Economic momentum accelerated in the second quarter of 2024 (Q2 2024), with gross domestic product (GDP) growth registering a modest 3.2% year-over-year (YoY), surpassing the 2.51% expansion in Q2’23 and the 2.98% in the previous quarter. This is according to recently released data from the Nigerian Bureau of statistics (NBS). While the GDP growth in Q2 2024 outpaced Nigeria’s population growth of approximately 2.4%, it pales in comparison to the robust average GDP growth 6.4% achieved during the decade from 2005 to 2014. The data also indicated that growth accelerated in only 10 of the 46 economic activities monitored by the NBS. Growth in the service sector, which accounted for 58.76% of GDP in the quarter, slowed to 3.79% (Q2 2023: 4.42%), but still remained the primary engine for growth. This was supported by higher crude oil output, with the oil sector growing by 10.2% (Q2 2023: -13.43%) in Q2 2024, offsetting the impact of the naira’s depreciation on industrial sector performance within the period.

Oil Sector Rebounds amid lingering Challenges

Nigeria’s crude oil output increased to 1.41 million barrels per day (mbpd) in Q2 2024, up from 1.22 mbpd in Q2 2023. However, the sector continues to face significant challenges, including persistent oil theft, pipeline vandalism and reduced investments, all of which have hampered crude oil production. The oil sector, which experienced a prolonged period of negative growth, remains vital to the country’s economy and remains the primary source of government revenue and foreign exchange reserves. With the liberalisation of the foreign exchange market in June 2023, the performance of the oil sector has become even more critical to maintaining exchange rate stability in the near term.

Harvest Season to the Rescue

Growth in agricultural output, which comprised 22.6% of GDP, declined slightly in Q2 2024 to 1.41% (Q2 2023: 1.50%). The dominant segment, crop production, comprising 20.35% of GDP, remained subdued, with growth slowing to 1.65% in Q2 2024 (Q2 2023: 1.82%). While the commencement of the harvest season contributed to this growth, the segment remains significantly constrained by persistent insecurity, including farmer-herder clashes and kidnappings for ransom in key agricultural regions.

While the financial sector growth, at 28.79% (Q2 2023: 26.84%), remained robust, we are not oblivious to the stifling effect of heightened credit risks and possible crowding out effect of government borrowing on loan growth in the banking industry. The transportation and storage sector continued its downward spiral in Q2 2024, contracting by a significant 13.53%. This steep decline, following a staggering 50.64% contraction in the previous year, was primarily driven by a sharp decrease in demand as businesses grappled with soaring logistics costs. Road transport, a key indicator of economic activity, contracted by 15.88%, reflective of significantly higher petrol and diesel prices as well as heightened insecurity in many parts of the country. Activities in the aviation industry also contracted by 11.47% on higher airfares and the relative lull in politically-induced travelling, which was prevalent in Q2 2023.

Although the exchange rate stabilised at circa ₦1,500/$ in the latter part of the second quarter of 2024, which supported GDP growth, exchange rate-sensitive sectors, such as trade and manufacturing, faced significant challenges due to the substantial naira depreciation over the past year. Rising borrowing costs and reduced consumer spending further compounded these difficulties.

 

Context is Key

At this juncture it is crucial to note that a nuanced interpretation of year-over-year comparisons is essential, considering the significantly constrained economic environment of the second quarter of 2023. Uncertainty about the outcome of the election petitions and the lingering effects of the poorly implemented currency redesign policy, ostensibly aimed at curtailing vote buying, had a profound impact on business activity. The abrupt withdrawal of 75% of cash in circulation proved to be disruptive to business transactions, particularly in the business-to-consumer (B2C) segment, as the banking system’s digital payment infrastructure proved to be manifestly unprepared to cope with the sudden surge in e-payments. This disruption led to a decline in both private consumption and investment spending. Consumers prioritised available cash for food and other essential purchases, while demand for discretionary items, such as durables, garments, and luxury goods, was severely curtailed. The resulting unplanned inventory build-up further dampened investment activity.

In addition, the macroeconomic landscape in Q2 2024 presented a markedly different scenario. Inflation had surged to an average of 33.94% within the period, a dramatic increase from the 22.47% recorded a year earlier. Interest rates on 365-day treasury notes also rose sharply to an average of 20.66%, up from 9.4% in Q2 2023. Furthermore, the naira experienced a substantial depreciation, weakening to an average of ₦1,386.5/$ from ₦508.63/$ it exchanged at in Q2 2023. Much of these adverse movements in economic variables have been down to the reduction of petrol subsidies (triggering a tripling of pump prices) and the adoption of a ‘managed’ floating exchange rate regime. While we concur that these reforms are essential for positioning Nigeria on a higher and more sustainable growth trajectory, their implementation was marked by haste and poor sequencing. The resulting surge in energy, logistics, and food prices, has exacerbated the cost-of-living crisis. The situation has been further aggravated by the monetary authorities’ hawkish stance, which has driven borrowing costs to elevated levels.

Notably, all but the oil sector among the seven largest sectors, which collectively account for 79% of the Nigerian economy, experienced a slowdown in growth during the quarter. This is reflective of the constrained business environment and, in some cases, deep-seated structural challenges.

Growth Prospects

In Q3 2024, oil sector growth is expected to slow as high base effects kick in. While the non-oil sector is poised to remain the primary driver, the expansion will likely be tempered by the high interest rate environment and sluggish consumer spending. While the significantly weaker naira will continue to weigh on the prospects of the economy as a whole, we believe that the exchange rate sensitive-sectors – manufacturing, construction, real estate, and trade – will be disproportionately affected. The impact of the weaker naira is likely to be felt across most sectors, with the exception of those that primarily earn foreign exchange, such as the oil sector. The oil refining sector is poised for significant growth in Q3 2024, driven by a substantial increase in petrol output from the Dangote Refinery. As this refinery ramps up production, it will gradually displace fuel imports, boosting net exports and improving the overall current account balance in the second half of 2024 and beyond.

The ICT sector, which contributed 16.36% to GDP in the quarter, faces mounting challenges. The rising costs of maintaining critical infrastructure, coupled with regulatory restrictions on tariff adjustments, have squeezed profitability. With tariffs unchanged since 2013 and a weaker naira exacerbating costs, the sector risks compromising service quality if prices are not adjusted to reflect economic realities.

Despite the ongoing insecurity crisis, which poses a significant threat to agricultural production, the sector is expected to maintain some momentum throughout Q3 2024 due to the ongoing harvest season. However, the extent to which insecurity will impact overall output remains uncertain, particularly in regions that have been severely affected. Moreover, the anticipation of a US Federal Reserve interest rate cut in September could provide a much-needed boost to Nigeria’s economy. A weaker US dollar and the pursuit of higher yields by global investors could lead to increased capital inflows, strengthening the naira and supporting overall economic stability.

 

On a Final Note

A single month’s data is insufficient to determine a definitive trend, and the recent 30% surge in petrol prices is likely to reignite inflationary pressures. Consequently, the Central Bank of Nigeria (CBN) will need to closely monitor inflation figures in the coming months. Our previous forecast of a sustained and prolonged inflation moderation for the remainder of 2024 is now untenable. The earlier optimism surrounding the MPC’s anticipated shift towards less aggressive tightening now appears increasingly uncertain, as renewed inflationary pressures loom. This potential recalibration of monetary policy could dampen Nigeria’s near-term GDP growth prospects, constraining both consumer spending and business investment.