In 2024, the impact of the policy-induced shocks, which cascaded through the Nigerian economy in 2023 and severely weakened the macro picture, are expected to linger, leaving even the most unapologetic of optimists with cautious expectations of modest improvements. This is due to and despite significant progress, at least theoretically, in the dismantling of some of the deep-rooted structural and policy impediments that have constrained Nigeria’s economic performance for decades. The pace and scale of pro-market reforms (petrol subsidy ‘reduction’ and exchange rate liberalisation), once heralded as unprecedented, have lost steam. For the most part, analysts blame the poor sequencing of these market reforms – particularly against the background of high inflation – for the less-than-stellar outcomes.
High energy costs, multiple taxations and foreign exchange illiquidity continue to constrain the business environment, recently triggering the exit of multinational manufacturers and intensifying the wave of emigration of middle-class Nigerians. Tepid economic growth, elevated price levels, a weakening naira along with deteriorating debt and poverty statistics all paint a bleak picture and raise several questions about the proverbial light at the end of the tunnel: How long is this tunnel? how fast are we moving? what land mines lay ahead? how radiant do we expect the light to be? This newsletter intends to do justice to these and some other questions.
From where will economic growth derive its momentum?
At a time when crude oil production appeared to be recovering, supported by security measures to combat theft and vandalism, with a 16% increase to an average of 1.3mbpd in 2023, Nigeria’s OPEC-sanctioned quota of 1.5 million barrels per day (mbpd) poses a significant limitation to export earnings. We expect the crude oil production gains observed in 2023 to be sustained in 2024 (1.45 mbpd – 1.5 mbpd).
Crucially, we expect domestic crude oil refining to receive a significant boost from the Dangote refinery and the re-commencement of operations at the Port Harcourt oil refinery (expected output of 210,000 bpd by December 2024in addition to the other state-owned oil refineries. In addition, BUA Group’s 250,000bpd refinery and petrochemical plant in Akwa Ibom State is expected to start operations in late 2024. These are expected to push Nigeria’s combined refining capacity to circa 1.4 mbpd of crude oil by the end of the year. The sector is poised for exponential growth as domestically refined crude oil products plummeted by a whopping 92% in the last decade to 6,000mbpd in 2022. This is positive for ending (or significantly reducing) the dependency on refined petroleum imports by December 2024 while the sale of products to neighbouring countries, in the medium term will be positive for exports.
A likely increase in foreign exchange (FX) supply, and stability, on the back of improved crude oil production and some foreign currency denominated inflows (loans and securitsation of NLNG dividend), will benefit the manufacturing, trade and other import-dependent activities. However, we believe manufacturing output will suffer from the negative effects of the recent divestments in the sector. We anticipate a marginal increase in aggregate consumption, spurred by the expected modest increase in the minimum wage, but this will be weighed down by the sustained impact of higher petrol prices and a weaker naira. High borrowing costs could trend even higher as a rejuvenated CBN tightens its policy stance further in response to the need to rein in inflation and attempt to push real returns back to positive territory. This would heighten credit risks, limit lending to the real sector and weigh on the country’s GDP growth prospects. However, it is worth mentioning that the need to manage the FGN’s borrowing costs and keep them in check may restrict the potential increase in interest rates.
Figure 1: Real GDP Growth (%)
While the President’s infrastructure agenda, as reflected in the establishment of the Infrastructure Support Fund (ISF) for the 36 states, will benefit construction activity, agricultural output is likely to be constrained on several fronts. The discontinuation of intervention measures by the CBN as well as the recent escalation of conflict in major food-producing areas in the country’s middle-belt have cast a shadow of gloom over crop production prospects. In addition, the escalation of tensions with Niger Republic, which has been a significant source of input for some agribusinesses is also likely to continue to adversely impact the sector.
We believe the services sector particularly telecommunications and financial services will remain the biggest driver of growth in 2024, and with the 2024 budget signed into law, policy direction, and priorities, have been given more clarity, and, as a result, we expect less uncertainty and improvements in business confidence. Overall, we forecast a modest increase in GDP growth to 3.1% in 2024.
Will the price level continue to rise?
Headline inflation continued on an upward trajectory all through 2023, rising by a cumulative of 8.16% to 29.5% in December, fueled by surging food inflation, the exchange rate pass-through effect and the surge in energy price. Nonetheless, we expect the rise in the price level to persist in 2024, albeit at a slower pace. We believe that sustained monetary tightening, the reduction in the use of Ways and Means Advances by the FGN, a relatively more stable naira (compared to 2023), base effects and consumer resistance will cause inflation to reach an inflection point by mid-2024, and begin a gradual decline to an average of 26% in 2024.
Figure 2: Headline Inflation (Annual Average, %)
We note that growing insecurity in major food producing parts of the country’s middle-belt and the possibility of a weaker naira and higher petrol prices are major risks to this forecast, as well as the possible escalation of the Israel-Hamas conflict into a regional crisis, which would trigger a spike in oil prices, with consequences for domestic petrol pricing.
How will the Monetary Authorities Respond?
The new leadership of the CBN has pledged to whittle down the unusually broad mandate of the past administration and enhance the consistency of the current framework for monetary policy operations to ensure that price stability guides monetary policy actions. This implies a return to orthodox monetary policy activity and a focus on inflation targeting. However, the CBN is yet to explicitly state what the inflation target is or if 6%-9% remains the target band. Nonetheless, we expect the CBN to raise the MPR to circa 19.5% before December 2024 given the need to effectively manage inflation, mop up liquidity and raise interest rates to a level where long-term savers earn positive return, while also being mindful of the FGN’s cost of borrowing. As a result, we anticipate a rise in Treasury Bill rates (364-days) to an average of 16%.
Figure 3: Average Interest Rates (364-day benchmark) (%)
The President’s stated preference for lower interest rates to support economic growth at a time when the policy environment is poised to remain tight and restrictive raises the risk of inaction and will be a true test of the CBN’s independence.
How much impact will the spending plan have?
In the second half of 2023, government revenues were significantly propped up by the reduction of petrol subsidies and a significantly weaker naira, which implied a higher nominal revenue for dollar-denominated receipts. This is despite limited crude oil production, which caused oil revenues to fall short of the target (9M’23: ₦1.42 trillion) by c.15%. In 2024, the expectation is for an ambitious revenue estimate of ₦18.32 trillion, underpinned by higher crude oil production, the depreciation of the naira, subsidy ‘reduction’ and efforts to streamline taxes to about 10 main taxes from over 70, which will enhance the ease of collection. Government-owned Enterprises (GOEs) have also committed to significant revenue growth in 2024, amounting to ₦1.2 trillion, in order to bolster the expenditure plan. This will support a record-high expenditure plan of ₦28.77 trillion ($34 billion). However, we expect government spending to still be constrained by the high debt service burden (₦8.27 trillion), an upward revision to public-sector salaries and cash transfers to poor households.
Capital expenditure, at ₦10 trillion (2023: ₦5.9 trillion), is larger than recurrent expenditure (₦8.77 trillion), however, we believe this will change after the anticipated review of the minimum wage and the expected consequential adjustment. Nonetheless, CAPEX, which has historically recorded poor implementation, still amounts to less than 5% of GDP and will fail to move the needle, particularly with regard to infrastructure, which has implications for growth and employment. Once again, this emphasizes the urgent need for more innovative infrastructure funding mechanisms.
Debt sustainability concerns are rife given the deterioration of fiscal ratios in the last four years, largely on the back of securitised Ways and Means (₦22.7 trillion), and the significant depreciation of the naira. Total public debt is up 235% in the last four years to ₦87.91 trillion ($114.35 billion) as at September 2023. Although improved government revenue has allowed for a reduction in the debt service to revenue ratio to 67% as at September 2023, from 99% in H1’23, it remains a concern on the macroeconomic barometer.
Figure 4: Interest Payment to FGN Revenue Ratio (2018 -2024f)
The fiscal deficit will largely be financed by domestic borrowings, considering the narrow window for external financing, raising the share of domestic debt even higher – currently 63.62% of total debt. We expect the debt burden to increase in 2024, as interest rates are anticipated to rise in response to further tightening by the CBN and increased issuance of domestic debt instruments as the FGN weans itself off deficit monetisation. On the bright side, there are no Eurobond repayments in 2024.
However, the efficient and optimal allocation of these borrowed funds is crucial for its debt sustainability. The FGN must target the productive sectors to boost revenue sources, as well as infrastructure that de-risks and galvanizes business activity.
How far will the naira fall?
In 2024, we believe that the risk of further depreciation of the naira looms large as external imbalances persist. This is despite expectations of higher export earnings from improved oil production and still high oil prices. However, capital inflows are likely to remain constrained on low investor confidence as FX illiquidity lingers. The CBN has committed to “intermittently boost FX liquidity”, and we believe the recent receipt of a $2.25 billion FX support facility from AFREXIM, anticipated inflows from the World Bank, and proceeds from dividend securitisation from the NLNG will support efforts in this regard. This amount represents circa 12.5% of the estimated $18 billion inflow expected from various external sources. We believe that achieving 50% of this target in 2024 and maintaining crude oil output at 1.5mbpd will be crucial in restoring FX stability in the near term.
The CBN reportedly redeemed a portion of the matured currency forward liabilities amounting to almost $2 billion in the last three months of 2023. This is in addition to a payment of $61.64 million to foreign airlines, who were owed an estimated $700 million at the end of November 2023. However, currency pressures remain heightened as FX shortages persist in the face of a largely constrained external reserves position, limited crude oil output, an FX backlog of $8 billion and past-due FX forwards estimated at $6.5 billion.
Figure 5: Exchange Rate (₦/$)
As a result of the aforementioned, we expect less volatility than in 2023 and forecast a Year-end exchange rate of ₦1100/$ at the official market. A major risk to the forecast is the threat of rapid currency depreciation and the reversion to heavier management of the exchange rate by the CBN to contain it.
On a Final Note
Nigeria’s Future economic growth is hinged on the continued implementation of macro-fiscal and inclusive structural reforms. We believe that reforms aimed at tackling insecurity and incentivising investment are particularly crucial in the near term. The recent upgrade of Nigeria’s economic outlook from stable to positive while still maintaining a junk credit rating was premised on the possible reversal in the deterioration of Nigeria’s fiscal and external positions on the back of reform efforts, citing the need to contain inflation and the government’s borrowing costs. This alludes to the need for a coordinated monetary and fiscal policy response and we believe that a strategic balance between economic policies and external factors will determine the trajectory of the Nigerian economy in 2024. The good news is that the Nigerian economy is unlikely to be as poorly managed in the next four years as it was in the previous eight.
