In its latest report titled “Nigeria Economic Outlook: Navigating Economic Reforms,” PricewaterhouseCoopers (PwC) provides an in-depth analysis and projection for Nigeria’s economy in the second half of 2024.

The report highlights modest improvements driven by sustained policy reforms, while also addressing ongoing economic pressures and fiscal sustainability concerns.

PwC forecasts that Nigeria’s GDP will grow marginally by 2.9% by the end of 2024. This growth is primarily attributed to the sustained policy reforms being implemented by the government.

However, the report also warns that the growth prospects may be limited by elevated economic pressures.

In terms of inflation, PwC projects a slight decline to 29.5% by year-end: “GDP may grow marginally by 2.9% on the back of sustained policy reforms although growth prospect may be limited by elevated economic pressures,” the report says.

This projection balances the effects of recent reforms, policy actions, external pressures, and fluctuations in food prices. Despite this anticipated decline, fiscal sustainability remains a concern, as debt servicing costs are expected to finance 89% of the budget deficit through new borrowings.

Key Reforms and Their Impacts

Deregulation of PMS

One of the significant reforms highlighted in the report is the deregulation of PMS (Premium Motor Spirit). In May 2023, the government removed PMS subsidies, resulting in an increase in prices from N187 to N630. This move aims to reduce government spending and redirect resources to other critical sectors. However, the IMF has reported that PMS is still sold below the market price, effectively maintaining a partial subsidy.

Debt Reduction and Restructuring

To address the country’s debt burden, the Debt Management Office (DMO) restructured N4.9 trillion of ways and means advances at a reduced interest rate of 9%, down from 21%, over a 40-year period.

This restructuring has improved fiscal discipline and increased government savings. The report highlights that improved fiscal discipline from refinancing debt service obligations has led to significant savings for the government.

Tax System and Revenue Generation

The report notes that major tax reforms are underway to harmonize tax laws and enhance revenue collection. Some recommendations include new national tax and borrowing policies, tax exemptions for 95% of the informal sector, and focused enforcement targeting the middle class and elites. These measures aim to create an efficient and equitable tax system, thereby boosting revenue generation.

Liberalization of the Foreign Exchange Market

In June 2023, the Central Bank of Nigeria (CBN) liberalized the foreign exchange market to achieve price discovery. This move included the clearance of FX backlogs and the removal of restrictions on 43 banned items from accessing FX. Additionally, the CBN has gradually increased the Monetary Policy Rate (MPR) to 26.25% as of April 2024, up from 18.5% in June 2023, to address inflationary pressures and ensure price stability.

Power Sector Reforms

Reforms in the power sector include the introduction of a market-reflective tariff of N225/kWh for customers receiving a minimum of 20 hours of daily electricity supply. This is part of the Electricity Act aimed at tackling Nigeria’s energy challenges, which result in annual economic losses of $26 billion. The National Electricity Regulatory Commission (NERC) has introduced these tariffs to pave the way for a more sustainable and efficient power sector.

Banking Sector Reforms

The CBN has also increased capital requirements for banks to support economic growth. Commercial banks with international licenses now require N500 billion, national banks need N200 billion, and regional banks require N50 billion to operate. These measures are designed to strengthen the banking sector and ensure its ability to support economic growth.

Oil and Gas Sector Reforms

The government has issued three executive orders covering tax incentives, exemptions, and local content compliance requirements in the oil and gas sector. These orders aim to streamline the contracting process, reduce cycle time to six months, and enhance local content requirements without compromising cost efficiency.

Agriculture Sector Initiatives

To combat food inflation and enhance production, the government has embarked on initiatives such as dry season farming and the distribution of rice, fortified crops, seeds, fertilizers, and improved farmland security. These measures aim to boost agricultural production and stabilize food prices.

Positive Outcomes from Reforms

The report highlights several positive outcomes from the implemented reforms. FAAC (Federation Account Allocation Committee) disbursements increased by 91.3%, from N976 billion in May 2023 to N1.87 trillion in April 2024. This increase was driven by distributable VAT, statutory allocation, and exchange rate difference revenue.

Fitch Ratings revised its outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from Stable to Positive. This revision was attributed to exchange rate and monetary policy reforms, reduction in fuel subsidy payments, and the scaling back of government financing by the CBN.

Oil exports grew by 200.9% to N15.5 trillion in Q1 2024 from N5.15 trillion in Q1 2023. Non-oil exports also saw significant growth, increasing by 38.5% to N1.8 trillion in Q1 2024 from N1.3 trillion in Q1 2023. Foreign direct investments (FDI) grew by 114% from $86 million in Q2 2023 to $184 million in Q4 2023, while foreign portfolio investments (FPI) surged by 190%, from $106.9 million in Q2 2023 to $309.8 million in Q4 2023.

The Challenges

Despite these positive outcomes, the report also identifies significant challenges and unpopular developments resulting from the reforms. Inflation rose from 22.41% in May 2023 to 33.95% in May 2024, driven by increases in food, utilities, and transportation costs. Public debt grew by 144.1% to N121.67 trillion in Q1 2024 due to naira devaluation and the securitization of ways and means.

Government spending remains high, with recurrent expenditure averaging 84% of total expenditure between 2015 and 2023. Limited revenue-generating capacity has resulted in revenue as a percentage of spending being 65% between January and September 2023. Total revenues as of September 2023 exceeded 2022 revenues by only 7%, driven by an increase in net oil revenues (82%) and non-oil revenues (4%).

Experts’ Insights

PwC emphasizes the importance of continued reforms and strategic measures to stabilize Nigeria’s economy while addressing immediate economic challenges.

According to the report, “The continuous rise in debt from issuances of debt instruments without commensurate rise in revenue-generating investments may crowd out private investment and worsen the country’s debt profile in the long-term.”

On the inflation front, PwC notes, “The rise in inflation driven by food (40.6%), utilities (29.6%), and transport (25.6%) continues to erode the purchasing power of households and businesses. CBN’s reform actions have not yet tapered the continuous rise of headline inflation, which was 33.95% in May 2024.”

Furthermore, PwC highlights the impact of high borrowing costs on businesses, stating, “Although the rise in MPR may attract more investors to the fixed-income market due to higher yields, it has negatively impacted borrowing costs for businesses.”

Recommendations for the Government

PwC advises the government to focus on three key areas: structured and focused policy, policy flexibility, and mitigation measures.

Structured and Focused Policy

The government should prioritize macro stability by addressing security, social, and economic pressure points, particularly inflation and exchange rate pressures. Mobilizing capital to drive growth through market-focused policies and intensifying investment promotion is essential. Short- and long-term sectoral bets should focus on exports, domestic substitution, and job creation.

The government must drive fiscal prudence by optimizing spending on capital projects with the highest returns on investment, rationalizing public service spending, and improving revenue diversification and collection efficiency.

Policy Flexibility

The report emphasizes the need for policy flexibility, advising the government to decide when and how to introduce, defer, sequence, or stagger different policies based on current economic and social conditions.

Scenario planning should be adopted before implementing any major economic reform to avoid unwarranted policy reversals. Contingency plans should be embedded within economic policies during the planning phase.

Mitigation Measures

To support businesses and households affected by economic pressures, PwC recommends implementing intervention funding schemes, such as low-interest loan programs or credit guarantees.

Social safety net programs, such as unemployment benefits and workforce development programs, should be created to absorb job losses from business exits due to economic pressure points.

The government may also need to reconsider any planned increases in selected taxes to alleviate financial challenges and unlock liquidity for impacted businesses.