In my remarks today, I will offer my thoughts on the concerted reforms the government is making towards economic growth and address some key challenges that I find significant. I will also examine how monetary policy actions can contribute to resolving uncertainties surrounding the country’s economic outlook.
The most straightforward question is: Are the reforms effective? Is the economy moving in the right direction, and is the well-being of Nigerians better than previously indicated? Before our discussion, I will take a few minutes to discuss recent economic data.
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Incoming economic data over the past few months indicates progress. In the third quarter of 2023, the Gross Domestic Product (GDP) showed a growth of 2.54 percent (year-on-year) in real terms, surpassing the 2.25 percent recorded in the third quarter of 2022 and the 2.51 percent growth in the second quarter of 2023. The agricultural sector experienced a growth of 1.30 percent (year-on-year) in real terms during the third quarter of 2023. Additionally, the real GDP for other services grew by 0.63 percent (year-on-year) in Q3 2023. This growth was 3.30 percent higher than the previous year’s corresponding period and 1.06 percent lower than the growth in Q2 2023.
These are very positive indicators.
But despite this, several uncertainties still surround Nigeria’s economic outlook and impact my views on our current position. Prominent among these are the present inflation rate, which stands at 28.92 percent; the extent to which the naira continues to weaken against the dollar and the pound sterling; limited external reserves; inadequate foreign exchange supply; and high unemployment. The average fuel price in Nigeria rose to 627 Naira per litre from 191 Naira in late 2022.
These challenges have resulted in a higher cost of living, making it challenging to showcase some of the government’s achievements.
We cannot determine the duration of these macro-economic and social challenges or anticipate the immediate steps that will be taken to address some of these issues over the coming quarters. While the path is expected to be challenging and may take some time, a central area of discussion that could yield potential solutions is how monetary strategies can be best applied to achieve price stability and counteract some of the forces contributing to persistently high inflation. I will come back to this point.
Relatedly, there is an ongoing concern that, with the rising cost of living, the inflation rate could increase to 30 percent, potentially limiting the Monetary Policy Committee’s (MPC) ability to respond effectively. However, the Central Bank and the Nigerian Economic Summit Group have jointly presented a differing perspective, forecasting that inflation will decrease to 21.4 percent and 21.5 percent, respectively. While the assertion that inflation will drop to 21.4 percent due to the Central Bank’s inflation-targeting policies may seem overly optimistic, it’s conceivable that a modest reduction could be supported by enhancements in agricultural productivity and improvements in supply chains.
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But, in my assessment of the outlook, it is fair to say that the state of the Nigerian economy and its future direction are marked by clear uncertainty. The bottom line is a steady decline in real household incomes, set against a backdrop of rising inflation, falling consumer confidence, and weakened service industry activity. Even forward-looking economic forecasts for output and employment also paint a negative picture.
That said, my takeaway is that while the MPC’s task is to steer inflation back to a more favourable level, they may encounter a tricky situation. This is because a surge in energy prices and unfavourable supply shocks could lead to stagnated economic growth and an increase in unemployment.
Let me emphasise that one risk is the possibility that inflation in Nigeria could be more persistent than expected. The elimination of the fuel subsidy and the increase in food prices are largely to blame, with the former bearing more responsibility, along with the need to stabilise exchange rates. In an earlier presentation, I argued that while these reforms were positive, they could have been introduced and managed more systematically.
This leaves us with the puzzle. What would monetary policy have to do?
Looking ahead:
As we face the challenge of persistent inflation, which looks set to continue hurting families, businesses, and the economy for a longer time, the MPC must strike the right balance in its approach. On one hand, the MPC must avoid being too cautious and doing too little to combat inflation. On the other, it must be careful not to restrict economic growth by being overly aggressive in its policies. The goal is to find a middle ground, implementing measures that not only support the economy—like improving supply chains, getting more people into the workforce, and encouraging the government to keep energy affordable—but also ensure that the economy benefits everyone.
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However, I believe that it might be smarter to slightly tighten the grip on monetary policy to prevent inflation from getting worse. This is particularly important if we aim to meet the central bank’s inflation target of 21.4 percent. The bank should also be ready for any unexpected changes in the economy and communicate its plans to tackle inflation quickly and effectively. Getting inflation under control is not just about numbers; it’s about ensuring a strong job market and a healthy economy for all.
King Omeihe is the President of the Academy for African Studies and serves as a Senior Economic Advisor at Marcel. He holds the position of Associate Professor at the University of the West of Scotland.
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