y) as the growth rate declined by 1.47%.

Notably, the oil sector maintained its slim contribution of 6.33% to the total real GDP in Q2-2022. This shows a reduction of -0.31% compared to the contribution reported in Q1-2022 (6.63%). We highlight that this contribution is low when compared to the average quarterly contribution of the oil sector in 2021 (7.34%) reflecting the continued infrastructure challenges and theft unsettling the sector’s performance. Consequently, the real growth of the oil sector contracted by -11.77% y/y in Q2-2022. We note that amidst this downswing, the data indicated an improvement of 0.89% relative to the rate recorded in Q1-2022 (-26.04% y/y). However, this improvement is not enough to bring the sector back to the growth trajectory witnessed in 2021 as performance (-11.77% q/q) is still below the average quarterly growth in FY-2021 (-8.41%). In our view, the inability of the sector to upscale its production level is the key factor behind this sector’s GDP contraction. In particular, oil output from Nigeria has been below potential as total oil production in Q2-2022 printed 1.43 million barrels per day (mbpd) which is lower than the 1.49 mbpd recorded in Q1-2022. This is also lower than the OPEC quota of 1.8 mbpd to Nigeria. As noted, this production bottleneck can be attributed to the sector’s infrastructural decay, under-investment, and theft arising from illegal refining.  

On the other hand, the non-oil sector printed a contribution of 93.67% to the total real GDP in Q2-2022. This is larger than the contribution reported in Q1-2022 (93.37%) and Q2-2021 (92.58%) by 0.31% and 1.10% respectively. Correspondingly, the non-oil sector grew 4.77% y/y in Q2-2022 compelled by the growth in financial institutions (24.59 y/y) and air transport (17.48% y/y). The agriculture sub-sector rose by 1.20% y/y in real terms in Q2-2022. However, rising energy costs due to the Russia-Ukraine war slowed the non-oil sector growth by -1.31% from the 6.08% y/y recorded in the previous quarter.

The icing on the cake

Finance and Insurance: This industry grew 18.48% y/y in Q2-2021. On a quarter-on-quarter basis, the growth rate moderated by -4.76% from the 23.24% recorded in the preceding quarter (Q2-2022). However, the sector growth rate increased by 20.96% from the -2.48% y/y contraction it recorded in the same quarter last year (Q1-2021) while trembling on the after-effect of Covid-19. This increased growth can be linked to the interest rate hike by the Central Bank of Nigeria (CBN) that led to a corresponding 200bps increase in the rate Nigeria banks charge mortgage, personal and corporate loans. We also think that the premium growth from the insurance sector has also impacted the finance and insurance growth for the quarter. Specifically, Nairametric reported that Nigeria’s top insurance companies grew gross premiums to N138 bn by June 2022 more than the N115.5 bn in the same period last year (June 2021).

Agriculture: The agriculture sector grew by 1.20% y/y in real terms in Q2-2022 as against the 3.16% y/y in Q1-2022.  However, this growth slowed by -1.96% when compared to the 3.16% y/y in the preceding quarter (Q1-2022). In our view, this moderation resulted from the seasonality effect associated with the second quarter of the year because of the impact of land preparation & planting. We also think that the rising cost of fertilizers and persisting insecurity concerns in the major food-producing regions compounded the downside of the seasonality effect. Subsequently, the sector reported a contribution of 23.24% to overall GDP in Q2-2022 which was 0.88% higher than the 22.36% in Q1-2022. We attribute this increase to the proportionate decrease in the contribution of the industries sub-sector of the economy (19.40%) in Q2-2022 (Previously 21.47% in Q1-2022).

Would the icing be cut short?

We understand that the oil sector’s daily production is at its lowest level on record with an approximate loss of about 400,000 bpd. While we understand that recurring theft and sabotage discouraging investment incentives in the sector may not cease up to the end of the year, we acknowledge the deal (worth N48 bn) between the Nigerian National Petroleum Company (NNPC) and Tompolo for the protection of pipelines and other activities in the oil-producing region, Niger-Delta. We note that if executable, we expect production to come back to normal as theft and vandalism are reduced to the barest minimum. On this stand, we expect the oil sector to print a moderate growth rate of -9.94% y/y for Q3-2022. This is 1.83% higher than the -11.77% y/y growth reported in Q2-2022. Nonetheless, we are doubtful of the success of this award to Tompolo as other militant groups in the region may escalate tension because of neglect.

For the non-oil sector, we project growth to print 5.06% y/y in Q3-2022. This is 0.29% higher than the 4.77% y/y reported in Q2-2022. This is on the back of an improved pace of growth in the agriculture, finance and insurance, and other service sectors. For Agriculture, though the weeding season may continue to affect the sector’s growth coupled with the nation’s insecurity issues and rising transportation cost. We expect the growth to be sustained resulting from the emergence of the harvest season. We expect the elevated interest rate environment to continue to drive the finance and insurance sector’s performance positively. We also expect growth from the Telecommunications and Information services to impact the performance of the non-oil sectors as some of its firms render financial service products. Taking all these drivers into account, we expect the total GDP to grow by 4.00% y/y in Q3-2022. This is 0.45% higher than the rate reported in Q2-2022 (3.54% y/y). However, a slight moderation of 0.03% when compared to the 4.03% y/y recorded for the same period last year (Q3-2021).