The Nigerian economy has deteriorated over the past 8 years. Inflation has soared, growth has slowed, and unemployment is rife.
It did not help that specific domestic constraints on the economy were tightened further by exogenous global troubles, ranging from the Covid-19 pandemic, and Russia-Ukraine war, to monetary policy normalisation by the US Fed and the central banks of other developed economies, after a long bout of accommodative measures to support a global economy in polycrisis over the past decade.
Still, Nigeria’s economic troubles are mostly self-inflicted. Hard currency has been scarce owing to a flawed highly-managed multiple exchange rate regime that has allowed arbitrage to fester and cause shortages of foreign exchange. For a largely import-dependent economy, this has been hard-hitting. Foreign investors and firms have not been able to take profit home on time, nor has international trade been allowed smooth running owing to not only hard currency shortages, but import bans and border closures as well.
Slowing growth, rising debt, deteriorating fiscus
Fiscal policy has been misguided as well. The fiscal authorities have been on a borrowing binge, with a large chunk of revenue increasingly used to service debt. A costly fuel subsidy regime, estimated to cost about US$15bn in 2023, and half that amount if just for the first 6 months, from US$10bn in 2022, has also weighed significantly on the fiscus.
Attempts by the administration of Muhammadu Buhari, Nigeria’s president, who leaves office in May 2023, to remove fuel subsidy in 2015-22 proved abortive. It remains to be seen whether this will finally be achieved in mid-2023, just as Mr Buhari leaves office.
A new private crude oil refinery with capacity of 650,000 barrels/day in operation from mid-2023 will more than suffice for domestic fuel requirements, thus curbing the need for fuel importation, another hard currency guzzler. The authorities have repeatedly breached the fiscal responsibility laws, with the federal government’s budget deficit estimated at 6.2% of GDP in 2022, easily reaching 7% of GDP by end-2023.
High inflation on exchange rate distortions, money growth
Monetary policymaking has been nonchalant as well. Not only has the Nigerian central bank been printing money to finance the federal government’s budget deficits to the tune of about N24trn (US$52bn), it has been printing money, about N4trn (US$9bn) at the last count, for myriad inefficient development finance interventions in the Nigerian economy.
Unsurprisingly, belated interest rate hikes by the central bank since 2022 have had little effect on the general price level. In light of the above considerations, Moody’s downgraded Nigeria’s credit ratings further into junk territory in late January 2023.
The authorities had hitherto been priced out of the international bonds market, as global market participants began to countenance how the authorities’ monetized budget deficits of about US$52bn over the past 8 years have deteriorated Nigeria’s debt metrics.
Consequently, the authorities must make robust efforts to boost dollar revenue from oil as well as domestic revenue via taxation. New security measures to curb crude oil theft will improve production sustainably above 1m barrels/day and enough to meet OPEC quotas over the medium term.
Potential success with migrating the economy from cash to cashless owing to an aggressive demonetization policy in early 2023 bodes well for broadening the tax net. The authorities will almost certainly increase value added tax (VAT), currently 7.5%, one of the lowest in the region.
More importantly, the Nigerian economy needs to start pulling its weight towards its huge potential. At 3%, economic growth is above population growth but not inclusive nor job-creating. Insecurity has been weighing on agricultural production as well, with severe impacts on food inflation and employment.
Agriculture, which is about 30% of GDP, accounts for 35% of jobs in Nigeria, according to World Bank data. Farmers have been hindered from free movement to and from their lands in northern Nigeria, where the bulk of agricultural production takes place, owing to banditry, kidnappings and terrorism.
Smooth transportation of farm produce across the country, especially between north and south has been severely constrained. Floodings have been worrisome as well, albeit some of the negative effects have been moderated by drawdowns on the government’s grain reserves. Fertilizer has become more expensive owing to the Russia-Ukraine war, as alternative suppliers in Russia’s stead are pricey.
Manufacturing, which constitutes about a fifth of output, is severely constrained, as acute energy and foreign currency shortages impede operations. The dominant services sector, accounting for more than half of production, has been a bright spot, however, especially information and communication technology, with a new startup law expected to boost growth.
Reforms imperative is palpable
The political economy has not been particularly stellar either. Leading candidates in the presidential election in late February 2023 are mostly tainted, with little to suggest they are enthused enough to turn the economy around.
A new president in May 2023 will need to expand the tax base, raise taxes, curb waste in government, cut costs, allow the foreign exchange market free rein, and implement policies to boost economic growth and create jobs.
These are dauting tasks even for the most prepared presidential hopeful. It is almost inevitable that Nigeria will seek an IMF programme before end-2023. For while the Nigerian case is still manageable, there will increasingly be little room to maneouver without robust international assistance. Crude oil production has been sub-par, with barrels perennially short of OPEC quotas.
Just like in northern Nigeria, an intractable security situation supports widespread vandalism of oil and gas infrastructure and theft of crude oil from pipelines in the southern oil-rich Niger Delta region to such an extent that only half of production makes it to oil tankers for export.
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There is hope that some of these constraints on the Nigerian economy will begin to ease with a capable president from May 2023. But the problems are just so overwhelming that there is no escaping the tide of time even with robust policies and implementation.
Even so, all hope is not lost. With easy money, Nigeria exited its latest recession in the fourth quarter of 2020, four years after the last one in 2016. A third recession within a decade since may yet be in store for Nigeria. High oil prices have also been supportive despite underwhelming production, which has been deteriorating since mid-2020.
Disinvestment from crude oil production by multinational oil majors, especially onshore, remains problematic, with little hope for recovery, as climate action increasingly takes priority globally. Greater interest in liquefied natural gas (LNG) may make up for some of the investment shortfall, as European countries look to secure alternative gas supply outside Russia.
Policy reforms in the sector, especially the new Petroleum Industry Act (PIA), will reduce uncertainty, albeit its delayed implementation to mid-2023 is already cause for concern. An overbearing NNPC Limited (NNPCL), the state oil firm that is now purportedly privately run, has raised doubts about the game-changing prospects of the PIA. Nigeria also stands to benefit from the African Continental Free Trade Area (AfCFTA) as both a consumer and production destination. But myriad import bans and restrictions have to be eased.
Edited version was first published by the Italian Institute for International Political Studies in Milan, Italy. See link viz. https://www.ispionline.it/en/publication/slow-growth-high-inflation-nigerias-economy-needs-vital-reforms-117517
