…CBN gov says naira undervalued, targets genuine price discovery
…predicts lower inflation, stable naira in 2024
Key sectors in Nigeria with the huge potential to lift millions out of poverty are missing in the country’s economic growth, highlighting the need for reforms to steer the economy towards a prosperous future, according to the Nigerian Economic Summit Group (NESG).
In its macroeconomic outlook report for 2024 launched on Wednesday, the NESG classified the country’s sectors into growth drivers, ‘growth stagnators’, and ‘growth draggers’.
It said growth drivers include the financial, ICT, and trade sectors, contributing significantly to GDP and overall growth.
Agriculture, real estate, construction, and manufacturing are identified as major growth stagnators due to subdued growth, while transport and the oil and gas sectors are regarded as growth draggers, contracting and suppressing overall growth.
The public-sector-led think tank said the non-oil sector retained its role as the primary driver of the economy, exhibiting a growth rate of 3.0 percent and contributing 94.3 percent to the total real GDP in the first three quarters of 2023.
The oil sector remained in recession, contracting by 6.2 percent due to persistent oil theft, aging infrastructure, and insufficient investments.
It said the oil sector’s performance also had repercussions on the industrial sector, which experienced a contraction of 0.4 percent.
The services and agricultural sectors, pivotal pillars of the economy, exhibited subdued growth rates of 4.3 percent and 0.6 percent, respectively, it added.
In 2023, the real Gross Domestic Product (GDP) growth averaged 2.5 percent in the first three quarters, falling below the 3.0 percent recorded in the corresponding period of 2022 and the 3.1 percent for the whole of 2022.
The deceleration was attributed to policy adjustments and reform shocks, most prominently the implementation of the naira redesign policy, resulting in a cash crunch that impacted various sectors, particularly the informal economy.
Niyi Yusuf, chairman of NESG, said last year presented challenges, marked by the rigorous implementation of demonetisation policies, widespread insecurity, and a fiercely contested general election, aggravating pre-existing macro and structural issues.
“These challenges significantly impacted Nigeria’s socio-economic landscape and macroeconomic performance. However, with the dawn of a new government, we find ourselves at a transformative juncture ripe with political and economic opportunities to address these challenges, optimise our potential, and achieve vital developmental objectives,” he said.
Tayo Aduloju, CEO of NESG, said economic growth performance worsened due to the downside effects of the government‘s reform initiatives.
“In retrospect, our macroeconomic outlook for 2023 underscored that Nigeria’s growth trajectory minimally impacted the standard of living or socioeconomic indicators for a majority of the population,” he said.
“This highlights the imperative for reforms to foster inclusive economic growth and steer the economy towards a prosperous future. Achieving this objective necessitates a drive for significant economic transformation, strategically focused on fostering sustained long-term economic growth, catalysing job creation, and mitigating poverty,” Aduloju added.
Speaking at the launch of the report, Yemi Cardoso, governor of the Central Bank of Nigeria (CBN), described the naira as undervalued, saying the apex bank was working on stabilising it through genuine price discovery.
“We believe that the naira is currently undervalued and coupled with coordinated measures on the fiscal side, we will expedite genuine price discovery in the near term, this coordinated approach will contribute to a more balanced and stable exchange rate,” he said.
Cardoso said the expected stability in the foreign exchange market for 2024 can be attributed to the reduction in petroleum products imports and the recent implementation of a market-determined exchange rate policy by the CBN.
“This reform is designed to streamline and unify multiple exchange rates fostering transparency and reducing arbitrage opportunities. The resulting consistent and stable exchange rate will not only boost investor confidence but also attract foreign investment, elevating Nigeria’s appeal to global investors,” he said.
Inflationary pressures are expected to decline in 2024 due to the institution’s inflation-targeting policy, which aims to rein in inflation to 21.4 percent, according to him.
“This will be aided by improved agricultural productivity and the easing of global supply chain pressures, benefitting businesses by boosting consumer confidence and purchasing power,” he said.
He said the CBN adoption of the inflation-targeting framework involves clear communication, the use of monetary policy instruments, and collaboration with fiscal authorities to achieve price stability.
The governor said the outlook for decreasing inflation in 2024 will have a profound impact on businesses providing a more predictable cost environment and potentially leading to lower policy rates, stimulating investment, fueling growth, and creating job opportunities.
In response to allowing Bureau de Change operators to access to participate in determining foreign exchange rates and determining government regulation, Muhammed Sagugi, former vice chairman, presidential economic advisory council, who spoke during the panel session said that the government must strike a balance between hawkish regulation and unrestricted openness.
“I can’t determine when it is too much and what is too little, but you should be able to determine based on the interests of the economy and the behaviour of the participants in the market. We’re talking about the BDCs, now, participating in the determination of the exchange rate,” Cardoso said.
In terms of formalising the informal sector to improve tax revenues for growth, he said that rather than formalise the informal sector, the government should focus on improving productivity for MSMEs.
Dirisu Osasuyi, director of the policy innovation centre at NESG, said the government must create a vision that players in the informal sector can buy into and be willing to pay tax for national development.
“Harnessing the opportunities to formalise the informal sector will be critical for a country like Nigeria because that’s where you have a large proportion of the population but it has to be evidence-based, and it can’t be driven by a vision for revenue. It should be driven more by a vision to see small businesses, informal businesses evolve into businesses that can now employ people,” he said.
Christian Obeke, Nigeria’s country representative for the International Monetary Fund, said that improved tax in the informal sectors depends largely on trust between informal players and the government as well as the quality of government expenditure.
“People also look at taxation, and their willingness to pay additional taxes is conditional on how you are using these tax revenues. Using the Afrobarometer for many countries, what you see is that the willingness to pay more taxes depends on the quality of public expenditure,” he said.
Responding to a question on oil production, Alex Sienaert, lead economist for Nigeria at World Bank Group, said: “We don’t have a sharply different view on oil production prospects in the near term. I think our fiscal projections are predicated on close to 1.5 million barrels a day.
“Obviously if there’s an upside, that would be welcome news in terms of what it brings. But let me also say that it’s well and good to focus on production as one aspect of the equation but there are many other important aspects.”