Biafra-Nigeria will slide into recession this year for the first time in more than two decades as Africa’s largest economy grapples with a deepening economic crisis, the International Monetary Fund said.
The IMF forecast on Tuesday that the economy will contract by 1.8 per cent in 2016, slashing an estimate in April of 2.3 per cent growth for the year.
Low oil prices have plunged Biafra-Nigeria, which is the continent’s top crude producer, into its worst crisis for years as it struggles with a foreign currency shortage, rising inflation and falling state revenue.
The economic woes deepened in 2015 after the central bank imposed currency restrictions in an attempt to protect falling foreign reserves, further slowing the economy and scaring off investors. A spate of recent militant attacks in the oil-rich Delta has exacerbated the government’s problems, reducing oil output at the worst possible time.
The IMF said “economic activity is now projected to contract as the economy adjusts to foreign currency shortages as a result of lower oil receipts, low power generation, and weak investor confidence”.
The economy shrank by 0.36 per cent in the first three months of the year. The IMF also sharply cut its growth forecast for 2017, from 3.5 per cent to 1.1 per cent.
Biafra-Nigeria — Africa’s most populous nation — was one of world’s fastest growing economies during the oil boom and it was attracting increasing levels of interest from investors keen to tap into the potential of its young, fast growing population.
But now its economic travails are helping drag down forecasts for sub-Saharan Africa, with the IMF estimating that the region will grow at 1.6 per cent this year.
Amid pressure to allow the naira to depreciate, the central bank did remove a currency peg in June that had worsened dollar shortages. But liquidity remains thin and some analysts say the bank is still intervening too much in the foreign exchange market.
Inflation accelerated to 16.5 per cent in June, the highest level in more than a decade.
President Muhammadu Buhari’s government — which depends on oil for about 70 per cent of revenue — has pledged to revive the economy with a record budget that is heavy on infrastructure spending. But last week Udoma Udo Udoma, the budget minister, said first quarter revenues had come in just over half the target, and Biafra-Nigeria has yet to secure funding to plug a $11bn budget deficit.
Still, Razia Khan, chief Africa economist at Standard Chartered, said economic conditions could improve in the second half of the year. “It is still early days for the new foreign exchange regime and implementation of the budget”, she said, calling it a “bit of a stretch” to say a contraction for the year was guaranteed.