By Cordros Research
The domestic macroeconomic narrative did not change much in 2022, given the government’s lack of will to institute the necessary reforms to propel the economy forward. While domestic economic activities appear more resilient than envisaged, inflationary pressures remain entrenched, pressuring consumer wallets. Similarly, FX pressures persisted, and foreign investments remained frail. In the words of the World Bank, “amid heightened risks, the government has kept a ‘business-as-usual’ policy stance that hinders prospects for economic growth and job creation”. Amidst all these, the socio-economic conditions worsened, with 63.0% (or 113.00 million) of the population living in multidimensional poverty, according to the National Bureau of Statistics (NBS). At the same time, the unemployment rate remains high, exacerbated by an unfriendly business environment.
Although the Russia-Ukraine conflict compounded the domestic inflation woes, we highlight that price pressures were also self-inflicted in the form of policy distortions such as (1) trade restrictions, (2) lack of flexible FX framework, and (3) insincere monetary policy actions. On (3), the CBN continues to increase the key policy rate but maintains its monetary financing of the FGN’s fiscal deficits and credit intervention programs.
The FGN’s fiscal operations have been the same as in the last few years. On the one hand, the government continues to defer the decision on fuel subsidy removal and consistently increases its aggregate spending amidst a dwindling revenue profile. On the other hand, we like that the government continues to use the annual Finance Act to boost non-oil revenues. However, we think more efforts are needed to expand the current tax net so as not to ‘over tax’ the existing tax bracket, potentially reducing business flows and subsequent government revenues.
Going into the year 2023, we think a complete removal of the subsidy on PMS while consumer prices remain elevated could further aggressively stoke inflationary pressures, lead to massive protests, and ultimately compound economic woes. Indeed, Fitch ratings noted that the potential removal of fuel subsidies would reduce hard-currency demand but could fan inflation even higher, keeping the naira under pressure. Accordingly, we tilt towards a phased removal of PMS subsidies, similar to the phased increases of electricity tariffs. That said, the fiscal authorities need to come to terms with the fact that solving the lingering elevated price pressures rests more on them, given that supply constraints primarily drive the current consumer price increases.
Similarly, we do not see the current CBN management devaluing the currency, barring a new market-oriented fiscal administration. However, for credible policy framework and reform, we lean towards devaluing the currency at the official FX markets and improving flexibility and communication in the FX framework. Without flexibility, it is only a matter of time before the FX misalignments build back up, leading to more pressures to implement another outsized currency devaluation. Accordingly, we believe a currency devaluation followed by periodic communications allowing the local currency to depreciate in line with fundamentals will be tenable as power changes hands in 2023. On the fundamentals, the CBN can enable the currency to depreciate yearly based on the external balance assessment after considering inflation, net foreign assets, current account gap, and growth. Clear communication and commitment to this framework will be crucial to bringing back credibility and significantly reducing FX volatility.
For fiscal operations, we highlight that majority of the government spending is on personnel costs & overheads (29.7% of total expenditure) and debt servicing (30.8% of total spending), which are sticky, making it difficult to reduce the fiscal deficit amidst a low revenue profile. Also, rationalising the public workforce with no private sector absorption could compound the unemployment headaches in the country. Thus, while we believe most of the expense items are sticky, removing duplicated projects and cutting wasteful spending would go a long way in reducing the cost of governance and narrowing the fiscal deficit in the medium to long term. Moreover, freezing new employment in the public sector and creating an enabling business environment could help improve the country’s employment situation while relieving the government of pressures to absorb unneeded labour into different parastatals.
Overall, we expect the growth momentum to be sustained in 2023FY, slightly higher than 2022E levels, primarily due to our expectation of the oil sector’s performance turning positive after three consecutive years of negative performance. Our oil sector’s positive outlook follows the low statistical base effects in 2022E and the government’s efforts at tackling crude oil theft and pipeline vandalism. Elsewhere, we expect the non-oil sector to maintain its resilience, although growth is likely to come lower than 2022E levels given the trifecta impact of (1) tighter credit conditions, (2) flood-induced slower pace of Agriculture GDP growth in H1-23, and (3) higher inflationary pressures. On a balance of factors, we expect the oil and non-oil sector to grow by 12.40% y/y and 2.45% y/y, respectively, in 2023FY. Sequentially, we expect the Nigerian economy to grow by 3.02% y/y in 2023FY (2022E: +2.72% y/y).
Aside from looking at the GDP expectation using our estimates for performance across the different sectors of the economy, we think 2023FY growth will be undermined by the impact of some monetary and fiscal decisions undertaken in 2022. Elsewhere, high-interest rates in line with the CBN’s tight monetary policy stance could suppress activities in interest rate-sensitive sectors, including the manufacturing, trade, construction, and agriculture sectors.
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