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Nigeria’s inability to optimise the global oil price rally has worsened its fiscal position as the government faces revenue generation challenges amid an increasing debt burden, according to the World Bank.
The bank added that the country’s reliance on oil has also caused it to be highly vulnerable to global and domestic shocks which heighten its risk of a recession.
According to the banks’ Nigeria Development Update (NDU) for December 2022, and Economic Memorandum, between 2020 and 2021, when oil prices were much lower, the government missed an opportunity to address one of the primary sources of fiscal vulnerability by choosing to maintain the subsidy for petrol, consequently, the country now faces a fiscal time bomb amid its low oil production.
“Instead of benefiting from the windfalls to build macroeconomic resilience, the Nigerian economy is becoming more vulnerable to external shocks and if the external windfalls were to reverse, the economy could face a similar recession to that of 2015–2016,” it stated
Furthermore, because Nigeria is unable to benefit from the oil price boom, the government has resorted increasingly to costly CBN financing, which in turn has increased interest costs, causing severe fiscal and debt challenges. Hence without adequate buffers, the economy is more vulnerable to external shocks more severe than the pre-pandemic period.
According to the NDU, with such intense fiscal pressure, debt servicing is expected to surge, exerting fiscal and liquidity pressures and is projected to reach about 45 percent of GDP in 2027.
“As debt is increasing rapidly, the proportion of short-term (expensive) debt is high, and poor market perceptions coupled with higher global financing costs may limit Nigeria’s access to international financing,” the report said.
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Pressured finances at the federal level will further weaken the fiscal condition of sub nationals even till 2023 as statutory transfers to states are expected to decline by 5.5 percent as expenditure and capital expenditure is expected to increase by almost 4 percent and 17.3 percent respectively in nominal terms.
“Consequently, the fiscal deficit of an average state is estimated to reach 37.9 percent of revenues in 2022, as opposed to 31 percent of revenues in 2021 and 17 percent of revenues in 2020, debt levels for an average state are estimated to increase from 154.6 percent of revenues in 2021 to above 200 percent of revenues in both 2022 and 2023,” the World Bank said.
The global body said Nigeria’s macroeconomic stability has deteriorated significantly and revised downward the country’s growth estimates to 3.1 percent in 2022 and 2.9 percent in 2023–2024 as against the 3.4 percent and 3.2 percent earlier projected for 2022 and 2023–24 respectively.
“A weak infrastructure base, high levels of insecurity, governance issues, bottlenecks to private investment and competitiveness, poor human development outcomes, and uncertainty about the pace and direction of economic policy, are key factors hampering the long-term growth of Nigeria’s economy,” it stated
It, however, noted that in 2023 to 2024, the economy will continue growing at a moderate pace driven by services particularly in the telecommunications, trade, transport, and financial services sector, manufacturing and construction sector, and a partial recovery in the oil sector.
The bank warned that as Nigeria prepares for the 2023 general elections, which will be the seventh general elections held since the return to democratic rule, its chances of accelerating economic growth by increasing investments, easing macroeconomic imbalances, addressing fiscal vulnerabilities, and protecting the welfare of poor households is rapidly shrinking.
“With the upcoming general election in February 2023, a key challenge is addressing macroeconomic vulnerabilities when elections encourage higher spending, high inflation is pushing millions of Nigerians into poverty; and higher global interest rates weigh on portfolio investment, and raise the costs of private investment financing and public borrowing,” it stated.
On the back of accelerated inflation, the report noted that the double-digit increase in prices of food and essential commodities especially when incomes have been declining, has pushed millions of Nigerians into poverty and reduced the welfare of many more.
Nigeria’s inflation quickened for the 10th straight month to a new 17-year high of 21.47 percent, which has eroded the N30,000 minimum wage by 55 percent and widened the poverty net with an estimated five million people in 2022.
The bank warned that if Nigeria continues its ‘business as usual’ narrative, its GDP growth rate will continue to lag other emerging economies, inflation will be higher, and fiscal deficits larger, hence some critical reforms need to be implemented.
“If no structural reforms are implemented and business as usual continues, people’s prospects will be hindered. Per-capita income will plateau, 80 million working-age Nigerians will not have a full-time job by 2030 if the employment rate does not improve, and 23 million more Nigerians will live in extreme poverty by 2030,” it stated.
According to the report, Nigeria needs to grow faster and create more jobs which is a necessary condition for accelerating poverty reduction and economic transformation which necessitates the need for a business enabling environment and increased investment inflow.
“In addition to macroeconomic and institutional enablers, investment accelerators are critical to develop a more competitive private sector; unlocking private investment is the only way to create more and better-quality jobs in a sustainable manner,” it stated.
The report stated that to sustain growth and job creation in the long term, structural constraints that hinder private investment must be addressed, highlighting a change of policies in key areas such as Investing in power infrastructure, reducing protectionist measures and strengthening competition in domestic market to improve the productivity of the economy by reducing the cost of doing business and improving the allocation of resources.
In its country economic memorandum, it was advised that Nigeria adopt a single and market reflective exchange rate, increase non-oil revenues, eliminate petrol subsidy, contain inflation by reducing the federal government’s recourse to CBN financing and also reduce insecurity.
Following the circulation of the new naira notes, the bank noted that although a naira redesign was due, the transition period from its announcement on November 23rd to January 31st when the old notes will cease to be a legal tender is short and will have a negative impact on economic activities as well as poor households.
“International experience suggests that rapid demonetisations can generate significant short-term costs, with small-scale businesses, and poor and vulnerable households, potentially being particularly affected due to being liquidity-constrained and heavily reliant on day-to-day cash transactions,” it stated.
It added that currently, households and firms already face elevated financial pressures from prolonged, high inflation, recently compounded by external food and fuel price shocks, and the severe floods hence phasing out existing naira notes over a short time period may add to their challenges.
