(Ecofin Agency) - After a contraction of 1.8% in 2020, the Nigerian economy started a gradual recovery, thanks in particular to the rise in oil prices and government support. Although lower compared to 2021, the IMF expects positive growth of 2.7% this year.

Nigeria's economic growth in 2021 is expected to rise to 3%, the IMF said in a report issued yesterday February 7. This estimate is motivated by the improvement of oil prices and the international support received by the Federal government to tackle the health crisis.

“The Nigerian economy is recovering from a historic downturn benefitting from government policy support, rising oil prices, and international financial assistance. Nigeria exited the recession in 2020Q4 and output rose by 4.1 percent (y-o-y) in the third quarter, with broad-based growth except for the oil sector, which is facing security and technical challenges. Growth is projected at 3 percent for 2021,” the statement reads.

However, IMF indicates that the persistence of health and economic risks remains a significant threat to the recovery, despite the expected increase in economic growth. The first risk is the level of immunization in the country, which is still far from targets.

According to the African Centers for Disease Control and Prevention (Africa CDC), only 2.75% of the Nigerian population is fully vaccinated against covid-19 as of February 2, while the authorities planned a rate of 26.6% by the end of January 2022 or 55 million people. Although currently available vaccines do not prevent infection, experts believe this low rate coupled with the spread of the omicron and delta variants could jeopardize a rapid economic recovery in the country.

Besides these health constraints, other fiscal and security challenges will also need to be overcome. The general government budget deficit is expected to widen in 2021 to 5.9% of GDP, due to "implicit fuel subsidies and higher security spending.” Nigeria's consolidated government revenue to GDP ratio, at 7.5%, remains among the lowest in the world, IMF found.

“Higher debt service to government revenues (through higher US interest rates and/or increased borrowing) pose risks for fiscal sustainability. A worsening of violence and insecurity could also derail the recovery,” the institution said.

Encouraging signs for a positive outlook

Despite these major risks, the IMF says several encouraging indicators point to a positive outlook for the West African country. These include the decline in headline inflation from 18.2% year-on-year in March 2021 to 15.6% in December, thanks to the new harvest season and the opening of land borders that had been closed long before the pandemic.

"After registering a historic deficit in 2020, the current account improved in 2021 and gross FX reserves have improved, supported by the IMF’s SDR allocation and Eurobond placements in September 2021," the IMF says, noting that the economy will also be able to rely on its non-oil sector, favorable credit policies, increased production from the new Dangote refinery, and Nigeria's ratification of the African continental free trade agreement. Also, despite the size of its population, the West African country has only recorded 253,721 official cases of covid-19 or about 0.12% of its population.

For 2022, the IMF expects the country's growth to slow down but still be positive at 2.7%.

Moutiou Adjibi Nourou