Where is the Nigerian economy headed?

In 122 days, the 2023 elections will hold, and Nigeria will transition to a new administration by the middle of the new year.

While it’s difficult to say who would hold the mantle for the “new Nigeria,” what’s evident is that whoever inherits the country next year will not only carry the burden of Nigeria’s current macroeconomic problems (high inflation, rising debt, insecurity, etc.) but have to make tough and necessary decisions to revitalise the economy. 

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But what will Nigeria’s economic state look like by then? This question is the motivation for today’s story. Thankfully, the International Monetary Fund (IMF) has its World Economic Output report for October 2022, which made predictions about the country. We will focus our analysis on GDP growth and inflation. Why? Because politicians and policymakers often fixate on growth as a trophy for a job well done. An example is the APC’s plan to deliver 10% yearly growth for the next five years. Meanwhile, we are looking at inflation because it is now a global problem.

Before we take a broad look at Nigeria, we will briefly provide an overview and outlook on the health of the global and regional economies (sub-Saharan Africa). We are doing this for two reasons: First, Nigeria does not exist in a vacuum. Rising prices brought on by Russia's invasion of Ukraine and high-interest rates in America directly affect the country. The second is that Nigeria, and South Africa, are the two largest economies in sub-Saharan Africa (SSA) by GDP and often dictate the region's direction and pace of growth. So, if the IMF believes that SSA GDP growth will fall, Nigeria’s GDP growth will either decline or contract.

The global economy will face hard times in 2023

The slowdown of covid-19 cases in 2021 raised hopes for a better 2022, but that didn’t happen. The Russia-Ukraine war brought a spike in prices of essential food (wheat, corn, cooking oils) and energy commodities (crude oil, natural gas).  For context, both countries jointly account for 24% of the global wheat supply, 57% of sunflower seed oil exports and 14% of corn, among other agricultural commodities.

To add, Brent—the benchmark crude oil price—is trading at $93 per barrel (October 24), up 21% from December last year as sanctions from the West (EU, UK & US) on Russia’s crude oil and gas output kicked in. This led to a supply shortfall in the global market and triggered the worst energy crisis the world has seen in the decade. The supply shortage and its attendant energy crisis are still happening, and it's bound to worsen. This is because the Organisation of Petroleum Exporting Countries (OPEC) plans to cut its oil supply by 2 million barrels per day from November.

Simply, import-dependent countries (for food and energy) will experience increased import costs that will bloat inflationary pressures, worsen living standards, and hamper economic activities in 2023. 

The rise in food and energy prices has kept global inflation stubbornly high (8.8% in 2022). Advanced economies like the UK (10.1%), the US (8.2%), and the EU (10.9%) are experiencing the highest level of inflation in 40 years. In response, monetary policy authorities began increasing interest rates—a hike not seen in over five decades—to mop up excess liquidity and, in turn, tame inflation. For example, the US Fed has hiked rates five times this year to the 3%-3.25% range—the most aggressive rate increase since the 1980s.

The interest rate hikes are not only happening in advanced countries; other central banks in emerging markets and developing economies are doing the same. Inflation is a global problem, and the only card for central banks is to increase interest rates. The IMF expects global inflation to peak at 8.8% in 2022 before slowing to 6.5% in 2023, as advanced economies respond quickly to the rate hikes and drag down worldwide inflation.

To top it all, China’s property sector crisis (e.g. Evergrande), its lingering zero covid policy, and its harsh lockdown measures, continues to feed into mounting fears of a global recession in 2023. 

Global growth is expected to fall sharply to 3.2% in 2022 and 2.7% in 2023, as most countries, especially emerging markets and developing economies, are likely to record negative growth rates. According to Ned Davis Research, there is a 98.1% chance of a global meltdown. For context, the recession probability model run by the firm has only been this high two times: the global financial crisis of 2008/2009 and 2020. So, it is no longer a question of if but when in 2023, the economic downturn will gulp the global economy. The warning signs are everywhere!

By 2023, the global economy will experience more challenging times as growth declines and inflation peaks.

Now, let’s bring this home a bit.

SSA in turbulent waters

With growth expected to slow down globally, there will be a trickle-down effect on SSA. SSA countries are vulnerable to external shocks like aggressive monetary policy tightening and slow growth in advanced economies. The deal here is that as rates rise in advanced (stable) economies, investors are likely to pull away from developing countries (unstable) in a region like SSA. Also, the high-interest rate environment makes it difficult for countries in the region to borrow because investors will ask for higher interest payments that several developing countries cannot afford. In addition, when inflation and growth in global economies are shaky, remittance (money from citizens in diaspora) and capital inflows (investment) are likely to fall. This explains the negative trickle-down effect. 

Besides, the fiscal and monetary health of many SSA countries had not fully recovered from the impact of covid-19 before the war began, making the macroeconomic conditions more precarious. Several countries were and are still grappling with high inflation, sluggish growth, and currency weakness. The recovery of sub-Saharan Africa has been abruptly halted, and the region’s GDP growth is expected to slow to 3.6% this year before gradually increasing to 3.7% in 2023.

On inflation, it's important to note that SSA countries are susceptible to global price changes as most countries in the region are commodity-dependent and net importers of food and energy items. So, volatile global commodity prices are harmful to the region.

Currently, the pass-through from global to domestic food prices is high at 30%: indicating that for every 1% increase in the price of a global commodity, domestic food prices will increase by an additional 0.3%. SSA countries spend more to purchase global commodities because of a weak currency that makes imports expensive and translates to higher domestic prices.

Moreover, the appreciation of the dollar makes it even more problematic.

Remember, almost all global commodities are priced in US dollars ($), so as the dollar appreciates, the more expensive the commodity. For context, the dollar is stronger because of the effects of the US Fed's rate hikes.

Let me explain this briefly.

What’s happening is the transmission mechanism from an increase in the Fed’s anchor rate to other rates like government-backed securities (bonds, treasury bills, etc.) When rates on these securities increase, investors are motivated to purchase them. Theoretically, this should reduce the dollars in circulation within the US economy, taper money supply-induced inflation and cause the dollar to gain in value (because there is less cash going around in the system).

Think of it like scarcity brings value.

Now that we understand how global commodity price increases affect domestic markets, we can move on to what inflation will look like in SSA by 2023.
 

This year, inflation in SSA will mirror the global trend, rising sharply to 14.4% before slowing to 11.9% in 2023. The poor and vulnerable will be the worst hit by higher food prices, worsening food insecurity in the region. According to the IMF, over 123 million households or 12% of SSA’s population, will be acutely food-insecure (lacking access to a sufficient quantity of affordable and nutritious food) by year-end.

Like other emerging markets and developing regions, SSA will experience slow growth and high inflation in 2022 and 2023. But uniquely, more SSA countries will face debilitating debt levels with few funding options from the external environment. Between now and 2023, policymakers in the region are faced with the daunting task of addressing food insecurity and managing the change in the global monetary policy environment. They also have to effectively manage inflation expectations and reduce the risks of runaway inflation while cautiously managing public debt levels.

So far, we have highlighted that a global economic slowdown is inevitable in 2023. And whatever happens in the world will directly impact specific regions, particularly SSA, which is filled with primarily low-middle-income countries. 

Moving on to Nigeria.

Nigeria will keep facing headwinds

For Nigeria, the economic situation will get worse before it gets better. Similar to the global economy and peer countries in SSA, the country will experience tepid growth levels and sky-high inflation. As I mentioned, there is a trickle-down effect from the global economy to SSA and, by default, Nigeria.

With how fast our population is rising, 121% to 210 million from 95 million in 1990, it is evident that the available economic resources like infrastructure will not be enough to satisfy the country's needs. The net effect is a decline in GDP Per Capita, which measures how economic growth translates to better welfare for the citizens. In Nigeria’s case, GDP Per capita would remain low,  indicating that the economy is not growing as fast to improve the living conditions for people. 

Essentially, the direct effects of the Russian-Ukraine war and global economic slowdown will spill over into 2023 and continue negatively impacting economic activities. The IMF is projecting that GDP growth will fall to 3% from 3.6% in 2021 and 3.2% in 2022.

It is important to note that Nigeria was already suffering from slow growth before the trifecta effect of a tepid post-pandemic recovery, the Russia-Ukraine war and, most recently, monetary policy tightening. Our primary source of revenue, oil, has been declining and buttresses the point of why we believe Nigeria is no longer an oil-based economy. Its contribution to GDP is also tanking (down to 6.3% in Q2’2022) as massive oil theft and pipeline vandalism threatens Nigeria's oil production levels. In September, Nigeria produced just 938,000 barrels of crude per day. For context, this is 50% below the oil production estimate of 1.88 million barrels per day in the 2022 budget. Basically, the lower the oil produced, the less revenue we can generate.

Moreso, with the country being a net importer of refined petroleum products like diesel that has witnessed its price tripling this year, businesses are also hurt due to rising operating expenses.  The business environment is challenging, and the overall impact is a decline in economic output (GDP).  

At 17.3%, inflation (consumer prices) will remain astronomical in 2023. The marginal decline from 18.9% in 2022 will be due to calmer inflationary pressures in advanced economies by 2023 because the increase in interest rates is expected to achieve the goal of reducing inflation. Currently, headline inflation is at a 17-year high at 20.77%, with food inflation at 23%.

The factors affecting Nigeria’s inflation, like insecurity and money supply saturation, are still expected to be very prominent by 2023. At the top of the list is currency weakness.

But before we go on, it's important to note that Nigeria's barrage of inflation-stoking factors may completely deviate actual inflation from the IMF’s forecasts in 2023. The only constant is that inflation in Nigeria will inevitably remain high next year.

Back to currency weakness, a top factor influencing the inflation rate in Nigeria.

So far this year, the naira has lost over 30% in the black market, trading at ₦750/$. The official rate has also weakened to ₦440/$. The main issue is the lack of forex, reducing the CBN’s ability to defend the naira in the official market. Usually, the country generates income (in dollar terms) from crude oil exports, natural gas, etc.; some of this revenue is added to our foreign exchange reserves (external reserves) with the CBN. From the reserves, the CBN then withdraws to supply (sell) forex at the official window to importers/exporters at the official price. So, when our forex earnings fall, it directly affects the value and stability of the naira.

Meanwhile, when the naira loses value, imported inflation climbs. As of September, imported inflation spiked to a record high of 18%. And we already know the cycle; higher import costs lead to higher domestic prices, fueling inflation and further squeezing consumer disposable income.

The other factor affecting inflation is the money supply, which will keep increasing in 2023 due to election spending and rising Ways & Means advances (printing money by the CBN). First, as campaigns continue into next year, there will be an influx of cash in the system that will increase liquidity and push up inflation. For instance, in this article, our Senior Governance Analyst explains (hypothetically) that about ₦4.3 billion (raw cash) could be injected into the system on just election day. Now, this coinciding with supply shortages in the country (especially with the impact of the recent flooding that will take months to correct) will push up inflation. It's simple, too much money chasing too few goods.

Meanwhile, the same analysis goes for the Ways & Means of advances (printing of money) by the CBN to the federal government. Already, Ways and Means are at a staggering ₦20 trillion. The good news, however, is that the government plans to securitise this debt to a 40-year bond with an interest rate of 9%. This action should mop up excess liquidity in the system triggered by money printing and possibly reduce inflation. That's if investors buy this bond. 

So, where Nigeria will be in 2023 is an advanced situation of today. Think of it like macroeconomic problems “pro max”. It's a sad and harsh reality for a country with vast capital, mineral and human resources. In 2023, the living situation for most Nigerians will keep deteriorating until some tough choices are made to revitalise the economy. For instance, on the fiscal side, the government has to be more daring in its stance to stop oil theft, address fuel subsidies, and ensure better public spending to solve our revenue problems. In contrast, on the monetary side, the CBN has to ensure that the steps taken to achieve its primary functions of price and exchange rate stability are void of political interference.

We all have to brace for the impact in 2023.