Pwc in its Nigeria economic outlook, titled: Navigating economic
reforms, released yesterday said despite the reform measures, fiscal sustainability concerns may remain slightly elevated, given debt servicing costs, of which 89 per cent of the budgeted fiscal deficit is to be financed by new borrowings.
It said the reform measures of the present administration have yielded some positive results, noting specifically that FAAC disbursements increased by 91.3 per cent from ₦976 billion disbursed in May 2023 to ₦1.87 trillion in April 2024. The increase it said was driven by distributable VAT, statutory allocation and exchange rate difference revenue.
It also noted that the country’s credit rating has improved. According to the report, Fitch Ratings revised its outlook on Nigeria’s Long-Term Foreign-Currency Issuer Default Rating (IDR) from Stable to Positive. “The revision was due to exchange rate and monetary policy reforms, reduction in fuel subsidy payments, and scaleback of government financing by CBN,” the report said.
It also noted that Oil exports grew by 200.9 per cent to ₦15.5 trillion in Q1 2024 from ₦5.15 trillion recorded in Q1 2023. While Non-oil exports also grew by 38.5 per cent to ₦1.8 trillion in Q1 2024 from ₦1.3 trillion recorded in Q1 2023.
“Foreign direct investments (FDIs) grew 114 per cent from $86 million recorded in Q2 2023 to $184 million in Q4 2023. Similarly, foreign portfolio investments (FPIs) increased to 190 per from $106.9 million in Q2 2023 to $309.8 million in Q4 2023,” it said.
The report also noted that there are pressure points weighing on expected reform outcomes among which include, the depreciation of the naira against the dollar by 67.8 per cent from an average of ₦461.1 in May 2023 to ₦1,433.8 in May 2024. It said the depreciation took effect despite foreign exchange market reforms by CBN to achieve price discovery and attract liquidity to the market.
There is also the issue of the rise in inflation driven by food inflation which is 40.6 per cent, utilities, which is 29.6 per cent, and transport which is 25.6 per cent, which the report said continues to erode purchasing power of households and businesses.
According to the report, CBN’s reform actions has not yet tapered the
continuous rise of headline inflation, which was 33.95 per cent in May 2024. It said the Monetary Policy Rate (MPR) which was raised by 775 basis points between May 2023 and 2024 to address rising inflation, though may attract more investors to the fixed-income market due to higher yields, has negatively impacted borrowing costs for businesses.
On the impacts of the pressure points on households and businesses, PwC said Inflation and exchange rate pressures have reduced real value of household disposable income and consumption expenditure.
“Household savings may decline as individuals prioritise consumption and debt repayment over saving,” it said, adding that Investments may decline due to reallocation of resources to consumption. The decline, it said, may be due to high inflation and rising cost of borrowing.
“On businesses Inflation may erode revenue by reducing the purchasing power of consumers. This leads to low sales for
businesses, which consequently impacts business revenue negatively.
“Higher production costs, import costs, and raw materials costs from the inflationary and exchange rate pressures are passed on to businesses.
“Naira depreciation is expected to drive up the cost of imported raw materials. High interest rates may lead to higher borrowing costs for
businesses, making it more expensive to fund operations and investments.”
The PwC report said the changes in the key reform indicators imply that the economy may face slower growth, reduced consumer purchasing power, and increased cost of living, necessitating robust
policy interventions to stabilise the economy.
It noted that though it is good news that the ₦4.9 trillion of the ₦7 trillion approved for the securitisation of ways and means as well as ₦4.5 trillion debt to fund the 2024 budget deficit was raised by the DMO as of May 2024, it however warned that 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.
It advised that the government should Prioritise macro stability by addressing security, social and pressure points of inflation and exchange rate pressures, Mobilise capital to drive growth through market focused policies, intensification of investment promotion and make short- and long-term sectoral bets focused on exports, domestic substitution and job creation.
“Government must drive fiscal prudence by optimising spending on
capital projects with the highest return on investment (ROI), rationalise public service spending and improve revenue diversification and collection efficiency,” it said, adding that the government should decide when and how to introduce, defer, sequence, or stagger different policies based on current economic and social conditions.”
The Pwc also advised that the government should adopt scenario planning before any major economic reform is implemented to avoid unwarranted policy reversals such as what happened in the case of cyber security levy.
Other recommendations by the report include, Embed contingency plans within any economic policies during the planning phase, Implementation of intervention funding schemes to support businesses with low-interest loan programs or credit guarantees to ensure businesses have access to affordable financing despite high market interest rates; creation social safety net programs such as unemployment benefits and workforce development programs to absorb the job losses from business exits due to the economic pressure points and that government may reconsider any planned increase in selected taxes to alleviate the financial challenges and unlock liquidity of certain businesses being impacted by the economic pressure points.