For Nigeria, the overarching theme in 2023 will be the general elections and, perhaps on an equally vital note, how whoever emerges president deals with the unprecedented national debt (₦44.06 trillion), near-debilitating debt servicing costs (estimated at ₦5.24 trillion in 2022) and expensive yet popular petrol subsidies. The somewhat negative effects of previous electoral cycles on the Nigerian economy have been well-researched and documented. However, these are extraordinary times in Nigerian history, with the general consensus being that the country is at a crossroads. Tepid growth, structurally high inflation, currency weakness, shrinking real incomes, pervasive insecurity and tightening credit conditions have contrived to paint a grim macroeconomic picture and constrain the business environment. Election-related uncertainty has heightened investor apprehension over the likely winner, his potential reforms and likely policy direction, which is stalling investment decisions and limiting economic activity.
Politics: A 3-Horse Race for an Unenviable Job
The forecast is for a keenly contested and potentially divisive presidential election with a high chance of a run-off. It will also be the first three-way presidential race since the advent of the fourth republic in 1999. The election will present the first real test of electronic transmission of results, as demanded by the newly passed electoral law. The outcome will be just as important as the process and in the event that the polls are marred by malpractice or/and seeming bias on the part of the umpire, it could pose significant new security risks and serious violence cannot be ruled out in certain regions of the country.
The ruling party’s handling (or mishandling) of certain issues in the run-up to the February 25th polls could also play a key role in stoking widespread discontent and tilting the political balances. Take the naira redesign policy for instance. As strategic and well-intentioned as it is, its implementation has ostensibly been accompanied by teething problems which are proving disruptive to economic and social activity. At this juncture, it is also crucial to note that at the launch of the redesign project, a revision to the Central Bank of Nigeria (CBN’s) cashless policy was also announced – to reduce the quantity of cash being printed – aimed at driving the increased use of digital banking channels. This, it seems, is at the crux of the current challenge (scarcity of new naira notes) as most Nigerians expected a simple exchange of old notes for the new ones. So far, the exercise has reeled in 75% (₦1.9 trillion) of the ₦2.7 trillion held outside the banking system. While this sounds like success, it in no way absolves the CBN of its responsibility to ensure adequate and transparent distribution of the new notes or manage public expectations, both of which have combined to trigger widespread panic (and hoarding) which now threatens the social economy.
The next president’s first order of business will be to confront Nigeria’s aforementioned economic challenges, which are the culmination of multi-decade structural and policy weaknesses. In the last few years, structurally high inflation has been exacerbated by elevated global commodity prices, currency weakness and the impact of the rising spate of insecurity on food production. This has left the average Nigerian significantly poorer as GDP per capita, at $2,418 in 2022, is still lower than 2019 levels of $2,505. This is currently contributing profoundly to a wave of emigration by Nigerians, in search of greener pastures, which now threatens several critical sectors of the economy, particularly healthcare.
Monetary Policy Pragmatism
In advanced climes, it is somewhat unusual for central banks to shift ground on interest rates in an election year lest they evoke the perception of partisanship. But these are rather unusual times in Nigeria. Treasury Bill rates (364-days) have declined by 1006bps to 4.78% in January 2023 from 2022’s peak of 14.84% (in November) in spite of the five Monetary Policy Rate (MPR) hikes (a cumulative of 600bps) since May 2022. This contradiction calls into question the potency of the MPR as an anchor rate, however, the hawkish tone of the MPC signals a desire to deploy the MPR as the primary tool in aggressively combating inflationary pressures. As a result, we expect inflation to taper in 2023 to 15-17%, also supported by the easing of global commodity prices from their peak in 2022. This is despite the impact of predicted floods and widespread insecurity on food production, as well as elevated energy prices, election-related spending, exchange rate pressures, and cost-reflective rates (petrol and electricity).
Figure 1: Annual Headline Inflation (%)
Source: National Bureau of Statistics (NBS), Agusto & Co. forecast
Policy Reform: Needs More than mere Rhetoric
All eyes will also be set upon a post-election push for reform. Top of the list will be eliminating petrol subsidies. It is already widely acknowledged in Nigeria’s political arena that the country’s fuel subsidy scheme is unsustainable and, if nothing is done, Nigeria could soon be staring debt distress in the face. Officially, petrol subsidies are set to end in June 2023, and the analyst consensus is for a decision to bite the bullet and deregulate pump prices beginning July 2023. With petrol already selling for as much as ₦320 per litre in parts of Lagos and Abuja, and much higher in most parts of the hinterland, many are hoping that the outgoing administration would do everyone the favour (including its successor) of raising petrol prices and alleviating the current scarcity problem.
Nigeria’s total subsidy bill was estimated at ₦6.3 trillion between 2019 and 2022. It is forecast to reach ₦5 trillion in 2023 and continue to limit expenditure on crucial infrastructure needed to galvanise economic growth in the medium to long term.
Figure 2: Petrol Subsidy Deductions vs Gross Oil & Gas revenues (₦’ Billion)
Source: NNPC, OAGF and BOF and World Bank estimates.
While doing away with it would be inflationary and is likely to trigger severe backlash from unions and many sections of the wider public, it is critical to blocking one of the biggest leakages in Nigeria’s public finances as it takes away the incentive to smuggle petrol to neighbouring countries where prices are more market-determined. At ₦185 ($0.41) per litre, the ninth cheapest globally, the petrol price in Nigeria is 38.3%, 35.6% and 39.4% of prices in Benin ($1.07), Togo ($1.15) and Cameroun ($1.04) respectively.
Eliminating, or at least minimising subsidies, will make way for further and more fundamental fiscal reforms. On evidence, higher oil prices ($100 per barrel in 2022) have become insufficient in balancing Nigeria’s budget – largely as a result of low oil production [1.1 million barrels per day (mbpd)] – 37.9% lower than its OPEC quota (1.8mbpd) and about 50% of 2013 levels (2.18mbpd).
Fiscal Overhang: Little Room to Maneuver
Nigeria’s fiscal picture is grim. Without additional (and increasingly expensive) borrowing, crucial spending on infrastructure, salaries, debt payment and defence will become nearly impossible. The 2023 budget (₦21.8 trillion) projects a fiscal deficit of ₦11.3 trillion (5% of GDP). This, in our opinion, is likely to overshoot on account of the historical precedent of poor revenue performance and petrol subsidy spending. The revenue expectations mean more debt and growing market concern about how the government can service its debt service obligations. Obtaining external financing is also complicated by high global interest rates.
Figure 3: Federal Government Interest Payments as (%) of Federal Reserves
Source: FAAC, DMO
The likely restructuring of the Ways and Means stock (estimated at ₦22.7 trillion) in 2023 will likely span several years to avert a liquidity crunch but is likely to tighten credit conditions if we assume largely domestic uptake by banks. This would also push up debt servicing costs significantly as Ways and Means Advances are projected to account for 30% (the largest chunk) of Nigeria’s ₦77 trillion debt stock by May 2023.
The removal of subsidies, and the attendant incentive for smuggling, should finally bring an end to the confusion over how much petrol is actually consumed in Nigeria and, in theory, should also right-size petrol imports (which account for 15% of the total import bill), conserving valuable foreign exchange. However, the launch of the 650,000bpd Dangote refinery in January 2023 is a potential game-changer as it could completely eliminate Nigeria’s petrol imports. This hinges crucially on the complete price deregulation of petrol as the export market presents a significant opportunity that will be virtually impossible to pass up. The 60,000bpd Port Harcourt refinery is also expected to be completed and back on stream in Q1’23.
The World Bank has revised its economic growth projection for Nigeria downwards to 2.9% from 3.2% initially stated in June 2022. Agusto & Co has a slightly more optimistic forecast, at 3%, and believes GDP growth will be supported by election spending, improved oil output (to 1.3-1.4mbpd) and still high oil prices ($88pb) but will be constrained by low investment and productivity. How quickly Nigeria can stem rampant oil theft and vandalism will be crucial to boosting foreign exchange earnings and providing the CBN with enough ammunition to intensify its interventions in the forex market. However, we expect high global interest rates to continue to limit capital inflows and add to currency pressures in 2023.
In addition, Nigeria’s insecurity challenge will continue to be a major issue in 2023. It worsened in 2022 and is now rife in many sections of the country. The scale of the challenge will require a two-pronged approach – deploying resources to military artillery, personnel and intelligence; while also confronting the more deep-seated problems of pervasive poverty, high unemployment and extreme levels of inequality.
Figure 4: Full-year GDP Growth (%)
Source: NBS, World Bank forecast
Forecasting the value of the naira is a bit tricky as the protectionist leanings of the current administration have swayed the CBN’s dogmatic obsession with holding on to the value of the currency. All three leading presidential candidates, on the surface, appear willing to ‘allow’ for a more market-determined exchange rate. A successful election would ease frayed nerves and bolster investor confidence. We forecast a gradual downward adjustment of the official exchange rate to ₦480-500/$ and a simultaneous increase in FX supply, which would signal a willingness to shift ground and would likely trigger an appreciation of the naira in the parallel market to ₦650-680/$. This would narrow the parallel market premium and curb speculative activity.
Conclusion
2023 will be a pivotal year for Nigeria. Its development challenges are numerous and the choices facing the next government are far from easy. Voter apathy is unlikely to be as pervasive as in recent elections and the winner could have political capital to draw on. Who better to push through the unpopular reforms required to ensure the shift from the decades-old petro-state model than a popular president? However, all optimism at this point is still, at best, cautious. Nigeria is a long way off from building a globally competitive non-oil export base. The first step on the path to accomplishing this is developing a strategy that is both coherent and comprehensive. The hope is that this is outlined and articulated even before May 29 2023 as the world is watching with eager anticipation.
The largest underlying threat to Nigeria’s overall stability is the continued deterioration of economic conditions and living standards. While things are likely to get worse before they get better, you can’t make an omelette without breaking a few eggs.
