The Nigerian economy remains oil sector-driven. Fiscal sustainability is expected to persist in 2024 given the heavy public debt burden and revenue challenges which may be slightly ameliorated by the proposed increased taxation in the year. Poverty will persist in the economy – with the proposed increases in taxation which will reduce both real and disposable incomes of the average Nigerian.
According to the Federal Government Budget proposals, the Nigerian economy has been projected to grow by 3.76% in 2024. However, due to unfavourable developments in the economy, this projection may be unattainable, as has been the case for gross domestic product (GDP) growth rate projections of past years. This is specifically due to reductions in oil production and contractions in the agricultural sector following the persisting security challenges across the country, in addition to the fiscal sustainability challenges. Currently, the economy is performing poorly, coupled with the seemingly unending fiscal sustainability challenges.
Other issues that call for national economic concern are the capital inflow reversals, the worsening state of the external reserves, the growing and burdensome public debt and the fluctuating state of the equities market.
Government revenues as a proportion of GDP is still very low, at about 6 percent which is far less than the ratio for other developing countries such as Kenya where it is 19 percent as well as India (21%), China and South Africa (28%). Unless government intensifies its revenue diversification programme, with the current unbridled rate of external borrowing, debt service may become a major issue in 2024. In the Nigerian equities market, the continual caution exercised by foreign portfolio investors in the market had led to significant sell-offs which have also impinged negatively on the foreign reserves. These are signs of a troubled economy. The growing level of public debts is continually worrisome.
Global Economic Developments
The economic outlook for Europe, Middle East and Africa (EMEA) in 2024, according to the Fitch Ratings Agency, will be neutral. Fitch Ratings expects that moderate economic growth and more prudent budgetary policy will mitigate the negative consequences of a surge in inflation in this region. Slowing expenditure growth of local and regional governments will be accompanied by an increase in tax revenue or continuing support from central governments, which will lead to a stabilisation of their performance. Fitch also expects most local and regional governments in Europe, Middle East and Africa will have access to debt markets which will remain stable.
Global economic growth is still picking up after the devastating effects of the COVID-19 pandemic. Post COVID-19 recovery projections indicate that economic growth in 2024 may be less than that of the pre-pandemic era. According to the World Trade Organisation, world merchandise trade is projected to grow by about 4.7% arising from the prospect of tighter labour markets and global geo-political tensions such as the Russia/Ukraine war among others and the ongoing war in Palestine between Hamas and Israel which has implications for the global oil market.
Projected global oil demand and supply in 2024 have risen to higher levels than previous years peaking at a demand figure of above 100 million barrels per day (mbpd). Currently, oil price is in the region of $90 per barrel and projected to average at about $100 in 2024 barring any unanticipated volatilities in the market. Global equity markets likely to experience volatilities – up and down swings – due to the after-effects of the Middle-East crisis and the effects of the oil market.
Domestic Economic Developments
The Nigerian economy has been bedevilled by recurring uncertainties. These have been driven by the raging insecurities of life and property, fiscal sustainability issues and diminishing purchasing power of the average Nigerian. The government is still running budget deficits and borrowing even more, both from the domestic market as well as externally. This was exacerbated during the 2015-23 period under the Muhammadu Buhari administration. Federal Government aggregate debt currently stands at about N87 trillion, including the Ways and Means advances of about N23 trillion from the Central Bank of Nigeria. Debt-to-GDP ratio stands at about 30% while debt service payment-to-revenue ratio (depending on which debt figure used) hovers around 98%. This implies that for every N100 earned as revenue, about N98 is used to service debts – thus instigating more borrowings to sustain the economy. This is very tight for economic governance. The 2024 annual budget which has a total expenditure figure of N27.5 trillion, projected revenue of N18.32 trillion and a budget deficit of N9.18 trillion was based on an oil benchmark price of $77.96 per barrel
Gross Domestic Product (GDP)
Currently, the growth drivers are largely the non-oil sectors, particularly the services sector with Information and Communication Technology (ICT) has been growing at about 7.2%. Others are as follows: Trade (10.7%), transportation (10%) and financial services and insurance (6.8%). The GDP growth rate which was 6.2% in 2014 fell to -1.5% in 2015, -1.9% in 2020 and about 2.7% in 2021. In the 2024 budget, it is projected at 3.76%, which appears grossly unlikely. A more realistic range could be in the region of 2.5 – 3.0% and largely to be driven by the non-oil sector.
Oil and Gas
The Organisation of Petroleum Exporting Countries (OPEC) quota, the reduction in crude oil theft, the global crude oil price, some capital inflows through remittances among others are likely going to drive the inflow of foreign exchange in Nigeria in 2024. For other energy sources, the focus will keep moving away from fossil fuels and more on renewable energy such as wind and solar, among others.
Inflation/Monetary Policy
Data from the National Bureau of Statistics (NBS), indicate that inflation has increased to about 29% in December 2023. The targeted rate of 21% in the 2024 budget appears unrealistic as the country is yet to grapple with the pass-through effect of exchange rate instability and the persisting security challenges on inflation. Monetary policy direction by the Central Bank of Nigeria (CBN) may remain uncertain until the CBN Monetary Policy Committee and the Board of Directors of the apex monetary institution are reconstituted. Currently, their focus has been on enhancing the stability of the foreign exchange market which has been quite herculean. Fiscal indiscipline and high cost of governance may derail the management of monetary policy in 2014. As earlier indicated, inflation may not moderate down to 21% as projected in the 2024 budget, particularly with the removal of the subsidy on petroleum products and the removal of multiple foreign exchange rates. This may affect capital importation which has been declining from $23.7 billion in 2019 to $6.0 b in 2021 and even further down subsequently.
Despite the harmonisation of the foreign exchange market rates, the gap between the official and parallel market rates for foreign exchange has widened and is still an incentive for round-tripping in the market. Currently the naira-dollar exchange rate of about N950 in the official (Investors and Exporters) market and about N1,400 in the parallel market leaves a whopping gap of about N450 per dollar. This gap is even wider than it was before the rate harmonisation. This multiplicity and divergence of rates hinder capital importation, particularly with its pass-through effects on inflation.
Taxation
The government has increased taxation in 2023 in many areas and has sustained new taxes such as excise duty on carbonated drinks which was set at N10 per litre. This has negative effects on demand for non-alcoholic drinks and could lead to a drop in the turnover of the producing firms, as well as the company’s income tax in the food, beverages and tobacco subsector of the economy. Other tax increases were in capital gains tax for shareholders in public companies now 10% on share disposal exceeding a certain amount as well as 0.25% on profit before tax for companies with turnover greater than N100m for science and engineering infrastructure levy. There is also the introduction of 6% on turnover from Nigerian market being tax on foreign e-commerce business.
Services
There is an increased digitalisation taking place in the Nigerian economy. With the recent launch of the Central Bank Digital Currencies (CBDC) by the CBN under Godwin Emefiele as Governor, the digital currency and virtual form of its fiat currency or legal tender are along these lines. This was expected to create opportunities for new businesses in the digital space for the enhancement of payment systems among others. This has not fully materialised. However, there has been more focus on cashless policy focus in payments. More focus has also been placed on financial inclusion and the inflow of remittances, through digitalisation, particularly with the dwindling inflows for the oil sector. These are expected to drive the use of CBDCs in 2024.
Others
The poverty reduction programmes of government such as school feeding and other social investment schemes may be sustained since they form part of the main thrust of the policy framework of the ruling party since 2015. .
Insecurity may persist with the Islamic State of West African Province (ISWAP) and Boko Haram, particularly in the Northern parts of Nigeria, not being totally degraded. If not curtailed, this will impact negatively on agricultural production, capital importation and industrial growth among others
Opportunities
- Given the volatilities in the exchange rate, investments in dollar-denominated assets could be a good hedge against loss of value.
- The removal of fuel subsidies has provided a breathing space for the government to enhance its expenditure programmes in the economy. Expectedly, inflation has skyrocketed through the transportation multiplier. This has aggravated the loss of value of naira-assets.
- Return in Equities is highest in the Oil & Gas sector at over 50% with the worst being in the industrial goods at about -2.1%. This should guide choice of securities for investment in the capital market.
- More participation in the digital space will continually become attractive.
- The Tinubu administration may frontally address the fiscal sustainability challenge the Nigerian economy is going through. This is at the heart of the current economic problem. There may be a drive to seek for a rescheduling of the entire debt portfolio and the adoption of a more pragmatic debt management strategy where borrowing is strictly tied to projects that can repay the loan on its own.
- The quest for the enhancement of the supply of foreign exchange may be pursued by the Central Bank of Nigeria in 2024. Part of it may include the continuation of the RT200 FX programme which was designed to generate as much as $200 billion in foreign exchange repatriation inflows through the non-oil sector.
Recommendations
Based on the above analysis/projections for 2024, the Centre states as follows:
- 2024 appears bleak in terms of GDP growth and general economic performance of government.
- Structural reforms may be necessary to further support the fight against inflation by improving productivity and removing or easing supply chain disruptions.
- The vexatious Oil theft must be addressed in 2024, if progress in revenue enhancement is to be achieved.
- The authorities must ensure that the Cost of Governance is reduced across the three tiers of government
- There is an urgent need for the Federal government and policymakers to restore macro-economic stability by expanding agricultural spending in order to achieve future resilience in the sector
- There is a need for fiscal policies that support current efforts by the Central Bank to curb inflation in order to protect the vulnerable in the country.
- Monetary policy should stay the course to restore price stability, also, fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy
- Fiscal policy can help the economy to adapt to more volatile environments by investing in productive capacity, human capital, digitization, green energy and supply chain diversification.