In a month, the administration of President Bola Ahmed Tinubu would have crossed the 1-year milestone. With plans well underway to render an account of its accomplishments and instill confidence in the delivery of his ‘Renewed Hope’ agenda in the next three years, it begs the question: is it truly feasible to objectively evaluate performance within just one year? While the debates about the pace and sequence of economic reforms linger, there appears to be broad consensus about the overall policy direction being largely on track.
Upon taking office, President Tinubu embarked on arguably the biggest economic shake-up in Nigerian history. He swiftly rolled out market reforms (reduced petrol subsidies and floated the naira) aimed at eliminating market distortions and propel the Nigerian economy to an accelerated growth path. Nonetheless, given the context of already high inflation, the implementation was done hastily and haphazardly, triggering an acceleration of inflation to an almost three-decade high of 33.2% in March 2024 (food inflation rose to a 19-year high of 40%) and a sharp rise in the cost of living.
IMF’s View: Walking an Economic Tightrope
Nigeria’s economic story is now one of intriguing contrasts – immense promise and lurking danger. The International Monetary Fund (IMF), in its regional economic outlook for sub-Saharan Africa (April 2024), revised its growth projections for Nigeria upwards painting a picture of accelerating growth – now predicting 3.3% growth in 2024, exceeding its initial forecast of 3%. This optimism stems from a rejuvenated oil sector, spearheaded by the long-awaited Dangote Refinery, and a consistently strong services sector.
The recent announcement by the Dangote Refinery regarding the availability of diesel and aviation fuel by the end of April, subject to regulatory approval, priced at ₦940/$ and ₦980/$, respectively, is a tangible sign of a positive shift in the country’s oil sector. This aligns with our projections of double-digit expansion for oil refining output at the start of the year. Crude oil output is also anticipated to rise, reaching 1.56 million barrels per day by the end of 2024 on the back of measures to tackle insecurity. While the oil sector is experiencing a resurgence, the service sector (the consistent engine of Nigeria’s GDP growth) is projected by the IMF to maintain its momentum. This sector’s continued strength is crucial for weaning the economy off its reliance on oil and provides a vital foundation for long-term, sustainable growth.
The IMF also welcomed the bold move by the CBN to curb inflation via steep hikes in the monetary policy rate (MPR), which it believes reflects a commitment to economic stability. The Fund now expects Nigeria’s inflation to drop significantly in the coming years, falling to 14.6% by 2029. However, we note that there are structural supply-side issues constraining output, including insecurity and high production costs, which stoke inflation and limit the effectiveness of monetary policies. These will be major factors standing against the moderation of inflationary pressures. The IMF also notes that despite their positive outlook for Nigeria, a shadow hangs over the country’s economic future – fiscal debt. A major concern is the high cost of servicing Nigeria’s national debt – 66% of actual revenue (9 months-2023) – leaving less money for crucial investments in infrastructure, education, and healthcare.
Naira’s Rollercoaster Ride: From Record Lows to Dramatic Comebacks, What Next?
At present, the major worries remain inflation and the exchange rate, with the naira’s journey to price discovery fraught with volatility and wild swings, particularly in the last four months. After a plunge to a record low of ₦1,950/$ at the parallel market, the currency staged a dramatic comeback, rallying by 46.2% to ₦1,030/$ by April 17, to become one of the world’s best-performing currencies in recent weeks. The turnaround followed the aggressive tightening stance of the CBN, with policy rate hikes in February and March (of a combined 600 basis points), the success in clearing the backlog of FX obligations and a flurry of directives, particularly the ban on foreign currency denominated collateral for naira loans.
The CBN has also intervened to improve liquidity and higher interest rates have attracted ‘Hot Money’, which bolstered the naira and gave the apex bank more ammunition to influence the market. We believe increased inflows from foreign portfolio investors attracted by higher interest rates as a key factor in the naira recovery. Nonetheless, there is a sense of caution that these are likely existing investors familiar with the Nigerian market, rather than a surge of new money. Another point of contention is the central bank’s commitment to a free-floating exchange rate. Despite pronouncements of a “willing buyer, willing seller” market, the bank has resumed selling dollars to licensed FX dealers with a limited spread of 1.5%. The naira’s rally has also coincided with a 6.5% depletion of the CBN’s external reserves since March 2024, leading to suggestions that the Apex Bank has been supporting the naira more than previously disclosed and raising questions about the sustainability of the naira’s rally. While the CBN maintains it is not defending the naira, reserves depletion has stoked scepticism and renewed speculative activity, which is at the core of the resurgent pressure on the naira in the last week. In the eight days between April 17 and April 25, the naira lost 28.9% at the parallel market – from ₦1,030 to ₦1,450, respectively, despite the CBN’s intervention with $10,000 to each of the 1,583 Bureau de Change operators at a rate of N1,021/$.
While it remains to be seen what strategies the CBN will adopt in the coming weeks, we are certain that the naira’s future hinges on the central bank’s ability to navigate several challenges. First, it needs to keep tackling the stubbornly high inflation (from demand-pull-induced sources), likely through further rate hikes. Secondly, attracting sustained foreign investment that goes beyond familiar players is crucial. We strongly believe that it is not possible to achieve this goal without the involvement of fiscal authorities, who need to take action to attract foreign direct investment (FDI). Finally, establishing a truly transparent and functional foreign exchange market will be vital for long-term confidence in the naira. The naira depreciation since April 17 suggests that foreign investors, and speculators alike, are waiting for clearer signs of a comprehensive economic plan from the Nigerian government to attract capital inflows and ensure sustained naira stability. We believe that this is where the fiscal authorities face an uphill battle.
Bolstering Foreign Exchange Reserves: A Multi-Pronged Approach
The Federal Government of Nigeria (FGN) is now seeking a $2.25 billion loan from the World Bank ($1.5 billion for development policy financing and $750 million for program-based financing) to address some of the country’s economic challenges. The terms of the loan include a tenor of 40 years with a 10-year moratorium and a nominal 1% interest rate. The loan, in addition to new fiscal incentives aimed at attracting over $10 billion in new investments within the next 12 to 18 months.
In addition, the Nigerian government is setting its sights on the substantial financial resources of its diaspora community. It plans to achieve this by issuing diaspora bonds ($10 billion), designed to be appealing investments for both Nigerians living abroad and foreign investors. These bonds are expected to attract foreign currency holdings and contribute significantly to the Nigerian economy. The government is confident about a successful launch later in 2024 and anticipates a substantial response from investors, translating into a significant inflow of investment capital.
Furthermore, the FGN plans to collaborate with money transfer operators (MTOs) to streamline remittance channels. Their ambitious goal is to double the volume of remittances sent through official sources within a short to medium time frame. This initiative targets a quicker boost in foreign currency inflow compared to the diaspora bonds. We note that the alignment of the official and parallel market rates implies a decline in the premium, and we now expect diaspora remittance flows, estimated at $20 billion in 2023 (90% of which bypass official channels), to begin to flow more freely into the official foreign exchange window. By implementing these combined strategies, we believe Nigeria is taking steps to bolster its foreign exchange reserves and propel economic development.
Recalibrating Expectations: GDP Size and Long-Term Vision
The IMF now projects that Nigeria would fall to 4th position in terms of GDP size on the continent, surpassed by Algeria, Egypt, and South Africa. A significantly weaker naira and disruptions caused by policy reforms, like fuel subsidy removal, would contribute to this slip.
The government’s ambitious plan to reach a $1 trillion GDP by 2026 is seeming increasingly like a dream deferred. Nonetheless, we believe that a longer and perhaps more tortuous path could be a modest price to pay to lay and deepen the foundations for a more resilient economy that is set firmly on a path of sustainable and accelerated growth in the long-term.
