In Q1-24, the Nigerian economic activities decelerated, mirroring weak consumer demand as soaring inflation ate into real incomes.
The slowdown in economic growth also reflected sluggish business activities, with rising borrowing costs — spurred by the CBN’s monetary policy tightening — hindering business investments. However, the oil sector grew positively for the second consecutive quarter, buoyed by increased oil production compared to the previous year. Despite this, the sector’s growth was hampered by infrastructure decay and the divestment of onshore oil assets by International Oil Companies (IOCs). Nonetheless, the Nigerian economy is expected to remain resilient in 2024, with a growth print of 3.17% y/y in 2024E compared to 2.71% y/y in 2023FY, supported by a robust services sector and growth in the oil industry.
Additionally, consumer prices were on the rise for most of H1-24, fuelled by a potent combination of increased exchange rate passthrough, escalating energy costs, and acute food shortages. The surge in inflationary pressures prompted aggressive interest rate hikes, with the MPC raising the monetary policy rate cumulatively by 750bps to 26.25% in the first half of the year. The CBN’s monetary policy tightening, alongside its FX reforms and interventions, reduced naira volatility and lessened the exchange rate’s impact on domestic consumer prices, aiding a decline in monthly price pressures, though annual inflation remained high. Looking ahead, there is optimism for a downward trend in inflation in H2-24, which is expected to be aided by a high statistical base from the previous year and tamer naira volatility. In line with the projected disinflation in H2-24 and potential global interest rate cuts, the MPC is expected to institute another hike at the July meeting and hold the rate steady in subsequent meetings of the year.
On the currency front, the CBN’s efforts to stabilise the naira and reduce market distortions are evident in its sustained FX reforms, FX backlog settlement, and increased interventions in the FX market. These positive developments, coupled with elevated yields on naira-denominated assets, led to a rebound in capital inflows and increased FX market liquidity, thereby steadying the naira. Notably, the CBN resumed dollar sales to Bureau de Change operators, supporting FX supply to the retail market segment. However, the CBN’s weak reserves and increased geopolitical risks continue to pose downside risks to capital inflows and FX liquidity, thus supporting currency volatility.
Further improvements in FX liquidity are anticipated in H2-24, supported by a current account surplus (3.6% of GDP), the expected disbursement of the second tranche of the World Bank loan (USD750.00 million) and a likely Eurobond issuance (USD3.00 billion) in Q4-23, enhancing the CBN’s ability to support the naira. Additionally, reduced convertibility risk and potential global interest rate cuts are expected to boost Foreign Portfolio Investment (FPI) inflows, resulting in reduced volatility for the naira in the FX market throughout the year.
Regarding fiscal policy, we highlight that fiscal revenue was under pressure in H1-24 primarily due to the lag in oil revenue stemming from lower-than-expected oil production and a reinstated PMS subsidy. At the same time, higher personnel costs due to the FG’s general wage review of public servants and increased debt service payments scaled up government expenditure. With the FG suspending CBN’s deficit financing, it resorted heavily to borrowing from the debt market to meet its fiscal requirements, resulting in a notable increase in total debt. We anticipate fiscal revenue will continue to underperform, widening the fiscal deficit to NGN13.16 trillion in 2024E (or 5.0% of GDP). Additionally, we expect the government to introduce a supplementary budget as hinted by the President and as gleaned from a draft of the Accelerated Stabilization and Advancement Plan (ASAP) prepared by the finance ministry, which could further widen the fiscal deficit to as high as 7.5% of the GDP in 2024E. Furthermore, we expect the total debt to surpass the IMF threshold (50.0% of GDP) at 50.9% of GDP in 2024E, reflecting the impact of the depreciation of the naira on foreign debt and increased borrowing in the debt market.