Nigeria

major macro economic indicators

* Public debt guarantee included

RISK ASSESSMENT

A pivotal period for President Tinubu's ambitious reforms

Growth should remain robust in 2025, mainly thanks to the oil sector, whose real weight in the economy far exceeds its direct contribution to GDP (5.4% of GDP in 2023), since neither the theft of hydrocarbons, nor their clandestine extraction, nor the knock-on effects on the economy as a whole (foreign currency inflows, budget revenues) are taken into account. However, in June 2024, crude oil production only reached 1.28 million barrels per day (mbd), well below the 1.5 mbd quota set by OPEC for 2024 and the pre-Covid level of 2.1 mbd. Since 2020, oil production has been hampered by a combination of factors such as onshore vandalism, offshore piracy, aging infrastructure coupled with under-investment due to the belated passing of the Petroleum Act in 2021 and the withdrawal of foreign companies from the Niger Delta. The adoption of three additional decrees in 2024 should instill confidence and stimulate production in 2025. They include tax incentives for gas, reform of procurement procedures and deadlines, and local content reform to regulate intermediate entities. Last but not least, enhanced security is also crucial to improving oil production. While Nigeria is Africa's leading oil producer, it is also a major importer of petroleum products (33% of imports in 2023). After years of shutdown, two state-owned refineries are due to resume operations in 2024 according to the national oil company (NNPC). In addition, the new Dangote mega-refinery, due to come on stream in 2024, should reach a capacity of 550,000 barrels per day or 85% of its final capacity by the end of the year. The aim is to put an end to fuel imports, thereby reducing foreign currency consumption and import-related transport costs. However, the success of the project faces challenges: uncertainty surrounding NNPC crude deliveries is prompting Dangote to opt for imports. In addition, disputes with the government, which is opposed to the creation of a monopoly, could slow the company’s efforts.

In the non-oil sector, the electricity sector is failing to meet domestic demand. The capacity of the transmission and distribution network is inadequate, infrastructure maintenance is lacking, and gas supply is problematic. Moreover, theft and under-pricing discourage mainly private producers from investing further. The completion of the AKK gas pipeline linking the cities of Ajaokuta (in the South), Kaduna (in central Nigeria) and Kano (in the North), which is scheduled for 2025, should boost electricity production by 67% thanks to the additional 3.6 gigawatts, and promote the industrial sector. However, even with the planned extra capacity, the electricity supplied by private generators (22 million for an installed capacity of 42 gigawatts) is immeasurably greater than that provided by the power grid, albeit more expensive due to the high price of imported fuel. Furthermore, following the discovery of lithium deposits, Nigeria plans to develop its mining sector (0.9% of GDP), notably with the production start-up of the “Jupiter Lithium” mine in 2025. Services are another pillar of the Nigerian economy (56.2% of GDP) and will remain robust in 2025 thanks to the resilience of the information and communication (17% of GDP) and banking (5% of GDP) sectors. Last, production in the agricultural sector (25% of GDP and 45% of the workforce) remains insufficient due to insecurity, lack of infrastructure and meteorological accidents, resulting in significant imports of wheat, rice, sugar, fish, etc. (USD 2.13 billion in 2023 and 11% of merchandise imports). Private consumption (64% of GDP in 2023) is expected to pick up mildly on back of anticipated slight disinflation. However, investment (23.8% of GDP), especially private investment, will bear the brunt of monetary tightening.

President Tinubu's key economic reforms include ending fuel subsidies and aligning official and parallel exchange rates. The abolition of fuel subsidies in May 2023 caused prices to triple at the pump and drove up the cost of running generators, leading the government to backtrack in July 2023, and partially reintroduce the subsidy, which is due to end in 2025. As for the unification of exchange rates, this led to devaluations of the naira in June 2023 (-44%) and January 2024 (-39%), which were reflected in the prices of foodstuffs, which are largely imported (+40% year-on-year, in June 2024). These factors explain Nigeria’s double-digit inflation. In order to stabilise the naira and curb inflation, the Central Bank of Nigeria (CBN) extended its monetary tightening policy in 2024, with four consecutive increases in its key rate, taking it to a record 26.75% in July 2024. The CBN has no plans to lower its rate as long as inflation exceeds its target of 6-9%. Despite the action, inflation is expected to fall in 2025 thanks to the delayed effects of monetary tightening, the abandonment of the monetary financing of public deficits and a more resilient naira. The commissioning of the mega-refinery should reduce foreign exchange consumption, helping to strengthen the exchange rate. Furthermore, in July 2024, the CBN suspended customs duties on certain foodstuffs for 150 days to limit inflation on imported products.

Consolidating public finances

The reforms undertaken to consolidate public finances will do little to reduce the public deficit in 2025. Despite diversification efforts, revenues (9.4% of GDP in 2023) remain highly dependent on oil revenues (2.9% of GDP in 2023, or 30% of public sector revenues). However, they should benefit from an increase in oil production in 2025. Non-oil revenues will also rise, thanks to an increase in VAT from 7.5% to 10% and a broadening of the tax base. Expenditure (13.6% of GDP) will be rationalised. The partial resumption of fuel subsidies have weighed heavily on public accounts in 2024 (2.8% of GDP), but they should cease in 2025. That said, interest on debt servicing (3.3% of GDP and 35% of consolidated public revenues in 2023) remains high, compared with staff remuneration (1.9% of GDP) and capital expenditure (1.9% of GDP). By 2025, the government should cease to have its deficit financed by the central bank. It will opt for external and domestic financing, mainly through bond issues, despite high interest rates. Public debt is 35%-denominated in foreign currencies and limited to the federal level, with a domestic share of 62% and an external share of 38%. External debt (16% of GDP) is held by multilateral creditors (50%), bilateral creditors (14%) and bondholders (36%). In August 2023, Nigeria took out a USD 3.3 billion loan against future hydrocarbon production with Afreximbank to stabilise the naira. It is seeking a similar loan, this time to strengthen NNPC's finances and enable investment in the sector. Nigeria is due to repay a USD 1.1 billion eurobond in November 2025.

As in 2024, the current account should just about break even in 2025. Trends in the trade balance will depend on global oil price trends. Nigeria’s trade balance should remain close to breakeven, with imports (14% of GDP in 2023) declining due to the ramp-up of the Dangote refinery and sluggish domestic demand which has cooled on back of naira depreciation. The services deficit (2.5% of GDP in 2023) will subsist owing to transport costs generated by the oil and gas sector, as will the income deficit on back of interest payments on foreign debt (0.6% of GDP). These deficits will be offset by expatriate remittances (5.7% of GDP), mainly from the US, Canada and the UK, encouraged by the unification of exchange rates. Reforms, notably of the foreign exchange system, will struggle to attract foreign portfolio investment, let alone FDI (1.2% of GDP in 2023). Foreign exchange reserves are improving and stood at an equivalent of 11 months' imports in July 2024.

The presidential party is weakened by the poor social and security climate

Since coming to power in March 2023 with just 36.6% of the vote, President Bola Tinubu (All Progressive Congress Party) has launched a series of reforms to restore public finances and stimulate growth in the medium term. The abolition (second attempt planned in 2025) of the costly fuel subsidy will correct the distortions caused (rent-seeking behaviour, smuggling and corruption), and the unification of the exchange rate will stimulate exports hitherto monopolised by the oil sector, while eliminating favoritism in the granting of foreign currency at subsidised rates. However, the project has come up against the population’s growing discontent, which is faced with high inflation and its corollary, rising poverty. In July 2024, the government endorsed a new minimum wage from 30,000 to 70,000 naira (around USD 44) per month, was approved by the government and the main unions, ending months of stalemate and threats of a general strike. However, the wage-earning population that will benefit is small and is not representative of the poorest strata. Social protection for the most disadvantaged should be developed in tandem, but its implementation is hampered by a lack of public action. Also, massive demonstrations occurred at the beginning of August 2024 that were violently repressed by the security forces, causing a number of deaths. In these conditions, the introduction of reforms has tarnished the image of the presidential party, which holds a majority in the Senate (59 out of 109 seats), but has failed to win a majority in the House of Representatives (159 seats out of 360). The government also has to deal with a worrying internal security situation which primarily affects the rural population. The country is faced with terrorism, separatism, banditry (with repeated mass kidnappings), piracy and conflicts between farmers and herders. The North-East is particularly affected by attacks from the jihadist group Boko Haram and the Islamic State in West Africa (ISWA), while the South-East is affected by separatist attacks. The government must also combat the criminal activities that are disrupting oil production, with nearly 400,000 barrels reportedly diverted daily in 2023. The Niger Delta is particularly hard hit. The government is launching military operations in response to oil theft and illegal refining. Last, arms, drugs, gold and fuel smuggling activity is rampant at the borders.

Last updated: July 2024