Nigeria’s Growth Outlook

Forecasting Nigeria’s 2023 growth outlook has become an uphill task due to the multidimensional uncertainty that characterizes the year. The naira redesign policy is causing monumental disruption both in the real and financial sectors. The 2023 presidential election, with its intrigues, is demasking the country’s vulnerability and making investors increasingly unsettled. In the same vein, the persistent inflationary surge is brewing investor tentativeness as monetary policy tightening could become the new normal. 

According to the FDC forecast, a base case scenario shows that Nigeria's real GDP growth will slow to 2.55% in 2023 from an estimated growth rate of 2.71% in 2022. However, the worst and best case projections show that growth may slow to a low of 1.33% or expand by 3.10% in 2023 respectively. The subdued growth would be bookended by the naira cash crunch, election uncertainty, weak private consumption growth, and a tepid investment outlook. Elevated inflation, the naira redesign program, and restrictive monetary policy will also weigh on the overall outlook. 

Nigeria recorded two recessions in less than a decade, particularly in 2016 and 2020. The already fragile recovery seen in 2021 was subdued in 2022 due to the global headwinds precipitated by the Russian’s [1]Ukraine war and a massive decline in oil production. Oil production declined by 33% to 1.20 million barrels per day (mbpd) in 2022 from 1.79mbpd in 2019. Also, the skyrocketing gasoline subsidy payments, estimated to exceed $15 billion in 2022, also caused Nigeria its fair share of the global oil windfall enjoyed by oil producing countries in 2022

Inflation to average to 18.4% in 2023

For full year 2023, inflation is expected to average18.4%. Nigeria’s inflation accelerated to a 17-year high of 21.82% in January. In 2022, the average annual inflation was 18.8%, the highest since 1996. In an effort to rein in a viciously rising inflation, the CBN began an aggressive restrictive monetary policy in May 2022 raising rates by cumulative 600 basis points by January 2023. In spite of the aggressive rate hikes, inflation has remained stubbornly high. However, we expect that the CBN will begin to slow the rate of interest hikes in March.

Policy Reforms

Nigeria is now on a precipice and appears to have hit a brick wall. With tepid growth, limited fiscal headroom, a persistent currency crisis, record high inflation and worsening imbalances, policy reforms have become inevitable. Although we do not expect any major policy reform before the 2023 general election, it is evident that the new administration has limited choices: it must embark on targeted reforms, including debt restructuring, subsidy removal and other critical market-based reforms.

Sub-Saharan Africa 

In sub-Saharan Africa (SSA), output growth is expected to inch up to 3.8% in 2023 from an estimated growth rate of 3.6% in 2022, which is almost 1% lower than the 4.7% recorded in 2021. Most SSA countries, particularly non-oil exporting countries, faced global headwinds in 2022. Inflation rose sharply as global food and energy commodity prices surged. Most economies witnessed large depreciations in their currencies due to unfavorable terms of trade and widening current account deficits as capital outflows spiked. The increase in interest rates in the bid to curb spiraling inflation led to a sharp increase in borrowing costs and debt levels. SSA countries have gone on a borrowing honeymoon as they leveraged on the low interest rate environment that dominated the global debt market in the past decade, raising their external debts to $766.9 billion from the $372.5 billion they held a decade ago. According to the IMF, about 30 low-income countries in the SSA are at risk of a debt crisis and about eight other countries are already in debt distress. 

Global Growth 

Global growth will remain resilient in 2023 as shockwaves and uncertainty become the new normal. Although global output is expected to slow to 2.8% in 2023 from 3.2% in 2022, it will rebound to 3.4% in 2024 as most emerging markets and developing economies begin prioritizing growth-oriented rebalancing. 

The global economy started 2022 on an upbeat note, buoyed by the lifting of the COVID-19 restrictions and a pickup in global demand. However, the invasion of Ukraine by Russia in February 2022 halted the recovery momentum and changed the course of the global outlook for the rest of 2022. As the war escalated, the quick-fire Western sanctions on Russia sent global energy and food prices soaring, with inflation reaching multi-decade highs in most countries. 

The global economy was deeply mired in the most severe inflationary pressures since the Great Inflation of the 1980s. In a fierce response to the surging prices, most central banks began one of the most aggressive monetary tightening regimes since the 1980s. With the increasing impact of record high inflation and monetary tightening, the outlook for economic activity in 2023 remains uncertain as downside risks stemming from financial sector instability and fiscal fragilities come to the fore. FDC Think Tank highlights the key events that will drive global growth outlook.

Geopolitical tension will weigh on growth

The Russia-Ukraine war is fragmenting the world into different geopolitical alliances, and this has heightened global uncertainty. Russia will continue to push for alliances with China and India, but a stronger Western alliance will force Russia to reconsider its aggressive war stance. Although several regional blocs and economic consternations will experience geo-economic confrontation in 2023, global solidarity will be strengthened at the end of the war as emphasis begins to shift to global cooperation, economic integration, and advancement of plurilateralism.

Global headline and core inflation will moderate

As energy and food inflation become increasingly subdued in 2023, we expect global inflation to maintain a downward trend. Interestingly, both core inflation and headline inflation will decelerate in 2023 as currency crises ease and supply chain distribution improves. Headline inflation will slow to 4.7% from 7.0% in 2022 while core inflation is expected to slow to 3.2% from 4.3% in 2022

Restrictive monetary policy will undermine growth outlook

Higher interest rates and elevated inflation weakened household consumption and heightened the cost-of-living crisis across the world in 2022. Although global central banks will be less hawkish in 2023 than in 2022, higher interest rates will weigh on private consumption and investment in 2023. Consumers will draw down on their savings to support their consumption demand due to high borrowing costs. As consumer demand wanes, albeit mildly, investment spending will moderate in 2023 but will rebound in 2024.

Global financial conditions

By historical standards, financial conditions were tight in most of 2022, especially in advanced and emerging market economies, with the exception of China. As the economic outlook deteriorates amid heightened uncertainty, the risk of markets repricing economic risks rises. Emerging markets and developing economies will struggle with sovereign rating downgrades as borrowing costs rise amid subdued fiscal revenue. Limited access to credit and high costs of borrowing will trigger corporate mortality, widespread unemployment, and social crises in developing countries.

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