Doubts raised over Nigeria’s commitment to policy shift

The Nigerian government is failing to shrug off its interventionist tendencies, months after a shift to orthodox economic policy, London-based Capital Economics has said.

The recent policy shift in Nigeria will push inflation towards 30 percent over the coming months, bringing slower growth over next two years, the economic research firm said. 

“We remain concerned, though, that officials are struggling to break from the interventionist and distortive policies of the past,” it said in a note. 

It said the slowdown in GDP growth levelled off in the second quarter of the year but the latest surveys suggest that activity has struggled in recent months as policy moves, notably the removal of fuel subsidies and a devaluation of the naira back in May, have pushed inflation up further.

“President Tinubu’s flagship policy reforms were initially welcomed. Since then, though, there’s been growing evidence that the government and the central bank are failing to shrug off their interventionist tendencies,” Capital Economics said.

For one thing, the government has shown a preference to spend rather than save any fiscal windfalls from the reforms, it said.

It pointed out that amid rising political pressure, officials have stepped in with short-term palliatives to combat the rising cost of living, including “a potentially expensive choice to refrain from further petrol price increases”.

The firm said that while fiscal support may cushion the blow to households, it would leave Nigeria with persistent large budget deficits. 

“A saving grace is that much of Nigeria’s public debt is in local currency and a period of high inflation will help to erode debt this year and next. From 2025, however, we expect the debt-to-GDP ratio to return to an upwards path,” it said.

Capital Economics noted that the gap between the naira’s official and parallel markets has widened again as the Central Bank of Nigeria has stepped in to prop up the currency.

It said continued FX intervention would only cause macro imbalances to build again and prevent Nigeria’s balance of payments from being placed on a sustainable footing.

It said: “Admittedly, global oil prices have rebounded recently and should provide a modest boost to Nigeria’s terms of trade over 2024. And, as the Dangote refinery comes online, this will reduce Nigeria’s fuel import bill. Even so, the gains from high oil prices will continue to dampened by low oil output – ongoing insecurity and years of underinvestment mean that production will remain substantially below its OPEC+ quota. Consequently, the current account will remain in deficit. 

“Naira weakness and second-round effects from higher fuel prices will see inflation rise further towards 30 percent y/y over the coming months. This will put pressure on the CBN, which delivered an underwhelming hike at its last meeting, to crank up monetary tightening. All eyes are on newly-confirmed CBN Governor Olayemi Cardoso and whether he will be able to provide fresh impetus to the policy shift and reestablish the institution’s inflation-fighting credentials. As things stand, we envisage 300bp of hikes, to 21.75%, by year-end, with tightening continuing into 2024.”

Capital Economics expects GDP growth to come in at just 2.5 percent this year and next.