In 2024, Nigeria’s macroeconomic environment witnessed significant changes as policymakers sustained market reforms in the monetary, FX, and fiscal space. In Q1-24, the naira was again devalued to align with the parallel market rate, reaching a record low (NGN1,851.00/USD) before stabilising within the range of USD1,500.00/USD – NGN1,700.00/USD following subsequent FX reforms to remove market distortions.
The CBN also adopted orthodox monetary policy tools, raising interest rates significantly to curb inflation while tightening monetary conditions further. Additionally, PMS prices were deregulated in the second half of the year after subsidies were reinstated in February due to the naira depreciation. A critical development was the commencement of PMS production at the Dangote Refinery.
Reform efforts yielded notable gains, including (1) increased foreign investment inflows driven by higher naira yields and the perception of a fairly valued currency, (2) reduced naira volatility due to enhanced FX liquidity, and (3) FX reserves accretion supported by non-oil inflows.
Additionally, government revenue improved with the elimination of implicit FX subsidies and lower under-recovery costs. However, inflationary pressures surged, fuelled by higher PMS prices, weaker naira, and suboptimal agricultural harvests caused by flooding in key food-producing regions. While GDP growth remained robust, sectoral performance was lopsided due to challenges such as high borrowing costs, infrastructure deficits, insecurity, and inflation.
Rising debt levels became a concern, with debt-to-GDP estimated at 55.8% in 2024E, exceeding the IMF’s 50.0% threshold, driven by increased fiscal borrowings and naira depreciation effects on foreign debt. While the policy changes achieved commendable milestones, the associated challenges underscore the need for a more inclusive and balanced approach to policy implementation.
Sustainability of Reforms
In 2025FY, while the global environment remains volatile, the path to economic recovery and sustainable growth largely depends on the sustainability of reforms. For us, we think Nigeria’s need to attract and retain foreign investment will continue to underpin the need to sustain market reforms in the medium term. However, existing institutional weaknesses are likely to undermine reform efforts, limiting potential gains.
For GDP, we expect the growth of the oil sector to remain in positive territory due to an anticipated improvement in domestic oil production underpinned by improved investment from local players in the sector and enhanced security, transparency and accountability measures by the government. However, IOC divestment and weak infrastructure are likely to constrain growth. Non-oil sector growth is expected to rebound, led primarily by the services sector, while existing challenges in manufacturing and agriculture will weigh on overall performance. Despite our cautious optimism on growth, the potential rebasing of the GDP in 2025 is likely to provide an upside to our growth estimate as the exercise captures more recent economic activities and structural changes.
Headline inflation is set to moderate, primarily due to the high statistical base in 2024. However, the disinflationary process will be gradual, as we anticipate that the year-on-year print for headline inflation will stay above 30.0% for most of the periods in the year due to persistent pressures from (1) volatile PMS prices, (2) a weak naira and (3) subpar agricultural harvests.
On the external front, the current account surplus is expected to remain robust, underpinned by sustained trade surpluses and improved remittances. FPI inflows are set to increase, supported by attractive naira yields, global monetary policy easing, and improved FX market efficiency after the adoption of the Electronic Foreign Exchange Matching System (EFEMS). However, existing geopolitical tensions remain a key risk to substantial inflows.
FX Reserves Expected to Grow
Also, the country’s FX reserves are expected to grow with a possible boost from remittances, FPI inflows, and Eurobond issuances. While we anticipate an improvement in FX liquidity, the naira is poised to depreciate further as the overall supply will remain insufficient to keep it stable at current levels throughout the year. However, barring any shock, we think the path to depreciation will be steady as excess volatility is likely to be controlled by reduced market distortions under the EFEMS.
For monetary policy, a pause in the rate-hike cycle is on the horizon as the disinflationary process begins in Q1-25. However, persistent inflationary pressures will delay policy easing until late in 2025FY. Additionally, given that oil receipts from exports are expected to remain constrained, the MPC is likely to keep interest rates elevated to sustain foreign inflows and support FX market liquidity.
On the fiscal side, the subsidy regime appears to have ended, thanks to the shift in PMS supply dynamics, which could potentially boost oil revenues. However, NNPC’s remittances will likely remain constrained by pre-export obligations and suboptimal crude oil production, which is expected to stay below the FG’s target (2.00 mb/d).
Nonetheless, proposed tax reforms are expected to drive revenue growth, even as implementation challenges could temper gains. While we expect an improvement in overall revenue in 2025FY, the robust government spending, underpinned primarily by higher debt service and personnel costs, will keep borrowings elevated in 2025FY. However, the pace of borrowing is expected to slow relative to 2024 levels, which was partly driven by CBN ways & means repayments.
