By Dr Muda Yusuf
Gross Domestic Product [GDP] Performance
Despite the intense macroeconomic headwinds in 2024, the Nigerian economy exhibited resilience on account of GDP performance. The GDP grew at 2.98% in the first quarter, 3.19% in the second quarter and 3.46% in the third quarter. It may close the year at about 3.6%. This is at par with IMF forecasts for GDP growth for the sub-Sahara Africa which is 3.6% and better than global GDP forecast of 3.2%.
Sectoral Growth Disparities
The service sector continued to dominate the sectoral growth performance for most part of the year. In Q3 2024, the financial services sector outperformed other sectors with a growth performance of 32%. Insurance grew by 19.8%, road transport grew by 17.9% and rail transportation 19.7%. However, real sector growth remained subdued during the year with agriculture posting a GDP growth of 1.14% and manufacturing, 0.92% in the third quarter of 2024. Air Transport, Quary & Minerals, Petroleum Refining and Textile sector remained in recession as at third quarter of 2024.
The implication is that sectors with high job creation potentials and prospects for economic inclusion are still struggling. This situation needs to be reversed to fix the current high unemployment and reduce poverty.
The huge disparities in the growth of financial services and the rest of the economy are a reflection of the growing decoupling of the financial services sector from the real economy. It also exemplifies the failure of the financial intermediation role of the financial services sector in the Nigerian economy. It is a significant dysfunctionality in the economy which deserves the urgent attention of policy makers.
The current reality is that investing in financial instruments has become much more profitable than investing in the real economy. The risk is also very low. This is not consistent with our economic aspirations as it is a major disincentive to real sector investment. There is a need for appropriate policy measures to correct the huge disparity in the profitability between the real economy and the financial economy. There is also a progressive crowding out of the real economy in the financial markets.
Oil and Non-Oil Sectors
From a structural perspective, the non-oil sector continues to dominate the economic space with the sector contributing 94.43% of the country’s GDP in Q3 2024, while the oil sector contributed 5.57%. However, the economy is characterized by a paradox of the oil sector contributing an estimated 90% of foreign exchange earnings while the non-oil sector accounts for about 10%. This is a structural shortcoming in our economy which needs to be addressed as sectors that contribute hugely to GDP have no corresponding contribution to foreign exchange earnings. However, it is noteworthy that the non-oil sector contribution to revenue had improved markedly in recent times. This economic structure reflects the enormous productivity and competitiveness challenges of the non-oil sector of the Nigerian economy. The policy implication is that more should be done to fix the challenges of productivity and competitiveness of the non-oil sector of the economy. Most of these challenges are the structural issues, infrastructural challenges, funding constraints, regulatory issues and the general macroeconomic headwinds.
Forex review and outlook
As at the close of the year, official exchange rate [NFEM] was N1,537 up from an average of N1,455.59 in January 2024 and N907.1 in December 2023. However, from July to December 2024, the rate had largely stabilized. The moderation in exchange rate volatility was informed by the series of regulatory reforms and the periodic intervention by the Central Bank in the forex market. Meanwhile the balance of outlook for the exchange rate in 2025 is on the upside based on the following expectations:
Sustained improvement in foreign reserves which is currently in excess of $40 billion dollars.
Improvement in accretion to reserves on the back of improved inflows from the IMTOs and diaspora remittances.
Improved capacity of the CBN to moderate rate volatility through periodic intervention in the forex market.
The positive impact of the $2 billion Euro Bond proceeds on reserves.
Positive Impact of the successful domestic dollar bond of $500 million.
The successful clearance of legacy forex obligations of about $7 billion by the CBN.
The Import substitution effect of the Dangote and Port Harcourt refineries with the consequential easing of demand pressure on the forex market.
Gradual recovery of non-oil export sector and implications for forex inflows.
Inflation Outlook
High inflationary pressure was a major concern in 2024 with November inflation peaking at 34.2%. This situation had the following impact on the economy :
General increase in the cost of living with consequential effect of aggravation of the poverty situation.
Elevated cost of operations and cost of production for businesses.
Significant erosion of profit margins of many businesses as additional costs could not be transferred to consumers because of weak purchasing power of consumers.
Elevated risk of loan defaults.
High project costs across all sectors of the economy, with many cases of abandoned projects resulting from unforeseen cost escalation.
Inflation Outlook for 2025
Inflation may moderate slightly on the expected reduction of the volatility of the exchange rate and possible rebound of the naira.
Moderation in energy cost as the geopolitical tension eases as result of the impact of Trump presidency. There is a likely boost in global oil production as USA increases production and the embargo Russia eases. These are likely outcomes of Trumps presidency.
There is also the factor of the base effect on the inflation numbers as inflation was generally elevated in 2024.
However, the following key drivers of inflation may not completely dissipate in 2025:
High energy cost including electricity tariff.
Exchange rate
Transportation cost
High Interest rate
High cargo clearing cost
Impact of insecurity on agricultural output and food supply
Climate Change and flooding
Imported inflation resulting from geopolitical tensions, supply chain disruptions, trade war and tight global monetary conditions.
Monetary And Financial Conditions
Given the current disposition of the central bank of Nigeria, monetary conditions may remain tight in 2025. However, the degree of tightening may decelerate in 2025 given the current high levels of MPR and CRR. The space for further tightening has become limited. Some of the key factors that would shape the monetary outlook include the following:
Strong ideological commitment of the CBN to orthodox monetary policy which may continue to result in hike in interest rates.
Commitment of the CBN to philosophy of inflation targeting.
Risk of elevated fiscal deficit and its inflationary implications. There is also the related risk of higher money supply growth in 2025.
Risk of heightened debt levels and consequential implications for increased debt service.
Policy Implication
Government should expedite action to expedite boost capitalization of the development finance institutions – BOI, BOA, NEXIM to deepen development finance interventions.
Need to revitalize and restructure the Bank of Agriculture to support the agricultural sector and agro-allied industries with the much-needed concessionary financing. Current high interest rate in the commercial banks continues to impede the recovery and growth of the Nigerian agricultural and agro-allied sectors of the economy.
The CBN should soften its tightening stance in order to support investment growth and job creation in the economy.
Current high interest regime foisted by the tightening regime increases the risk of loan defaults, increasing the prospects of higher non-performing loans in the financial sector.
High interest rate also increases debt service cost for government with the current huge exposure to domestic debts.
High interest rates typically pose significant risks to business sustainability amidst numerous headwinds.
There is a need to protect the real economy from the adverse consequences of free market principles. This is the basis of government intervention in a market economy.
Energy Sector Outlook
The outlook for the Nigeria energy sector is moderately positive especially following the increased capacity in domestic refining of petroleum products. But this will require supportive fiscal and monetary policy support to unlock the full potentials of the domestic refineries and stimulate more investments in the sector. factors that may drive the positive outlook for the sector include:
Enhanced domestic petroleum refining capacity from the Dangote refineries, the Port Harcourt Refineries and others.
Emerging competition among domestic refineries which may have a moderating effect on prices.
Expectation of a slump in global energy prices on the back of Trump presidency and the easing of geopolitical challenges in the 2025.
Sustenance of the naira for crude arrangement which could help moderate prices of domestic refining of crude.
More generous fiscal incentives for the CNG and renewable energy solutions.
However, the electricity pricing conundrum would remain a tricky issue in 2025. The economy is too fragile to absorb the shocks of a fully deregulated or commercial electricity market. The quality of the transmission infrastructures and the consequent frequent collapse of the transmission grid require significant investment which the government would have to struggle to provide.
The outlook for the sector remains a major cause for worry in 2025. There are also the transition challenges of the states taking up regulatory responsibilities for electricity market. Not many states have the capacity to manage this transition. This is therefore a major source of risk for the electricity sector in 2025.
Key Business Risks in 2025
Businesses would have to worry about the following risks as they craft their strategies for 2025. Exposure to the risks vary across sectors. Businesses would therefore need to calibrate their strategies according to the level of exposure these risks.
Forex Volatility Risk
Interest Rate Risk
Inflation Risk
Financial And Monetary Policy Risk
Regulatory Risk
Cybersecurity risk
Insecurity Risk
Political Risk
Corruption Risk, especially with regard to public sector transactions and contracts.
Environmental /Climate Change Risk.
Silver Lining in The Current Reforms
Current economic reforms have their silver linings which includes the following:
Enormous opportunities for import substitution across all sectors. It reduces cost, improves patronage and profitability. This is essentially about focusing more on backward integration initiatives.
Boost to recycling business because of the soaring cost of raw materials and other inputs.
Provision of domestic alternatives to medical tourism, education tourism and vacations abroad. Many Nigeria elites are now seeking domestic alternatives in these areas because of the forex situation. This offers new opportunities for domestic investors.
Local fabrications of spare parts and other mechanical devices.
High food prices offer new opportunities and incentives for investment in agriculture because of better profitability prospects.
Outlook for export business has become very positive because of the weak domestic currency. It enhances the competitiveness of domestically produced products or services. But the local content of such products must be very substantial to guarantee good profitability prospects.
The weak currency now offers bigger opportunities for diaspora Nigerians to invest at home.
There should be deliberate policy to promote legal migration abroad to fill skill gaps in many of the countries in Europe and North America, especially United States and Canada. Many of these countries are also experiencing aging population which offers opportunities for our youths, many of whom are currently unemployed.
Brighter prospects for outsourcing business for foreign companies.
Bigger Investment opportunities in the petroleum refineries and related industries following the deregulation of the sector.
Growing opportunities in renewable energy investment which are cheaper and more environment friendly.
New opportunities in the use of CNG, LPG in transportation.
Decentralization of electricity provision opens up numerous opportunities in the electricity value chain.
Business Resilience Strategies in 2025
Business managers and owners need to prioritize the following to ensure resilience in 2025.
Leveraging technology to reduce cost and ensure competitiveness.
Industries need to deepen backward integration to reduce the forex exposure.
Reduction in debt financing to reduce the burden of high interest rate.
Adoption of efficient energy solutions to reduce the pressure of high energy cost.
Supply chains should be domesticated as much as possible.
Focus on talent retention, especially in specialized job functions.
Incorporate scenario planning framework in business strategy to manage uncertainties and volatilities.
Businesses must ensure cost optimization.
*Muda Yusuf is Director/CEO Centre for The Promotion of Private Enterprise
