Nigeria’s Economy: Past challenges, present realities, and future prospects

May 29, 2024 Mary

As Nigeria marks its first year under President Tinubu, the nation’s economic journey has been a mix of hopeful advancements and daunting challenges, with aggressive fiscal policy shocks aimed at economic stabilization. Unfortunately, the outcomes of these efforts have not been favorable, resulting in widespread hardship for the nation as it nears this milestone.

In this context, fiscal policy shocks are sudden and unexpected changes in government spending or taxation aimed at stabilizing the economy. As President Tinubu announced in 2023, “subsidy is gone,” marking a significant shift in the country’s economic strategy.

Regrettably, Tinubu’s predecessor, ex-President Buhari, also imposed aggressive monetary policy shocks through the Central Bank of Nigeria (CBN) under former governor Godwin Emefiele. Near the end of Buhari’s tenure, the CBN abruptly changed the currency notes without sufficient preparation, leading to a crisis dubbed “nairalization”—where people were forced to buy naira with naira for basic transactions.

This period of intense hardship exacerbated the nation’s economic woes, leaving a lasting impact on the populace.

While experts initially applauded President Tinubu for his policy implementation, believing it would bring hope and improvement, the persistent economic challenges have since cast doubt on this optimism.

As hardship continues, some supporters remain steadfast in their belief in the policy’s potential, while others question the administration’s competence, wondering if they truly know what they are doing, given the lack of tangible achievements so far.

In similar vein Bismark Rewane, a foremost economist in Nigeria, in his latest presentation at the Lagos Business School Breakfast session titled “12 Months After Reform: Is Nigeria Breaking Out or Breaking Down?”

Thus, to address this question, a call for a deeper examination of Nigeria’s economy over the past 365\ days is essential. This analysis looks into what was, what is, and what will be—a positive economic statement analysis.

Snapshot analysis of what was and what is

This snapshot provides the summary of macroeconomic indicators behavior before President Reform and After pictorially.

As Nigeria navigates through its economic landscape, a closer examination of key indicators from Q1 2023 to Q1 2024 reveals a mixed bag of progress and challenges. Here’s a snapshot of how the economy has evolved over the past year.

GDP growth:

2023 (Q1): 2.31 percent

2024 (Q1): 2.98 percent

Data from the National Bureau of Statistics (NBS) shows that the GDP growth rate has seen a modest increase, rising from 2.31 percent in Q1 2023 to 2.98 percent in Q1 2024, with the service sector contributing 58 percent. Although Nigeria’s Gross Domestic Product (GDP) growth rate slowed to 2.98 percent in real terms in Q1 2024 compared to 3.46 percent in the preceding quarter, according to the National Bureau of Statistics (NBS), this uptick from Q1 2023 to Q1 2024 suggests a gradual economic recovery and expansion. However, this growth is still below the potential for a developing economy. The improvement may be attributed to various sectors, specifically the service sector, showing resilience despite prevailing challenges.

Inflation rate:

2023 (Q1): 22.04 percent

2024 (Q1): 33.2 percent

According to data from the National Bureau of Statistics (NBS), inflation has surged alarmingly from 22.04 percent to 33.2 percent, underscoring escalating cost pressures following the removal of the fuel subsidy announced last year by President Tinubu. This policy shift has driven food prices higher, significantly affecting staple foods such as garri, rice, beans, and eggs.

Beyond the subsidy removal, the alarming insecurity in the country poses a severe threat to farmers, preventing them from safely accessing their farms. The unification of exchange rate windows has led to substantial currency depreciation, making imported goods more expensive. Additionally, supply chain disruptions caused by insecurity and geopolitical tensions, such as the ongoing Ukraine-Russia war, exacerbate the situation.

The high inflation rate erodes purchasing power, posing significant hardship for the average Nigerian. This rapid rise in inflation highlights the need for urgent economic and security reforms to stabilise prices and ensure the accessibility of essential goods for all citizens.

Exchange Rate (Naira to Dollar)

2023 (Q1): 460

2024 (Q1): 1303

The exchange rate has depreciated dramatically, with the naira weakening from N460 to N1303 against the US dollar, according to data from FMDQ. This significant devaluation highlights deep-seated economic vulnerabilities. Key factors contributing to this decline include policy reforms such as the removal of the fuel subsidy and the unification of exchange rate windows. Additionally, declining oil revenues, exacerbated by persistent pipeline vandalism, have reduced the inflow of foreign currency.

External debt pressures and chronic foreign exchange shortages further strain the economy. The weaker naira exacerbates inflation by increasing the cost of imported goods, which adversely affects import-dependent sectors and heightens the financial burden on everyday Nigerians. This currency depreciation underscores the urgent need for robust economic policies and strategic interventions to stabilise the naira and address the underlying structural issues.

Oil Production (Million Barrels Per Day)

2023 (Q1): 1.26

2024 (Q1): 1.23

Oil production has slightly decreased from 1.26 million barrels per day (mbpd) to 1.23 mbpd, according to the Nigerian Upstream Regulatory Commission (NUPRC). This decline, though seemingly minor, underscores the persistent challenges within Nigeria’s oil sector, including operational inefficiencies, theft, and global market fluctuations.

Nigeria’s heavy reliance on oil revenues means even slight reductions in output can have significant economic implications. Compounding the issue, Nigeria was among several countries allocated a lower crude oil output target after years of failing to meet previous quotas. For 2024, Nigeria’s target was reduced to 1.38 million mbpd from the previous year’s 1.74 million mbpd, a figure still below the 1.78 million barrels per day target set for funding the 2024 budget.

This shortfall further stresses the need for strategic reforms and enhanced security measures in the oil sector to bolster production levels and secure vital revenue streams.

External Reserves

2023 (Q1): $34.26 billion

2024 (Q1): $32.95 billion

Additionally, external reserves have dipped from $34.26 billion to $32.95 billion, reflecting higher import costs and possible foreign debt servicing, as reflected in the 2024 national budget earmarked for N8.25 trillion.

The drawdown in reserves indicates increased pressure on the country’s financial buffers, raising concerns about the sustainability of current economic policies. This decline in reserves can also be attributed to the weakened naira and increased costs of importing goods, which exacerbate the financial strain on the economy.

The combined effect of declining oil production and dwindling external reserves paints a concerning picture for Nigeria’s economic stability. It highlights the urgency for comprehensive policy reforms to address these vulnerabilities and steer the economy towards a more resilient and diversified future.

Stock Market Capitalization

2023 (Q1): ₦29.54 trillion

2024 (Q1): ₦59.12 trillion

In contrast to the broader economic challenges, the stock market has experienced remarkable growth, with capitalization soaring from ₦29.54 trillion to ₦59.12 trillion. This doubling of market value suggests heightened investor confidence and the robust performance of listed companies. Several factors are likely to contribute to this surge.

The immediate catalyst for this growth was the announcement of the abolition of popular but costly petrol subsidies, which had been a significant drain on government finances, consuming ₦4.4 trillion in 2022 alone. This policy change was quickly followed by the news that the fuel importation monopoly of the state-owned oil company, NNPC Limited, had ended, opening the door for other oil firms to participate.

These developments spurred immediate interest in energy stocks, driving the overall market in early June, with companies like Eterna Oil, Conoil, and MRS leading the charge. The increase may also indicate that investors are seeking refuge in equities amidst currency instability, using the stock market as a hedge against the naira’s devaluation.

Additionally, the robust performance of the stock market could reflect underlying resilience and potential in specific sectors, particularly those less affected by the country’s macroeconomic vulnerabilities. This growth is a positive sign, suggesting that parts of the economy are still thriving despite broader challenges.

Moreover, the influx of investments into the stock market may be fueled by speculative activities and strategic positioning by investors anticipating future economic stabilisation and reforms. The strong performance of listed companies and attractive valuations compared to other emerging markets could also be driving increased investment flows.

While the stock market’s impressive growth provides a beacon of optimism, it is crucial to recognise the underlying economic instability and address fundamental issues such as inflation, exchange rate volatility, and oil sector inefficiencies to ensure sustainable long-term growth.

The data from Q1 2023 to Q1 2024 paints a complex picture of Nigeria’s economy. While GDP growth shows signs of recovery and the stock market booms, high inflation and currency depreciation pose significant risks. Oil production remains a concern, and dwindling external reserves signal potential future financial stress.

For Nigeria, addressing these challenges requires comprehensive policy measures aimed at stabilising the currency, curbing inflation, boosting non-oil sectors, and ensuring sustainable economic growth. The road ahead is fraught with obstacles, but with strategic interventions, Nigeria can navigate through these turbulent economic waters.

Policy recommendations:

-Monetary Policy

· Adopt Managed Float Exchange Rate Regime: Allow market forces to determine the naira’s value, with central bank interventions to prevent excessive volatility.

· Review IMF Support Programmes: Tailor IMF programs to Nigeria’s unique economic challenges for better effectiveness and long-term stability.

-Fiscal Policy

· Implement Strict Institutional Reforms: Enhance efficiency, reduce corruption, and improve public sector accountability.

· Adopt Public-Private Partnerships (PPP): Leverage private sector investment in key sectors like transportation, healthcare, and education for infrastructure and service improvements.

· Improve Governance and Transparency: Strengthen anti-corruption measures, ensure transparency in transactions, and enhance public spending accountability.

Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).

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