Nigeria Macroeconomic Update 2022 Q3

October 17, 2022/FSDH Research

Kindly click here to download the full report on Macroeconomic Update 2022 Q3. Below is the summary:

Highlights

GDP Growth inches upward but the economy feels the heat of rising Inflation

• Nigeria’s GDP growth has continued on a positive trajectory due to improvement in the non-oil sector. Inflation rate, however, remains a major concern.
• Inflation rate rose to 20.5% in August 2022, from 19.6% in the July.
• Food prices continued to trend upwards owing to a depreciating currency and high production costs.
• Key factors such as insecurity, floods and election spending will keep inflation rate high in coming months.

Pressure mounts on External Reserves and Exchange Rate

Despite high crude oil price, Nigeria’s external reserve faced pressure since the second quarter of 2022 amidst lower inflows. Foreign investment inflows was subdued owing to the tough business climate while crude oil theft limited foreign exchange inflow from crude oil. With this, the CBN limited its intervention in the foreign exchange market, triggering a depreciation of official exchange rate from ₦415/US$ in July 2022 to ₦434/US$ in October 2022. Dollar demand pressure also led to a widening of the gap between rates in the parallel and official markets.

Investment climate remains constrained but trade surplus improves in H1 2022

• Foreign investment inflow is still constrained – total inflows was around US$1.5 billion in the first and second quarters of 2022. This is far below the US$5.85 billion inflow recorded in 2020Q1.
• Structural problems such as inadequate infrastructure, foreign exchange scarcity as well as insecurity influence the inflow of investments into the country.
• In the first two quarters of 2022, the value of goods imported into Nigeria declined, from ₦5.94 trillion in 2021Q4 to ₦5.9 trillion in 2022Q1 and ₦5.44 trillion in Q2.
• The value of exports, on the other hand, trended upwards. Higher crude oil price as a result of the war in Ukraine was responsible for this increase, despite challenges associated with crude oil output.
• Given these trends, Nigeria recorded a trade surplus in the first half of 2022.

President Buhari presents the 2023 Proposed Budget

Key Budget Assumptions

• Oil price benchmark – US$70 per barrel;
• Daily oil production estimate – 1.69 million barrels (inclusive of Condensates of 300,000 to 400,000 barrels per day);
• Exchange rate – ₦435.57 per US Dollar;
• Projected GDP growth rate – 3.75%
• Inflation rate – 17.16%

Data Source: Budget Office of the Federation

The MPC tightens further as inflationary pressure amplifies

With the persistent increase in the inflation rate, the CBN Monetary Policy Committee (MPC) adjusted the Monetary Policy Rate (MPR) for the third time in three consecutive meetings in 2022.

In the meeting held in September 2022, the Committee unanimously voted to raise the Monetary Policy Rate (MPR) and the Cash Reserve Requirement (CRR), while other parameters were retained. Summarily, the MPC voted as follows:

• Increase the MPR to 15.5% from 14% in the previous meeting in July 2022;
• Retain the asymmetric corridor of +100/-700 basis points around the MPR;
• Increase the CRR to a minimum of 32.5% from 27.5%; and
• Retain the Liquidity Ratio at 30%.

Key factors that influenced the MPC policy decisions included:

• Aggressive inflationary pressures and associated weakening of the global economy;
• Widening negative real interest rate gap and worsening financial market conditions; and
• Capital outflows.

Data Source: Central Bank of Nigeria, National Bureau of Statistics

Analyst Views on the economy

Nigeria’s GDP growth has remained strong in 2022, driven mainly by the non-oil sector. Growth has been driven by improved consumer spending in the service sectors. Sub-sectors such as trade, transport, finance and ICT have played key roles in driving growth, although their impact on quality job creation and living standards are unclear. Developments in the oil sector show that Nigeria’s oil production dropped to 1.1 million barrels per day in August 2022 from 1.2mbpd in June, according to OPEC. This lower oil production is not only affecting government revenue but also GDP growth as the oil sector has been in recession since the third quarter of 2020. With the recent efforts by the government to curtail oil theft and illegal bunkering, official oil output figures are expected to improve marginally, although the revenue gains may be limited as oil prices trend downwards. Beyond oil theft, petrol subsidy is massively draining the government’s financials. The government had planned to remove subsidies in 2022 but this was suspended due to rising inflation and worsening economic conditions. Given the fast-approaching 2023 general elections, this burden of subsidy will likely be passed on to a new administration as the chances to make critical reforms are slimmer in an election year. The implication of this is more borrowing to finance recurrent expenditure and subsidy payments given the slow growth in revenue. Structural problems are not giving way anytime soon in Nigeria. Inadequate infrastructure, poor power supply, limited access to affordable finance are common problems faced by businesses, resulting in a less competitive business environment. In addition to these problems, insecurity and foreign exchange challenges are prevalent and are largely responsible for the upward trending inflation rate, which exceeded 20% in August 2022. The extent to which the economy can grow rapidly and become inclusive relies a lot on the government’s ability to address these problems going forward. Finally, the proposed 2023 budget does not present any significant hope to the myriad of challenges facing the country. Debt servicing gulps about one-third of the total expenditure and this share is likely to be higher at the end of 2023 when actual figures are released for several reasons. First, interest rates are trending upwards. Second, revenue will likely underperform leading to more borrowing to cover the gap. Thus, only about a quarter of total expenditure will be spent on capital projects in 2023. Already, figures from the budget office show that debt servicing exceeded revenue by 19% in the first four months of 2022. This trend is expected to continue in coming quarters. Why Social Inclusion Should Matter    Data Source: National Bureau of Statistics Data Source: National Bureau of Statistics, World Bank Nigeria Poverty Assessment Report Why despite these comprehensive plans and initiatives, exclusion persists in Nigeria. Limited scope and scale of social programmes: Many of the government-led intervention programmes do not cater for the majority of the poor and vulnerable Nigerians due to weak social infrastructure, limited funding and manpower requirements. Limited cooperation among government agencies and across the different levels of government: Some government agencies work in silos and there is often limited partnerships between federal and state governments in designing and implementing social programmes. Programmes, initiatives and agendas are often not synced with existing national and thematic plans and are not viewed as components towards achieving the overarching goals. Lack of effective monitoring and evaluation: Little is known about the impact of these social programmes on broader macroeconomic indicators such as poverty, unemployment and overall living standard. The scorecard for the NSPP is yet to be operational. An effective social inclusion strategy that is well implemented can improve income, build citizens trusts, expand the reach of government, drive financial inclusion and reduce conflict. The revised National Social Protection Policy (NSPP) aims to establish a National Social Protection Council (NSPC) to be domiciled in the Ministry of Budget and National Planning (MBNP) to coordinate the NSPP. We believe that part of the functions of the Council should be to spearhead the creation of an inclusion strategy and follow-through on its implementation. A monitoring and evaluation framework also needs to be developed. Beyond social inclusion strategy, a sound macroeconomic environment is important to limit the impact of both domestic and external shocks on citizens. Ensuring foreign exchange policy clarity, taming inflation and addressing crude oil theft are among key actions that should be implemented.