Nigeria is Africa’s largest economy and biggest oil producer. Nigeria’s oil-dependent economy has slipped into a recession following the global oil price crash in 2014. Nigeria's government aims to diversify its economy and reduce the country's dependence on oil revenue.

Top 10 largest African economies by GDP

Source: IMF World Economic Outlook

Nigeria’s crude oil sales accounted for 94.5% of export revenue and 70% of government revenue in 2016. Nigerian economy has been hard hit by the plunge in crude oil prices and attacks to oil and gas infrastructure by militants in Niger Delta in recent years. It is predicted that the country has lost around $100 billion in revenue in 2016 as attacks cut crude output to a record low. Nigeria’s GDP declined sharply from $568 billion in 2014 to $405 billion in 2016.

Nigeria GDP

Source: IMF World Economic Outlook

Almost all sectors of the Nigerian economy were in a recession with the exception of agriculture and communications in 2016. The country ended 2016 at about negative 1.5% growth. The IMF forecasts Nigeria will post only 0.8% growth in 2017. It is expected that Nigeria will grow at 2% in 2018.

Nigeria GDP Growth

Source: IMF World Economic Outlook

The lack of economic diversity is a major challenge for Nigeria. The unemployment and underemployment have risen since 2014. The dominant-oil industry provides only a small number of jobs. Thus, the federal government plans to revive the non-oil sectors of the economy in 2017. Agriculture, financial services, telecom, and retail largely drive the growth in the non-oil sector in Nigeria.

Nigeria GDP by sectors

Source: Nigeria National Bureau of Statistics

Oil exports are a major source of foreign exchange earnings for Nigerian economy. The sharp decline in global oil prices has caused acute scarcity of foreign exchange in Nigeria. The Central Bank of Nigeria maintained a peg of roughly 200 against the dollar until June 2016. As dollar reserves ran dry, the fixed exchange rate policy was replaced with a flexible one in June 2016. Removal of a peg caused the naira to lose almost 40% of its value against the dollar. Since then, the central bank has defended the currency at around 310 to the dollar.

Nigeria Exchange Rates (USD to NGN)

Source: IIG

Nigeria’s inflation rate significantly increased following the Central Bank’s removal of naira’s US dollar peg in June 2016. Inflation reached 18.72% in January 2017, the highest rate since September 2005. Forecasts show that inflation will remain high at around 15.7% in 2017.

Nigeria Inflation

Source: Central Bank of Nigeria

The overall objective of the 2017 federal budget is to reduce the reliance on the oil and gas sector. Given the low revenues expected from the oil sector, there is an increased focus on non-oil revenues. Non-oil revenue is expected to account for 28% of total budgetary revenue in 2017, compared to 38% in 2016. Agriculture, manufacturing, solid minerals and services are top priority sectors in the budget of 2017. The federal government also aims to develop infrastructure especially rail, roads, and power in 2017. The budget for 2017 allocates N2.24 trillion (30.69% of total budget) for capital expenditures, 24% increase in comparison to the previous year.

Nigeria’s 2017 Budget - Capital Allocation of Key Ministries

Source: IIG

Poor infrastructure, security problems, and weak business regulatory environment will keep Nigeria’s growth below potential in the short term. However, the country has tremendous potential for growth in the long term. Sound domestic policy measures are urgently needed to reap this potential.