2022: Nigeria’s economy faces tough challenges

As economists cheer the appointment of Dr. Doyin Salami as the Chief Economic Adviser to the President, indications are strong that the economy would face multiple challenges in the New Year, even as government moves to prop up its revenue by proposing increase in the pump price of petrol and increase taxes on certain items this year. PAUL OGBUOKIRI reports


•High borrowing cost, wider budget deficit, inflationary pressures,

FX scarcity, debt servicing, key hurdles, say Analysts


Economic analysts at the weekend expressed cautious optimism about the outlook for the Nigerian economy, and the financial markets. In its latest outlook, FSDH Group, an investment banking group, expects GDP Growth in 2022 at 2.6 per cent with average inflation rate at 14.7 per cent.


This came as a group of economists at Proshare said in 2022, the Nigerian economy is running scared amidst several intimidating factors that lie ahead. “Firstly, we see the possibility of higher borrowing costs amidst pre-election worries and the expectation of a hawkish stance from Central Banks in advanced economies.


This, we believe, may result in slower capital expenditure rollouts by corporate bodies. Also, with inflationary pressures likely to remain for most of the year, profitability margins may be further weakened, and the situation could be much worse should the government discontinue fuel subsidies or raise the pump price of PMS in the second half.”


They however, expressed optimism on the oil and gas sector as a result of expected recoveries in crude output, riding on softer OPEC cuts and infrequent infrastructure downtime. “Also, our view that oil prices would remain strong this year, amidst increasing global demand and supply disruptions, should translate to increased revenue for oil producing companies.


“We share a similar positive outlook for the industrial goods sector, given our expectation of rising cement consumption from both the public and private sectors. We believe improved oil revenue will reinforce the government’s capacity to roll out capital expenditure disbursements through the year.”


According to them, sourcing of foreign exchange would continue to limit topline performance for consumer goods players. “In line with this, increased shipping costs and constrained transportation from the ports may further impair producers’ ability to import needed raw materials.


With no near-term end to cost pressures, consumer goods players may suffer weaker bottomline growth next year,” they stressed. It would be recalled that in December 2021, Moody’s Investors Service (“Moody’s”) changed their outlook on the Government of Nigeria to stable from negative and affirmed its long-term issuer and senior unsecured ratings at B2. Moody’s also affirmed the Government of Nigeria’s (P)B2 senior unsecure


This came as amidst public concerns over rising debt burden. An Investment Strategy analyst at Afrinvest, Temitope Omosuyi, has said that the finances of the Federal Government would remain under pressure in 2022.


He said though the government borrowings and deficits are expected to widen next year, it will come with a 46.3 per cent decline in domestic debt from 56.7 per cent in 2021. Speaking on the domestic macroeconomic environment in 2021 and outlook for 2022 he said: “Nigeria’s Gross Domestic Product (GDP) growth would exceed population growth for the first time since 2016 (-1.62 per cent, excluding the pandemic base effect growth induced in 2021.”


Similarly, Economists at Vetiva Research stated that they expected Nigeria’s economic activities to normalize in 2022. “As a result, we expect growth to range between 1.3 per cent and 3.7 per cent. Key economic activities to watch out for in 2022 include the electioneering, removal of subsidies, and floatation of the Naira. While we see inflation moderating in 2022, we expect the CBN to remain accommodative.


The Lagos-based research firm in its 2022 macroeconomic outlook for the domestic economy predicted a non-oil sector facing foreign exchange volatility and higher energy prices.


“External pressures could result in rate hikes. Fiscal metrics could improve in 2022 on the back of recovery in oil revenue. However, we hold a differing view on subsidies considering the electoral season.


On the external scene, we see room for deprecation in both the official and parallel market. However, recoveries in the oil sector and maximization of the e-Naira could help keep the parallel market in check.”


On the fiscal sector, Vetiva predicted further expansion in the fiscal deficit despite plans to remove subsidies.


New taxes, removal of subsidy will further erode purchasing power


Meanwhile, some manufacturers at the weekend warned that the new taxes on sweetened beverages that’s due to come into effect this month must be removed by the government, saying it’s unlikely to generate the desired income and could cause some businesses to collapse and would also increase hardship.


The Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona and former LCCI Director- General, Muda Yusuf, kicked against the tariff in separate interviews with the Sunday Telegraph at the weekend. Alumona said the rise would inevitably lead to an increase in cost, decrease in demand and inevitably, job loss.


“The Chamber is also concerned about the government’s stance on the enforcement of revenue targets on government-owned enterprises. The operations of these Government- Owned Enterprises (GOEs) should not build up into a hostile business environment where the private sector will find it challenging to thrive.


And beyond the levying of taxes on carbonated drinks to force a reduction in consumption, we urge the various public health agencies to regulate the production of sugary drinks to reduce their negative effect on human health,” he added. Yusuf recalled that revenue limitations have always been the major downside risk to budget implementation. He said: “The experience with the N17.13 trillion 2022 Federal Government budget is unlikely to be different.


The revenue target of over N10 trillion is optimistic, the reason being that the economy is still in a recovery phase, oil revenues are volatile and unpredictable and expectations from independent revenue may be difficult to achieve bearing in mind the crowding out effect of electioneering activities in 2022.” Reacting to the announced taxes, Dr Ayo Teriba said the government should not be taxing an economy that is in recession.


Rather, it should be injecting funds to bail out the companies that are in distress as a result of the recession. “There are other sources of funds the government should embrace at this time, not taxes. Taxes will kill the companies that are already gasping for breath due to the pandemic induced recession,” he stressed.


Nigeria’s debt at risk of becoming unsustainable


The Chief Executive Officer of SD&D Capital Management, Idakolo Gbolade, said, Nigeria has a debt problem, saying the government is running away from the problem by  using debt to GDP benchmark. “The issue of not having a debt problem can be ascertained because they are using the debt to GDP benchmark. But our debt service to revenue is abysmal.”


According to him, the rate of borrowing is unsustainable and there is a need for the government to make necessary adjustments before the country goes into a severe problem with its debt. “Our borrowing is not sustainable. If we don’t increase our revenue, it would get to a point where we will use all our accruable revenue to service debt.


Nigeria is getting towards that if something is not down urgently. “What we need to do is to cut our cloth according to our coat. We need to reduce borrowing and ensure that we fund critical projects. If we don’t do that, we will run into a serious problem, going forward.”


The World Bank had said Nigeria’s debt was vulnerable and costly. It added that the country’s debt was at risk of becoming unsustainable in the event of macro-fiscal shocks. But the Minister of Finance, Budget and National Planning,


Zainab Ahmed, said that Nigeria’s debt servicing to revenue ratio rose to 76 per cent as of November 2021, the highest among top economies in Africa. Speaking in Abuja during the public presentation of the details of the 2022 Appropriation Bill, signed by the President, Major General Muhammadu Buhari (rtd) on December 31, 2021, saying “this is proof that what we have is not a classic debt sustainability problem but a revenue challenge”.


President Muhammadu Buhari also said during the recent interview with Channels Television that the country takes loans based on necessity, adding that the loans are needed to drive infrastructural development in the country.


FX outlook About two years ago, the Central Bank of Nigeria (CBN) had pledged its commitment to rally convergence around NAFEX. Last year, it replaced the default CBN official rate, the benchmark used for government transactions, with NAFEX, but a full rate


harmonisation has not been attained. Teriba said nothing short of “a single exchange rate implementation would help to clear the market and restore equilibrium.”

NAFEX is often touted as the anchor of the planned liberalised market but in its current formation, it is pseudo-market led as the apex bank regularly intervenes to shore up supply.

Vice-Chairman of Highcap Securities Limited, David Adonri, said the 3.5 per cent depreciation of the Naira in a single trading day reflected dwindling supply and a signal that the illiquidity challenge could enter the New Year. “It means Nigerians will have to brace up.


The challenges are not yet over. That depreciation underscores the precarious state of the market,” Adonri noted. A professor of Applied Economics, Godwin Owoh, had previously warned that the expected intra and inter-party campaigns ahead of the 2023 general elections would exacerbate the financial stress index and compound the monetary regulation challenges.


He said the appetite of politicians for the greenback would increase demand for FX and put more pressure on the naira.

He charged Nigerians to prepare for harder times, stressing that the odds do not favour a stable FX market this year. With capital flight expected to increase this year as election approaches alongside rising insecurity, Owoh said: “Nigerians should expect higher FX illiquidity.


“There has not been stability in the past six or seven years. The political campaign will only add to the challenge. I don’t think Nigerians should expect anything better than they have seen in the past years. What we have now is a baseline that will incrementally get worse as we progress into 2022 and 2023.


Foreign investment as solution to debt, FX instability and budget deficit financing


Teriba said that the current government can still change the economic story of Nigeria even though it has about has less than one year, six months to go, saying that Nigeria should focus on attracting investment into the equities market rather than issuing debt bonds which attract interest.

He told Sunday Telegraph that the big oil producing nations, like Saudi Arabia, Brazil are no longer planning their economy based on oil.

“Oil belongs to yesterday. Technologies like the Shell oil of the US, the development of the electric and gas powered vehicles have put oil in the past and our peers have responded to that.”

According to him, foreign investment is why China, Brazil, India and Saudi Arabia are doing well in the face of the global economic difficulties caused by the Coronavirus pandemic.

He emphasized the need for Nigeria to focus in the direction of Sukuk bonds that are non-interest based but are assets linked and investment in equities because you don’t pay any interest on them. Teriba noted that FX instability, which is tied to the reserves, has persisted because of the low revenues from oil.

He said the solution to that is in the foreign investment which will give to the reserves what was lost from oil.




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