Economy slows as naira crunch erases oil gains

Nigeria’s economy grew at a slower pace in the first quarter of 2023 as the naira scarcity caused by the currency redesign policy of the Central Bank of Nigeria offset the gains from increased crude oil production in the country.

Data sourced from National Bureau of Statistics (NBS) showed Africa’s biggest economy saw its Gross Domestic Product grow by 2.31 percent (year-on-year) in real terms in Q1 2023, down from 3.52 percent in Q4 2022 and 3.11 percent in the same period last year.

“The reduction in growth is attributed to the adverse effects of the cash crunch experienced during the quarter,” the NBS said on Wednesday.

The country’s average daily oil production rose to 1.51 million barrels per day (bpd) in Q1 2023 from 1.34 million bpd in the previous quarter and 1.49 million bpd in the same period of 2022.

The real growth of the oil sector was –4.21 percent (year-on-year) in Q1 2023, indicating an increase from the -26.04 percent recorded in the same period of 2022, according to the statistics office.

“The breakdown of the data showed that the drag from the oil sector continued to ease. After hitting a 50-year low in the middle of last year, oil production picked up to 1.51mn bpd in Q1,” Capital Economics said in a note. “The easing drag from the oil sector was more than offset by a further slowdown in the non-oil economy, from 4.4 percent year-on-year in Q4 to just 2.8 percent year-on-year – the weakest pace of growth since early 2021.”

The UK-based economic research firm said the downturn in the non-oil sector was partly due to a slump in agricultural production, which contracted by 0.9 percent year-on-year.

“But there was a broad-based slowdown across the other non-oil sub-sectors, no doubt reflecting the impact of cash shortages caused by botched demonetisation efforts,” it added.

Ibrahim Tajudeen, director of research and strategy at Chapel Hill Denham, said the weak growth was also driven by the challenges from fuel availability and the elections. But the cash crunch was the major driver.

“And the two percent growth rate means that the economy grew below its population growth rate. So, we need catalysts that will drive the economic growth to high single digits and over time take it to double digits,” he said.

Analysts at Financial Derivatives Company Limited, led by economist Bismarck Rewane, had anticipated a decline in the GDP.

“This is largely because of the effect of the cash crunch, which stifled aggregate demand. Most of the productive sectors are likely to perform sub-optimally, especially the agriculture and manufacturing sectors,” they said in a recent report.

The Nigerian Economic Summit Group said in a recent report that the cash scarcity associated with the currency redesign policy would likely motivate a slowdown in economic growth as many productive activities had been halted due to the inability to access cash.

“Furthermore, the uncertainty associated with this policy and its economic effects may contribute to volatile movements in macroeconomic variables,” it said.

It said the plummeting of productivity has implications for GDP and a domino effect on other economic indices. “This can mean fewer job opportunities, increasing poverty incidence, thus adversely impacting the collective economic health of the population.”

According to the Centre for the Promotion of private enterprise (CPPE), the economy lost an estimated N20 trillion during the cash crisis.

Muda Yusuf, director and chief executive officer at CPPE said millions of citizens slipped into penury and destitution as a result of the disruptions and tribulations perpetrated by the currency redesign policy, especially the mopping up of over 70 percent of cash in the economy.

KPMG Nigeria had projected the country’s GDP would lose about N10 trillion to N15 trillion due to challenges sourcing cash in Q1.

“This is because about 40 percent of Nigeria’s N198 trillion GDP in 2022 is informal of which about 90 percent is cash-based. Further 30 percent of formal sector GDP is cash-based. This means N106.9 trillion of the total too is cash-based,” Yemi Kale, chief economist at KPMG, said.

A recent report by SBM Intelligence, which engaged 46 businesses across the five geopolitical zones, showed that 76 percent of business owners were impacted by the naira crunch.

“From egg producers stuck with their produce to rice traders who had to bring down their prices to make sales, most of the business owners interviewed said they were negatively affected by the cash shortage,” it said.

A closer look at the NBS data showed President Muhammadu Buhari holds the worst record out of the four presidents who have led Nigeria since it returned to democracy in 1999.

While President Olusegun Obasanjo can boast of an average growth rate of 6.9 percent during his eight-year tenure, his immediate successor, Umaru Yar’Adua, did even better in a few years as president with an average growth rate of 7.1 percent while Goodluck Jonathan delivered 6.07 percent growth in his four-year term as president.

Read also: Nigeria’s GDP seen declining in Q1 on naira crunch

Under Buhari’s watch, however, the economy grew by an average growth of 1.35 percent.

Further findings from NBS data showed the performance of the GDP in Q1 2023 was driven mainly by the services sector, which recorded a growth of 4.35 percent and contributed 57.29 percent to the aggregate GDP.

The agriculture sector grew by -0.90 percent, lower than the growth of 3.16 percent recorded in Q1 2022.

The NBS said although the growth of the industry sector improved to 0.31 percent relative to 6.81 percent recorded in the Q1 2022, agriculture and the industry sectors contributed less to the aggregate GDP in the quarter under review compared to Q1 2022.

The non-oil sector grew by 2.77 percent in real terms in Q1 2023; this rate was 3.30 percent points lower than the rate recorded in the same quarter of 2022 and 1.67 percent points lower than the fourth quarter of 2022.

This sector was driven in Q1 2023 mainly by information and communication (telecommunication); financial and insurance (financial institutions); trade; manufacturing (food, beverage and tobacco); construction; and transportation and storage (road transport), accounting for positive GDP growth.

According to the NBS, the non-oil sector contributed 93.79 percent to the nation’s GDP in Q1 2023, higher than the share recorded in the first quarter of 2022 which was 93.37 percent and lower than the fourth quarter of 2022 recorded as 95.66 percent.