Rising inflation hobbles GDP growth, economic recovery


Nigeria’s economic managers may need to work extra hard to avert a recession or a significant slowdown of growth in 2023, owing to spiralling inflation, high energy cost, monetary policy tightening, and weakening consumer demand.

Last week, the Lagos Chamber of Commerce and Industry (LCCI) predicted a period of economic downturn, given the numerous challenges confronting the Nigerian economy.

The President of LCCI, Michael Olawale-Cole, who stated this during the chamber’s quarterly state of the economy press conference in Lagos, said with recent projections from the International Monetary Fund that one-third of the world economy would be in recession, Nigeria, though not on the list, might lead to a recession for millions of Nigerians “if we bring into focus the latest multidimensional poverty index.”

This is coming at a time the World Bank Group has once again, in its Global Economic Prospects report published last week, lowered its growth projection for Nigeria’s economy, citing a weakened oil sector as its primary reason.

The latest projection came barely three weeks after the Bank lowered its economic projection for Nigeria’s economic growth from 3.8 per cent to 3.1 per cent.

According to the projection, Nigeria’s economy will further decelerate to 2.9 per cent in 2023 and is not expected to record any growth in 2024. Specifically, the lender said Nigeria’s growth weakened to 3.1 per cent in 2022 and would further decelerate to 2.9 per cent this year.

The Washington-based bank said growth momentum in the non-oil sector was likely to be restrained by continued weakness in the oil sector, which would negatively impact Nigeria’s oil-based economy.

The Bank noted that a number of factors, such as low oil output, insecurity, petrol subsidies, forex scarcity, among others, hamper growth in the country.

The report read, “Growth in Nigeria—the region’s largest economy—weakened to 3.1 per cent in 2022, a 0.3 percentage point downgrade from the June projection. Oil output dropped to 1 million barrels per day, down by over 40 per cent compared to its 2019 level, reflecting technical problems, insecurity, rising production costs, theft, lack of payment discipline in joint ventures, and persistent underinvestment, partly because of the diversion of oil revenues to petrol subsidies, estimated at over 2 per cent of GDP in 2022.

“A strong recovery in non-oil sectors moderated in the second half of the year as floods and surging consumer prices (annual inflation surpassed 21 per cent for the first time in 17 years) disrupted activity and depressed consumer demand. Persistent fuel and foreign exchange shortages, with the naira depreciating by over 30 per cent last year in the parallel market, further dampened economic activity.”

The Bank further noted that the poor economic growth of 2.9 per cent in 2023, will be barely above population growth, which is often said to be around 2.5 per cent in previous reports.
The report, which was prepared by the World Bank’s Nigeria Development Update, had said that Nigeria’s economy needs to grow faster to reduce poverty.

The report noted that inflation had surged to 21.1 per cent in October 2022, pushing as many as five million more Nigerians into poverty since the start of 2022.

It further stated that despite higher oil export revenues, official reserves have fallen, and the currency market is severely distorted, undermining the business environment and investment. It warned that the weaknesses in the macroeconomic policy framework are suppressing growth and making Nigeria more vulnerable to shocks.

“Nigeria has a choice to implement critical macroeconomic and structural reforms that can reduce crisis vulnerabilities and increase growth. Doing so will lift per-capita incomes, sustainably reduce poverty and deliver better life outcomes for many Nigerians.

“Urgent business-unusual choices are needed to avoid a scenario in which up to 80 million working-age Nigerians do not have a full-time job by 2030 and up to 23 million more Nigerians could be living in extreme poverty,” said Shubham Chaudhuri, World Bank Country Director for Nigeria.

Hard landing

At the quarterly press conference, the President of LCCI, Michael Olawale-Cole,said, “As we enter the year 2023, the global economy, beyond the mounting uncertainties, may continue to face a confluence of challenges. From persistently high inflation and aggressive global monetary policy tightening to the continued disruptions caused by the Russia-Ukraine war and the energy crisis, weak consumer demand, and political upheavals, our projected outlook remains a hard landing.

“With several shocks suffered by many economies over a more significant portion of 2022, various projections and analyses of economic conditions across regional blocs point to the likelihood of a recession or a significant slowdown of growth in 2023 due to spiralling inflation, high energy cost, monetary policy tightening, and weakening consumer demand. Global growth, though positive, slowed down by about 50 per cent between 2019 and 2022.”

Noting that Nigeria’s inflation statistics reached a 17-year high in November at 21.47 per cent, Olawale-Cole said with the persisting war in Ukraine and high spending by the government on the forthcoming general elections and census, the chamber foresees a further rise in the inflation rate in the short term.”

He stated further, “We reiterate our position on the rising inflation that a rate hike will not tame the increasing inflation without complementary targeted financing of critical sectors like agriculture, power, energy, and defence.

“The government must invest more in boosting supply and cushioning the cost of production. Though the planned removal of fuel subsidies may cause inflation to rise in the short term, it remains the best economic decision to reduce our unsustainable debts. We expect the government to roll out cushioning policies before the possible removal later in the year.”

Imperative reforms for 2023

In its Economic Review for 2022 and Agenda for 2023, the Centre for the Promotion of Private Enterprises (CPPE] noted that to unlock growth and investment in 2023, the government must undertake some urgent reforms.

‘’The enactment of the Petroleum Industry Act [PIA] was a major step towards the reform of the oil gas sector.  It promises to transform the sector through the creation of a legal and regulatory framework that would inspire much higher levels of investors’ confidence, CPPE stated.

‘’But we need to see greater commitment to the implementation of the PIA. The deregulation of the petroleum downstream sector is a major economic reform imperative.  This is inevitable if we must unlock investment in the sector and put an end to the perennial fuel scarcity and the monopolistic structure of the sector.

‘’There is a need to also consolidate the power sector reform.  An enabling environment must be created to sustain current private sector investment in the sector and attract new private capital to the electricity sector. Urgent reforms are vital with respect to electricity tariff, metering and deepening of energy mix. We need robust incentives [fiscal and monetary] to boost private investment in renewable energy.

‘’We should reform the budget and appropriation processes to prioritise infrastructure financing and human capital development.  This would boost productivity and competitiveness of the economy. Adoption of these reform initiatives would guarantee progression towards fiscal consolidation, reduction in fiscal deficit, diminishing need for borrowing and abating debt service burden.’’

Resetting monetary policy

CPPE also noted that the current Cash Reserve Ratio [CRR] of 32.5%and Monetary Policy Rate [MPR] of 16.5% imposed on the Nigerian banks are among the highest globally.

It said high CRR in particular has become a key impediment to financial intermediation by the banks, adding that even more disturbing is the fact that effective CRR is as high as 50% or more for some banks.

‘’Financial intermediation is a fundamental function and essence of the banking system in an economy. The high CRR has made it difficult for the banks to play their primary role of financial intermediation’’, the Centre said.

‘’Their profitability is also adversely impacted because of limited room for credit creation activities.  Ways and Means finances of the apex bank pose greater liquidity and inflation risk to the economy than bank deposits. We seek a reduction in CRR so that the banks can be better placed to play their primary role of financial intermediation in the economy.’’

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