The Nigerian economy-maintained growth at a slower pace in 2023 despite facing global and domestic headwinds. Gross Domestic Product (GDP) growth decelerated to 2.74% from 3.40% and 3.10% recorded in 2021 and 2022, respectively, indicating a continued decline in annual output growth following the recovery from the COVID-19 pandemic. The growth performance was shaped by the adverse effects of supply chain disruptions (occasioned by the protracted Russia-Ukraine war), elevated inflation, and domestic insecurity, significantly reducing food production. Furthermore, Premium Motor Spirit (PMS) subsidy removal, foreign exchange reforms, longstanding infrastructural deficits, and global policy rate hikes weighed on growth outcomes.
Despite these challenges, the economy remained resilient, supported mainly by private consumption, which accounted for about two-thirds of output. Headline inflation remained elevated, rising from 21.34% in 2022 to 28.92% in 2023, owing to significant supply-side shocks from both global and domestic sources. The major drivers of inflation during the year included adverse spillovers from supply chain disruptions, higher energy and food prices due to the removal of PMS subsidies, exchange rate reforms, and widespread insecurity.
Real output is projected to grow by 3.38% in 2024 from 2.74% in 2023. This forecast is underpinned by continued fiscal policy support and broad-based reforms in the oil and non-oil sectors. Renewed efforts to secure crude oil production infrastructure and improve oil refining capacity with the commencement of operation by the Dangote refinery and expected resuscitation of the Port-Harcourt and Kaduna refineries would support growth in the near term. The agriculture and services sectors (especially ICT) would also continue to propel growth, in addition to the outcomes of the current reforms in the solid minerals sector, tax reforms and innovative financing options for infrastructure development, among others.
Inflation is expected to moderate to 21.40% (within a range of 19.84% – 25.35%) in 2024, from 28.92% in 2023 as the impact of fiscal support begins to crystallise. The continued aggressive monetary policy tightening further underpins the inflation outlook. Also, the transition to an inflation-targeting lite framework would anchor inflation expectations better in 2024, in addition to the favourable effect of moderating global inflationary pressures. However, high energy and food prices would continue to keep prices moderately high, exacerbated by the immediate impact of recent market-based reforms.
The downside risks to the outlook include the persisting supply-side shocks, high public debt and debt service obligations, implementation of new minimum wage, elevated inflation, high cost of funds, following expected tighter monetary policy stance, and exchange rate volatility. Climate shocks could exacerbate farmer-herder clashes, destroy crops and livestock, and undermine transport infrastructure, thus dampening growth prospects. Furthermore, spillovers from geoeconomic fragmentation and the recent threat to the global supply chain in the Red Sea pose considerable risks to the outlook for growth and inflation.
Moreover, higher-than-expected interest rates in Advanced Economies (AEs) could diminish foreign portfolio inflows and trigger capital reversals, weakening the equities market and heightening vulnerability.
On the fiscal front, inefficiencies in tax administration and low tax compliance could heighten budget risk and limit the capacity to finance the budget due to revenue shortfall. Furthermore, higher interest payments from accumulated debt could reduce fiscal space and elevate sustainability risk.
Recalibration and strengthening of monetary, fiscal, and structural policies are imperative to tackle existing imbalances and address potential threats to the outlook. Monetary and fiscal authorities would prioritise policy harmonisation to ensure a more effective framework for coordinating economic governance under a shared vision. In the near term, the Central Bank of Nigeria would intensify monetary policy tightening to rein in inflation, attract foreign exchange inflows using interest rates and other instruments of orthodox monetary policy, and sustain the ongoing reforms in the foreign exchange market.
In the medium-to-long term, fiscal authorities should embark on strategic reforms to strengthen tax enforcement agencies, promote the digitalisation of tax collection, enhance compliance, and enforce penalties for non-compliance. Furthermore, the government should address supply-side shocks through targeted measures to boost domestic production and build buffer stock. Also, mitigating the adverse effects of climate shocks on output through increased investment in early warning systems, innovative infrastructure, and renewable energy should be prioritised. Security challenges should be tackled by strengthening law enforcement agencies, addressing the root causes of insecurity, and promoting community engagement.
