In the first half of 2024, the Nigerian economy continued to grapple with the consequences of a wave of economic reforms initiated by President Bola Tinubu upon his resumption of office in May 2023. The reforms were aimed at addressing long-standing structural issues and propelling the economy towards accelerated growth. Nonetheless, the hasty and haphazard implementation of the reforms, which reduced petrol subsidies and attempts to float the naira (leading to a steep depreciation), sparked an acceleration of inflation to an almost three-decade high of 34.19% in June 2024. Food inflation rose to a 28-year high of 40.87%, heightening the cost of living and constraining the business environment.

The major concerns were inflation and the exchange rate, with the naira’s journey to price discovery being nothing short of dramatic. After plunging 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. However, another wave of currency pressure soon followed, pushing the naira to ₦1,480/$ – ₦1,530/$ at the end of June, where it has since found a semblance of stability.

The Central Bank of Nigeria (CBN) implemented aggressive policy measures to combat inflation and support the exchange rate. The apex bank doubled down on its hawkish monetary policy stance, hiking the Monetary Policy Rate (MPR) by 750 basis points in the first half of 2024. It also successfully cleared the validated backlogs of foreign exchange (FX) obligations, consolidated the official and parallel-market exchange rates, and improved communication with local and foreign markets, which have bolstered confidence and increased investors’ interest.

The CBN has been clear about its intentions to keep interest rates elevated for as long as necessary to tame inflation, while acknowledging that cost-push factors, particularly rising food prices, are a key culprit behind the nation’s inflation woes. Factors such as surging logistics costs for agricultural products, ongoing security challenges in key food-producing regions, infrastructure bottlenecks, and the impact of a weaker naira on the price of imported food items have contributed to the surge in prices.

Nigeria’s Gross Domestic Product (GDP) grew by 2.98% (year-on-year) in real terms in Q1 2024. Given the significant constraints to output in Q1 2023 (when a hastily executed currency redesign initiative triggered a cash crunch, which proved disruptive to businesses) we believe that the Q1 numbers largely reflect a subdued economic performance. This is also closely linked to tightening credit conditions and balance-sheet constraints facing many businesses, given the steep depreciation of the naira. The oil sector, which has long been the backbone of the Nigerian economy, saw a rebound in growth, with the real growth of the oil sector in Q1 2024 at 5.70% year-on-year, a significant increase from the -4.21% recorded in Q1 2023. This was on the back of a rise in crude oil output to 1.33 million barrels per day (mbpd) in the period compared to 1.28 mbpd recorded in Q1 2023. However, this falls short of both the country’s OPEC+ quota (1.5 mbpd) and the government’s own budget-dependent target (1.78 mbpd), underscoring the urgent need for a turnaround in the sector.

Nigeria’s total public debt reached ₦121.67 trillion ($91.46 billion) as of 31 March 2024, up 24.9% from ₦97.34 trillion ($108.23 billion) at the end of 2023. This increase was driven by new domestic borrowing, securitisation of Ways and Means Advances, and currency depreciation. With interest rates on domestic borrowing significantly higher in the first six months of 2024 (19%) than in 2023 (12.8%), debt servicing costs have soared, reaching an estimated $1.12 billion in Q1 2024.

 

H2 Outlook: Gearing up for the Finish Line

Oil sector growth is poised to be a major driver of the economy in the second half of the year. Under the best-case scenario, Agusto & Co. expects a rise in Nigeria’s crude oil production to 1.45 million barrels per day (mbpd), driven by expansion projects and improved security leading to higher uptime in key pipelines. While our best-case scenario remains lower than the OPEC+ quota, this anticipated increase will allow Nigeria to benefit from the relatively high crude oil prices, which we forecast to average $85 per barrel in 2024. The domestic crude oil refining capacity is poised for a substantial enhancement with the operationalization of the Dangote Refinery, which is set to increase the production of diesel, aviation fuel, and eventually petrol. This is expected to reduce Nigeria’s dependency on refined petroleum imports by the end of 2024. However, the ongoing fuel subsidy makes it unclear whether this will be a profitable endeavour for the Dangote Refinery, which has significant foreign currency-denominated debt. The company may focus on exporting products to neighbouring countries in the medium term, which would be positive for Nigeria’s exports.

H2 Outlook: Gearing up for the Finish Line

While the oil sector is poised for growth, the non-oil sectors are expected to remain constrained by the high-interest rate environment and weak consumer purchasing power. The significantly weaker naira will also weigh on the fortunes of the manufacturing, construction, real estate and trade sectors. However, the finance and telecommunications sectors are projected to remain bright spots. The robust banking sector, coupled with the expected impact of the industry’s recapitalisation, will continue to underpin growth in the financial sector. In the telecommunications sector, the enforcement of the National Identification Number-Subscriber Identity Module (NIN-SIM) linkage policy by the Nigerian Communications Commission (NCC) presents a potential challenge, as it led to a 2.4% decline in active voice subscriptions in Q1 2024, which could constrain subscriber growth in the coming quarters. Thus, we forecast a rise in real GDP growth to 3.19% in 2024.

Inflation Nearing an Inflection Point

While data from the NBS indicates a continued rise in headline inflation, the recent moderation in month-on-month inflation in March, April and May, along with the slower pace of year-on-year increases in the latter part of H1 2024, suggest that inflation is likely to reach an inflexion point early in H2 2024. This is supported by base effects, a more stable naira, and the expected ramp-up in domestic petrol refining, particularly with the entry of Dangote into the market, which has led to a decline in diesel prices for the first time since July 2023. However, risks to the inflation outlook remain, including insecurity, unfavourable weather conditions, and possible incidents of floods in key food-producing states. The government’s efforts to boost food supply, such as the introduction of a 180-day window to import wheat, corn, and other food crops duty-free, are unlikely to have a significant impact on food prices until early 2025. As a result, we forecast that inflation will decline gradually to 29.5% by year-end and average 32.19% for the year.

The CBN has been successful in putting monetary policy back on a more conventional footing. We believe the apex bank will maintain its hawkish tone in the early part of H2 2024, driven by the moderation in inflation numbers and the need to attract capital flows and deliver a positive real short-term interest rate. However, the convergence of the official and parallel market exchange rates, as well as the recent stability of the naira, may lessen the need for further rate increases. Based on the aforementioned we foresee at least one more rate hike in H2 2024 of a minimum of a 100 basis points.

External Sector and Exchange Rate Outlook

The significantly weaker naira has triggered import compression while also stimulating non-oil exports. Higher crude oil output and still-high crude oil prices will sustain foreign exchange (FX) earnings. The Dangote Refinery is expected to complement this and displace some fuel imports, boosting net exports and the overall current account balance in H2 2024. Given the backdrop of high inflation, we expect monetary policy tightening to remain insufficient in bringing real returns back into positive territory, and therefore, we do not expect a material wave of portfolio investment in H2 2024. However, the convergence of the official and parallel market exchange rates is expected to improve remittance inflows through official channels, supported by the CBN’s directive allowing International Money Transfer Operators (IMTOs) to transact directly or through Authorised Dealer Banks at the official exchange window. The recent approval of a $2.25 billion FX support from the World Bank is positive for exchange rate stability, and we believe that a Eurobond issuance could be on the cards. This, along with a planned diaspora bond, would provide the CBN with increased ammunition to support the naira on a sustainable basis. We align with the CBN on the naira being undervalued, and we believe that a significant inflow of capital (over $5 billion), in debt or investment would sway the market positively, sparking a sharp appreciation. Barring such an event, we expect the exchange rate to stay in the ₦1480/$ – ₦1,580/$ range in H2 2024.

Revenue Performance and Debt Sustainability

The Federal Government’s revenue performance in Q1 2024 was ₦3.94 trillion, 56.7% higher than the corresponding period of 2023, but 82.1% of the pro-rated revenue target. If this level of performance is sustained through the rest of the year, then revenues are likely to rise to ₦15 trillion, 21% higher than ₦12.37 trillion in 2023 (107% of the ₦11.55 trillion target). While the rise in revenue bodes well for capital expenditure, the continued strain of petrol subsidy payments, projected at around $3.7 billion in 2024, will push the fiscal deficit beyond the 3.88% of GDP forecast. Nonetheless, we believe that a supplementary budget will be essential for the effective implementation of the recently agreed minimum wage of ₦70,000 and the consequential adjustment.

 

Debt servicing in Nigeria gulped 64.5% of total revenue in 2023 with external debt service payments reaching $3.5 billion. The increase in Nigeria’s debt servicing costs, driven primarily by rising external debt payments (projected to reach $5.2 billion at the end of 2024), despite the government’s stated shift towards domestic borrowing, raises concerns about the country’s debt sustainability and the impact on its economic reform and development efforts.

Outlook

The CBN seemingly stepped up to the plate in 2024 with policies aimed at steering the economy towards stability. However, the fiscal side of the equation appears curiously quiet, lacking the forceful stimulus that could truly jumpstart growth. This raises concerns. Can a lone central bank maintain stability for long? The key lies in a coordinated monetary and fiscal response. Nigeria’s economic trajectory hinges on a delicate balance between domestic policies and external factors. Without a unified approach, navigating this tightrope walk for the rest of 2024 could prove perilous.