• Global GDP growth remains fragile following the impact of the war in Ukraine. Both advanced and developing economies are being affected by the impact of the war. In addition, China’s zero COVID-19 policy, if sustained, will slow the country’s growth and therefore have ripple effect on consumer demand and exports, especially in view of China’s contribution to global output and trade.
   
• With inflation already causing a cost-of-living crisis in several countries, a recession could trigger protests and unrests among poor and low-income earners. Central Banks will therefore need to tread cautiously in implementing a tight monetary policy stance to minimize the likelihood of a recession.
   
• The performance of the global economy will be hinged on the war in Ukraine and its continued impact on global commodity prices and trade. Oil producers may continue to benefit from high commodity prices in 2023, while oil importers will bear much of the cost of energy inflation, which could further slow economic growth and recovery.
   
• Inflation has become a major source of concern for many countries. The war in Ukraine triggered a sharp increase in crude oil and gas prices, which led to high food prices and energy costs across countries. In the United Kingdom, inflation rate rose to 40-year high of 10.1% in July 2022. In Germany, inflation rate rose to 10% in September 2022, reaching an all- time high since German reunification.
   
• While government’s across countries are implementing fiscal support and subsidies to ameliorate the situation for businesses and citizens, these measures do not appear sufficient in taming inflation. Monetary authorities have also raised interest rates to tackle rising prices, and this raises the possibility of constraining aggregate demand growth, and therefore could trigger a recession in some countries.

• Although Nigeria experienced GDP growth above 3% in the first half of 2022, growth decelerated in the third quarter of the year. The services sector continued to be the driver of Nigeria’s growth, led by improved performance in trade and ICT. Other services sub-sectors such as transport and storage and finance & insurance posted strong growth in the third quarter.
   
• Deceleration of growth in the third quarter of 2022 points to the impact of inflation on aggregate demand. Nigeria’s agricultural sector posted weak output growth owing to rising food prices and low productivity. Similarly, the manufacturing sector experienced a decline of 1.9% in the third quarter of the year. The situation was complicated by the heavy floods, persistent foreign exchange challenges and infrastructure deficit, all of which will continue to constrain growth of these two sectors in subsequent quarters.
   
• For the oil sector, despite government’s effort to address oil theft, oil output is still low, at around 1 million barrels per day. Sadly, Nigeria is losing the opportunity to benefit from higher crude oil price due to oil theft. External reserves remain pressured, while dollar inflows are limited, although the demand for dollar via imports of goods and payment of services is on the rise. The oil sector presents a quick-win for the government to raise revenue and generate foreign exchange inflows, especially at a time when oil prices are high. The Nigerian government will need to intensity efforts to curtail oil theft and illegal bunkering.
   
• 2023 is an election year. This comes with some element of risks. Investors in the real sector and financial markets are expected to adopt a wait-and-see approach before making huge investments. We expect the economy to grow by 2.5% in 2023.

• Prices will remain elevated in 2023. Challenges associated with low productivity, congested ports, impact of the floods, foreign exchange scarcity and depreciation and limited power supply are not abating anytime soon. These factors, coupled with the hike in fuel prices in late 2022, will trigger inflation in 2023. 
   
• Despite the Central Bank’s Race to US$200 billion in FX Repatriation (RT200 FX Programme) which aims to diversify foreign exchange sources with a goal of attracting US$200 billion over the next 3 to 5 years, external reserves has trended downwards in recent times. Nigeria is still challenged with limited FX inflows and high demand for foreign currency to finance imports and service payments. Worst still, receipts from oil are dwindling due to oil theft, and monetary tightening in advanced countries are expected to trigger capital outflows from developing countries.
   
• With limited inflows from exports and low foreign investment inflows arising from a tough business environment, exchange rate is expected to remain pressured in 2023. Efforts to improve the business environment coupled with clarity on foreign exchange policies remain vital in attracting investment into the country, boosting external reserves and ensuring exchange rate stability. 

• Our expectation for exchange rate is an average of N450/US$ in the official market in 2023.

• The fiscal environment will continue to be constrained in 2023 owing to limited revenue. This implies a higher than budgeted debt figure and debt servicing cost in the year. In the proposed 2023 budget, debt servicing accounted for 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 as a share of revenue was 83% in the first eight months of 2022. This trend is expected to continue in coming quarters.
   
• The tightening position of the MPC is not surprising, given the consistent increase in inflation rate and heightened capital flight due to higher rates in advanced countries. The CBN has in recent times cited the growth in money supply as one of the drivers of inflationary pressure and also cited the need to close the gap between interest rate and inflation. These factors motivated aggressive rate hikes in late 2022.
   
• Nevertheless, aggressive tightening is concerning in view of Nigeria’s fragile economic growth. Mopping up credit could limit growth of loans to businesses. Beyond raising rates, the government’s fiscal and trade team will need to step-up actions to address the rising inflation. In addition, more attention should be given to the Federal Government’s aggressive accumulation of CBN Ways & Means. Efforts to securitize the Ways and Means and ensure more transparency need to be hastened.

• Going forward, with persistent inflationary pressure, widening fiscal deficit, and government borrowing, we anticipate that the MPR will remain high in the first half of 2023.

• In October 2022, the Central Bank of Nigeria (CBN) announced that higher denominations of the Naira will redesigned and introduced into the economy from December 15, 2022 while commercial banks were directed to return existing denominations to the CBN.

• The CBN noted that as at the end of September 2022, N2.73 trillion out of the N3.23 trillion currency in circulation, was outside the vaults of commercial banks across the country.

• The policy move was motivated by the need to get more currency into the banking system. The panic created by the policy increased speculative activities on the exchange rate, which has experienced rapid depreciation since the announcement of the policy.

• In addition, in December 2022, the CBN released further guidelines limiting over the counter cash withdrawal to N100,000 and N500,000 per week for individual and corporate organisations, respectively.

• Withdrawal above this amount will attract a 5% and 10% fee, respectively.

• There are several underlining reasons why this policy move significantly affected the exchange rate.

1. The short conversion window. Existing currencies shall cease to be legal tender from January 31, 2023. This short notice has heightened the demand for dollar in the parallel market.
2. Low level of confidence on the market, FX policies and the economy at large. Since the beginning of the year, investment inflow (portfolio, FDI and other investments) into Nigeria has remained far below inflows recorded in 2019 before the COVID-19 pandemic. With such low level of confidence, any policy move with the slightest level of uncertainty is expected to trigger a panic reaction from market players.
3. High demand for dollar in the official market with very limited supply. Demand for dollars for school fees payments, medical bills, tourism, importation of inputs and other goods are high across major commercial banks. Faced with limited supply, manufacturers, investors and individuals have resorted to the parallel market to purchase foreign currency. This, in addition to the new policy on Naira banknotes, creates pressure on the Naira across board.

• We hold the view that although the intentions of the policy are good, such a sensitive policy requires careful and detailed appraisal, especially in view of the economic realities of weak dollar inflows from investors, crude oil theft, huge pending dollar demand, rising inflation, flood, low financial inclusion, among other factors.

• We believe that if these realities were properly considered, perhaps, a careful approach would have been adopted to achieve the goals of the policy and at the same time prevent a free-fall of the Naira.

• On the over the counter cash withdrawal limits, although developments are still unfolding, such policy move is expected to create panic. It could also leave millions of individuals, particularly informal traders, stranded, when it becomes operational on January 9, 2023.

• All three manifestos noted the role of the private sector as the driver of the economy. Atiku Abubakar’s (AA) manifesto, however, placed a stronger emphasis on privatization of key enterprises, protection of and incentivizing private sector players, and breaking government monopoly in major areas such as rail transportation and power transmission. All three manifestos emphasized the importance of Public-Private Partnerships (PPPs) in delivering infrastructure.

Major Goals

• As expected, the manifestos are ambitious with many of their targets. The plan by AA to make Nigeria the 15th largest economy by 2030 would require increasing the dollar value of Nigeria’s GDP by more than 3 times in less than a decade. In our view, this is a huge feat to achieve as nominal GDP growth would need to average 16% per annum from 2023, assuming a stable exchange rate.
• Similarly, the goal to attain 10% GDP growth and reduce the number of unemployed to 11.9 million in 2026 are overly ambitious targets in the Bola Ahmed Tinubu (BAT) manifesto. Peter Obi’s (PO) manifesto, on the other hand, was not specific on some broad goals such as the number of jobs created, growth rate to be achieved and specific exchange rate target.

Fuel Subsidy and Deregulation of the Oil and Gas Sector

• For the oil & gas industry, the manifestos of AA and BAT argued for privatisation, liberalisation and deregulation of the industry in line with the Petroleum Industry Act. On petrol subsidy, the two manifestos promised a liberalization of the downstream sector. PO’s manifesto also promised to eliminate fuel subsidy as it has become a burden on government revenues. There are however no specific details on when and how subsidy will be removed/addressed in all three manifestos.

ICT, Trade and Industrialization

• AA’s manifesto recognized the role of technology in driving development in Nigeria. The plan to increase ICT penetration among the young people and ensure adoption of ICT in government operations is a positive move. In addition, the manifesto noted the need to promote intra-African trade and ensure Nigeria maximizes the benefits of the AfCFTA and increases its influence on the continent.
• On industrialization, the approach in AA’s and BAT’s manifestos are similar – creation of industrial hubs/clusters, special economic zones, industrial policies to foster growth in key sectors. BAT’s manifesto proposes the creation of an industrial development masterplan and providing tax credits to manufacturers. The manifesto highlighted the importance for each region to harness their potential and develop their capabilities across several products. The deployment of ICT was central across major reforms.
• Peter Obi’s manifesto emphasized leveraging the 4th industrial revolution to improve industrial production, ensure growth of MSMEs and transform transport infrastructure. The manifesto also extensively highlighted reforms to improve power supply and leverage Nigeria’s gas resources to develop the economy.  Micro, Small and Medium-scale Enterprises (MSMEs) were also deemed important in the manifesto.

Concluding Thoughts

• The manifestos of PO, AA and BAT are progressive and contain plans to strengthen the private sector as well as improve social welfare of Nigerians.
• While manifestos are extremely important, we suggest that voters should not only base their decisions on the candidates’ promises, as contained in the manifestos. Factors such as feasibility of each plan; performance track record of candidates; their public statements/interviews, and their willingness to engage stakeholders and reform the civil service and government institutions should also be given important consideration.