Despite the new government’s commitment to macroeconomic adjustment, the economic outlook for the Nigerian economy will remain challenging in 2024 and 2025 amidst modest economic growth, elevated inflation and fiscal discipline; this will keep the risk of both socio-economic unrest and policy slippage high. The Nigerian economy will grow at around 3% a year in 2024 and 2025, which is only a tad higher than the population growth rate. This translates into only a very modest improvement of per capita income, on average. Given the substantial devaluation of the naira over the past year, per capita income in nominal dollar has actually fallen substantially, further adding to the economic pain. Meanwhile, continued high inflation will keep food insecurity high and will likely increase the poverty rate, as the government will be to fiscally constrained to maintain real income levels for the economically more vulnerable parts of the population. This, in turn, will lead to increasing political demands for the government to address socio-economic demand, which will increase the risk of policy slippage over time. Due to the continued downward adjustment of the naira, domestic per capita income measured in current dollars has declined from $2,000 in 2021 to $1,300 (in current dollars). In 2023, 25% of the population was at risk of food insecurity and the poverty rate was 37% in 2022.
Since coming to office in May 2023, President Tinubu has pursued fundamental macroeconomic policy reform with the aim of putting the economy on a sounder financial footing. In terms of fiscal policy, the government has pursued a tighter fiscal policy to reduce the deficit. It did so (initially) by removing fuel subsidies, even though it backtracked somewhat later on. The fiscal adjustment is essential if the government is to reduce its reliance on the central bank financing, which contributes to endemic inflation. As regards monetary policy, the central bank has begun to prioritize price stability and disengaged from some quasi-fiscal activities, such as the provision of loans and guarantees to domestic financial institutions. It has increased its policy rate several times. However, a combination of insufficient monetary tightening and significant nominal exchange rate depreciation has thus far failed to bring down inflation. Ex-post real interest rates remain deeply negative, thus contributing to high inflation. As regards exchange rate policy, the Central Bank of Nigeria (CBN) has moved towards a greater liberalization of the foreign-exchange regime and a unified, more market-determined exchange rate. In this context, the CBN has also been seeking to clear its overdue dollar obligations vis-a-vis domestic banks to ease the pressure on the naira and re-establish stability in the foreign-exchange market. At the same time, it seeking to address the backlog of dollar demand from foreign companies eager to repatriate their funds in the face of dollar scarcity and tight foreign-exchange controls.
Modest economic growth in the context of tight fiscal and monetary policies but high inflation will fuel demand for increased subsidies social spending. With the presidential elections more than three years away, the government faces solid incentives to stick with politically painful macroeconomic adjustment over the next 1-2 years in the hope of stabilizing the economy and creating sufficient space to accelerate economic growth in 2027. A lack of fiscal capacity and flexibility will make it difficult to generate the resources to support growth-enhancing investment or social spending to help offset the welfare losses suffered by high inflation and modest growth, unless it is willing to jeopardize economic and financial consolidation. The limited availability of international private and official financing further constrains the government. On the flipside, a roughly balanced current account will help limit the drain on Nigeria’s foreign-exchange rate reserves, and the IMF projects a gradual recovery of FX reserves in the context of limited dollar inflows. This will limit the risk of sovereign default in the next 12-24, not least because Nigeria retains the option of requesting a Fund program to avoid a broader balance-of-payments crisis.