Analysts at FocusEconomics predict that eliminating fuel subsidies in Nigeria and implementing a new foreign exchange (FX) framework will encourage foreign investments in the country.
However, these policies are expected to initially hurt economic activity in the upcoming months.
This assessment was provided in the July 2023 FocusEconomics Consensus Forecast report on sub-Saharan Africa. The report suggests that Nigeria’s removal of fuel subsidies and FX frameworks will affect food prices and transportation costs for a considerable period.
Nevertheless, analysts assert that removing subsidies and implementing the FX framework will ultimately strengthen the country’s fiscal and external positions. The report highlights that Nigeria’s current inflation rate reached 22.4% in May, an increase from April’s 22.2%.
This acceleration in inflation was primarily driven by higher price pressures in the food and transportation sectors.
Projected GDP growth at 2.9% in 2023, 3.2% in 2024
FocusEconomics panelists see Nigeria’s GDP expanding by 2.9% in 2023, which is up by 0.1 percentage points from one month ago, and expanding by 3.2% in 2024.
The FocusEconomics analysts also project that removing fuel subsidies and devaluing the naira will add significant upward pressure in the coming months. Inflation is seen well above the Central Bank’s 6.0–9.0% target band throughout the year.
Meanwhile, the naira traded at NGN 656 per dollar on 16 June, depreciating 29.8% month on month. The currency plummeted on 14 June, when the Central Bank of Nigeria (CBN) decided to stop intervening in FX markets, thus, allowing the naira to trade freely.
So, under a flexible exchange rate framework, the naira is set to trade at a significantly lower value in the foreseeable future. FocusEconomics analysts also project that Nigeria’s economic growth will decelerate in 2023, dented by double-digit inflation and higher interest rates.
The Oil Sector: Data from the FocusEconomics report points out that the oil sector contracted at a markedly softer pace of 4.2% year-on-year in Q1 2023 (Q4 2022: -13.4% yoy). It is important to note that Nigeria’s oil production rose to 1.51 million barrels per day (mbpd) in Q1 2023, from 1.34 mbpd in the previous three months.
Non-oil sector: According to the FocusEconomics report, growth in Nigeria’s non-oil sector, softened to 2.8% year on year in Q1 2023 (Q4 2022: +4.4% yoy). The slowdown reflected a 0.9% year-on-year decline in the agricultural sector, swinging from the previous quarter’s 2.0% annual growth.
Meanwhile, growth in the services sector weakened (Q1 2023: +4.3% yoy; Q4 2022: +5.7% yoy), contributing a larger 57.3% in Q1, up from the previous quarter’s 56.3%. Also, the industrial sector returned to growth, posting a 0.3% annual increase (Q4: -0.9% yoy).
What you should know: In the report, the FocusEconomics analysts reasoned that if Nigerians can navigate economic duress in the coming months, in the longer term, the country will enjoy a much more sustainable external position and headwinds stemming from a more attractive business climate.
However, they also noted that interest rate movements and capital controls are key factors to monitor during the transition to the new monetary framework.
