By 2027, it is anticipated that the federal government will increase the Value Added Tax (VAT) from its current 7.5% to 15% in order to finance social and job creation initiatives as well as its debt servicing commitments. This was mentioned in the Country Report by the global business research group, Economist Intelligence Unit (EIU).
According to EIU, the deficit may increase to 5% of GDP in 2024, which is marginally higher than anticipated in 2023. It stated that between 2025 and 2028, this was predicted to average 4.5% of GDP yearly, exceeding the three percent GDP legal cap and signifying an exceptionally lenient phase of fiscal policy for the nation.According to EIU’s forecast, the foreign exchange (FX) regime will cause the naira to drop to N2, 381 to the dollar, with a five to fifteen percent margin with the illicit market.
The paper went on to say that even with the naira’s 45% devaluation in February, confidence in the currency would be undermined by ongoing high inflation, deficit monetisation, negative short-term real interest rates, limited foreign reserves, and a backlog of foreign-exchange requests.The report stated that traders will likely remain apprehensive that restrictions on the currency might be increased at any time, but it also suggested that further devaluation is unlikely.
The analysis predicted that international borrowing would be used to replenish foreign reserves and predicted that by the end of 2024, the local currency will stabilize.It made the point that if the Central Bank of Nigeria (CBN) tightened monetary policy more aggressively than anticipated, the rate might end up stronger since the naira was starting to look undervalued in real terms.
Furthermore, should deficit monetisation continue and import inflationary pressures stay high, the EIU projected a further 100 basis point increase in the Monetary Policy Rate (MPR) to 23.75 percent in 2024 from the present 22.75 percent.But our fundamental belief is that the CBN would be unable to produce a positive real short-term interest rate since doing so would have a significant political cost in terms of unemployment.According to the paper, “We anticipate an end-2024 rate of N1, 770: $1, compared with approximately N1, 600: US$1 at end-February, accounting for additional near-term losses.” This prediction is well-balanced, though.
Numerous setbacks to self-assurance could lead to an even more severe deterioration. Alternatively, if the CBN tightens monetary policy more aggressively than we anticipate, the rate could end up firmer since the naira is starting to look undervalued in real terms.The naira’s outlook for 2025 was comparatively stable, according to the EIU assessment, and it may close at N1, 817 to the dollar in the review year after a significant real-terms adjustment.
However, as per the EIU research, “We uphold our belief that an insufficient combination of fiscal and monetary policies will weaken the naira’s long-term worth.” We predict that the currency will conclude 2028 at N2, 381:$1, and that the spread with the parallel market would be between 5 and 15 percent, in line with a decline in global oil prices from a cyclical peak.
The research also forecasted a gradual increase in the nation’s foreign exchange reserves over the course of the projected period, helped by increased access to international borrowing and an exchange rate regime that is increasingly oriented toward market forces. It did note, though, that in 2028 this would still only cover imports for roughly seven months.Furthermore, the analysis predicted that in 2024–2028, the public debt to GDP ratio will climb rapidly due to an anticipated increase in formal borrowing. According to the prediction, by the end of 2026, the statutory ceiling of 40 percent would be exceeded, resulting in a public debt to GDP ratio of 50.4% by 2028, up from less than 20 percent in 2022.As a result of Mr. Tinubu’s “fiscally active” job creation and infrastructure building plan, as well as an implied gasoline subsidy, the report stated, “We expect relatively large budget deficits.”The 2024 budget calls for a significant rise in non-debt recurrent spending due to the need to pay public sector employees more and provide cash transfers to low-income households due to high inflation.
According to the analysis, inflation will average 30.3% in 2024 as opposed to 24.7% in 2023. This is because rises in gasoline prices in June 2023 will not be included in the year-over-year calculation starting in mid-2024, preventing an even greater rate of inflation.”Assuming the naira stabilizes, average inflation should decline to 21.7% in 2028 and 20.7% in 2025,” the statement read.Because of anticipated increases in VAT rates, food price increases due to insecurity in agricultural areas, Nigeria’s infrastructure deficit, periodic monetisation of fiscal deficits, weak currency, and a general inflation bias in economic policymaking, inflation is expected to remain significantly higher than the 6–9% target range throughout the forecast period.According to the report, “An additional 100 basis points is likely to be added to the policy rate in 2024, assuming deficit monetisation continues and imported inflationary pressures remain strong,” in response to the recent increases in the cash reserve requirement by 1,200 basis points and the MPR by 400 basis points, to 22.75 percent in February.”The CBN has mentioned a switch to inflation targeting, but such a framework would have little credibility in anchoring inflation expectations, given the CBN’s record of unorthodox policy and as this would rub up against government economic policy,” the statement continued.The MPC will allow politics to influence policy, and it places a high value on economic growth.
Even though inflation stays above the CBN’s 6–9% target range, we anticipate the CBN to start loosening its stance in 2025, assuming inflation starts to decline. Rate decreases will start early in that year.”We anticipate that the policy rate will drop to 12.5% in 2026 and stay there for the duration of the projection.”Real GDP growth is expected to decrease from 2.9% in 2023 to 2.5% in 2024, according to an EIU estimate. It said, “Given the estimated 2.4% population growth, GDP per head will continue to stagnate.” Slow growth is a result of several factors, including rising inflation, anticipated monetary tightening, and balance-sheet challenges for multinational corporations with local currency earnings in light of the depreciation of the naira.It is also unlikely that Nigeria’s agricultural heartlands, where there has been a sharp increase in insecurity, will yield a bumper crop in 2024.In 2024, net exports will be the main driver of growth, helped along by the recent significant currency devaluation’s restraint on imports, increased crude output as the government improves its management of oil theft in the Niger Delta, and the Dangote refinery’s increased capacity.Domestic demand will resume (modest) growth in 2025 when inflation declines and monetary policy shifts to an expansionary stance.
As a result, real GDP growth will accelerate to 3.5% annually in 2025—the second-highest rate in ten years, mostly due to rebound effects—and reach 3.5% on average in 2026–2028. The economy will be held back by issues including power shortages, widespread insecurity, a lack of land titles, and a massive infrastructural shortfall.Regarding policy developments, the paper highlighted that President Bola Tinubu’s market reforms were meant to draw in investment, but they lacked a cogent strategy. “His two flagship policies—the removal of gasoline subsidies and the liberalization of the exchange rate—have an internal contradiction,” the statement read. Since almost all of Nigeria’s fuel is imported, naira devaluations—the most recent of which was a 45% decline in February—should be reflected in gas prices.
“However, despite the naira weakening from N461:$1 in May 2023 to N1, 600:$1 in late February 2024, there has been little movement since June due to the threat of industrial action.”This shows that a sizable subsidy has been returned. The government has a strong motive to resort to the Central Bank of Nigeria (CBN) for financing to offset the fiscal burden even if it publicly denies this.The EIU went on, “The currency will be undermined by high inflation and inadequate monetisation. It could happen that monetary policy is tightened to the extent that foreign investors start to see the naira more favorably.
Despite the CBN’s February policy rate increase, Mr. Tinubu has stated that he is opposed to high interest rates because his main economic objective is to double the country’s GDP by 2031. Since inflation has been let to reach a point where a positive real short-term interest rate would result in a notable increase in unemployment—adding yet another aspect of policy-induced suffering to the economy—we presume that political will would prevent this from occurring.”The CBN’s independence has been heavily eroded in recent years; the government will continue to rely on monetary policy to achieve job-creation and development objectives,” the report stated. Fiscal firepower is so limited.”Our view is that foreign borrowing will be necessary to rebuild the CBN’s buffers, fully clear a backlog of unfulfilled foreign exchange orders, and restore confidence,” the statement read.It’s likely that this will only be possible by the end of 2024. Nigeria obtained a $3.3 billion loan in mid-January from the African Export-Import Bank, which was backed by oil revenue through a mechanism known as the “crude oil prepayment facility.”This comes after the African Development Bank loaned $1 billion in November, and the World Bank is being asked to provide an additional US$1.5 billion. When US interest rates begin to decline in the second half of 2024, declining risk premiums on government foreign bonds will make accessing the international capital market another feasible—albeit pricey—option.The naira will be extremely volatile for the majority of this year, which could cause regulatory erraticism and have an impact on businesses, particularly those that hold foreign money. The CBN’s $33 billion in foreign reserves, of which a sizable portion (about $20 billion) is allocated to various derivative trades, leaves it unable to sustain the naira on its own.”Oil companies are not allowed to repatriate their export earnings overseas, and until the currency stabilizes, wider limits on convertibility may be imposed,” the CBN recently announced.The new Dangote mega-refinery, which has a capacity of 650,000 barrels per day, was also mentioned in the report as a potential circuit breaker for the nation. According to the statement, the plant was preparing for its maiden fuel exports, which would be followed by cargoes for the home market.”The facility can theoretically meet all domestic needs, but it’s unclear whether doing so will be profitable (let alone profit maximising),” the statement read.In any event, as the refinery increases output, Nigeria will be dependent on petroleum imports for the majority of the year. The wider business climate will continue to be extremely difficult due to widespread instability, cronyism, corruption, and a massive infrastructural gap.As currency losses put strain on bank sheets containing significant foreign liabilities, multinationals are increasingly choosing to leave Nigeria or scale back their presence there. In 2023, there was a net withdrawal of foreign direct investment, which is expected to happen again in 2024.”The exodus includes oil majors who are selling onshore assets, which are high-cost and vulnerable to insecurity, leading to indigenization of the sector over time,” the report added in reference to the significant investor flight.While this is good for foreign exchange accumulation in theory, local businesses won’t be able to match the exiting multinationals’ investment power. Our prediction is that the production of crude oil will increase from 1.23 million barrels per day (b/d) in 2023 to 1.48 million b/d in 2028, although it will still be roughly 250,000 b/d less than in 2019.
