The World Bank has reviewed upward, growth prospects for Nigeria’s economy in 2023 and beyond following the federal government’s decision to implement bold reforms like subsidy removal and FX unification in the country.
As against the 2.8 percent predicted for Nigeria in April 2023, the Bank in its Nigeria Development Update for June 2023 says that the country’s GDP is now expected to achieve 3.3 percent in 2023, 3.7 percent in 2024 and 4.1 percent in 2025.
“The bold and ambitious reforms initiated will lift Nigeria’s growth potential; The economy is expected to grow at 3.3 percent in 2023, 3.7 percent in 2024, and 4.1 percent in 2025,” the bank said. “The recent decision to remove the petrol subsidy marks a crucial initial step towards restoring macroeconomic stability, creating fiscal space, and improving growth prospects.”
According to the Bank, growth will be primarily driven by manufacturing and construction, a slow recovery in the oil sector and the services sector with activities around telecommunications, trade, transport, and financial services.
“The petrol subsidy removal and FX reforms are assumed to be sustained, and they will impact positively the fiscal and external sectors; further economic policy reforms strengthening Nigeria’s macro-fiscal policy framework would be a source of upside to the baseline scenario,” it added.
Giving further projections, the World Bank said Nigeria is expected to save about N3.9 trillion in 2023, equivalent to 1.6 percent of GDP, adding that between 2023 and 2025, the savings would be over N21 trillion.
“The revenue-to-GDP ratio will rebound, reaching 7.4 percent of GDP in 2023; the fiscal deficit is still expected to remain large, at 5.1 percent of GDP in 2023, before falling to 4.0 percent in 2024 and falling further to 3.9 percent of GDP in 2025, as such debt servicing is expected to be lower than in the continuation of the subsidy scenario,” it stated.
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The Bretton Woods Institution added that although the reforms will improve Nigeria’s fiscal position and set the foundations for a more resilient and faster-growing economy, its impact will be dependent on how the government plans to use the savings.
The bank acknowledged that following the reforms, some immediate shocks will be experienced such as inflation spike, debt increase, among others which can be managed.
“Headline inflation is expected to rise from 18.8 percent in 2022 to 24.5 percent in 2023, however, the medium-term effect will be to reduce inflation by Q1 2024; the removal of the subsidy will become disinflationary, i.e., it will reduce inflationary pressures because the subsidy removal will have created additional fiscal space and reduced the recourse to CBN financing, thus reducing growth of the money supply,” it stated.
Speaking on that Naira redesign, the bank stated that the naira demonetisation reduced GDP growth in the manufacturing and services sector in the first half of the year neither did it improve inflation or the FX parallel market rate premium.
However going forward, it stated that the naira redesign and the phase-in of new notes is projected to continue smoothly throughout the rest of the year without any serious disruption.
According to the report, Nigeria still needs more policies and reforms as it stated that addressing certain imbalances while neglecting other areas could prove costly for Nigeria’s economic performance and may not yield the desired benefits.
“It is imperative to implement a comprehensive reform package that encompasses a range of complementary measures to maximize their collective impact on growth, job creation, and poverty reduction,” it stated.
Recommending more options to sustain economic stability, the multilateral lender said the next policy priority is to reduce inflation and maintain price stability.
“To lower inflation to the CBN’s target of 6 to 9 percent in the near term, further concerted policy action is needed by reforming the mix of trade, exchange rate, monetary, and fiscal policies; In this context, continuing with the financing of the fiscal deficit through CBN Ways and Means financing would be counterproductive because it would lead to higher inflation and put pressure on the exchange rate,” it stated.
In restoring macroeconomic stability, it recommended that efforts are intensified to increase non oil revenues and reduce inflation to address the vulnerability of the economy to crisis, accelerate growth, reduce poverty and boost job creation.
“Non-oil revenues can be increased by building on recent progress that has begun to broaden the non-oil tax base efficiently and equitably, and rationalizing tax expenditures; inflation can be reduced through a sequenced and coordinated mix of trade, monetary and fiscal policies to restore conditions for private investment and growth, and to protect Nigerians’ welfare,” it said.
The bank also advised that the government expands the social protection program to protect the poor and most vulnerable from the immediate impact of the reforms such as compensatory cash transfers directly linked to the subsidy removal.
“International experience shows that such a social protection scheme can build trust in government institutions, and thus help to forge a new social compact with Nigerians to break out of the current cycle of low trust, weak public services, and low revenues,” it stated.
