The choice of macroeconomic policy framework has severely affected Nigeria's economic performance over time. As with every economy, Nigeria is locked in an economic impossibility trilemma involving (1) achieving a stable currency exchange rate, (2) financial market openness in terms of capital mobility, and (3) achieving autonomous monetary policy. 

The trilemma suggests that Nigeria can choose any two, but not all three: monetary independence, exchange rate stability, and financial integration. This framework poses a significant challenge for policymakers, requiring a delicate balancing act. 

• A fixed exchange rate system is associated with monetary policy autonomy, but capital becomes immobile. A fixed exchange rate system with CBN autonomy in interest rate setting and monetary policy implementation may restrain system liquidity and trigger capital flight. 
• A fully flexible exchange rate system is associated with monetary policy authority and capital mobility. Allowing a market-determined exchange rate grants the CBN greater autonomy to adjust interest rates and implement policies in response to economic conditions. This will further increase market liquidity and capital mobility but may introduce volatility in the foreign exchange market.
• A fixed exchange rate system with capital mobility means giving up the monetary policy autonomy. In the context of this model, the CBN's capacity to independently set interest rates and implement policies is curtailed is curtailed by the commitment to a fixed exchange rate regime.

Theoretically, Nigeria operates a flexible exchange rate system, where it promotes an unhindered flow of capital through foreign investments into the economy, and the CBN has the autonomy to set interest rates with its exchange rate, which is considered flexible. However, there has been an obvious departure from this stance by recent monetary policy authorities, who have pursued a managed exchange rate system by fixing it at a certain premeditated range. In so doing, the monetary authority has tried to simultaneously uphold the three aspects of the impossible trilemma. 

The somewhat fixed exchange rate system has proven to be fraught with challenges, such as multiplicities of rates, increasing parallel premiums, and persisting illiquidity in the foreign exchange market as reserves maintain a free fall. Despite concerted efforts by the CBN, the institution finds itself depleting the reserves quickly to safeguard the naira's stability. The parallel premium between the official and BDC rates has widened to about N300 as of December 2023, contributing to the country's inflationary pressure. 

With a managed exchange rate and the CBN maintaining its monetary policy autonomy, the country has suffered capital flight and a decline in the influx of foreign investments into the economy. Consequently, the naira has lost a huge value with respect to a basket of currencies as dollar supplies weaken. This has continued to foster instability in the foreign exchange market (see illustration 22 below).

Illustration 22:

The new leadership of the CBN has opted for a system that favours a flexible exchange rate system and monetary policy authority. We believe this offers an opportunity for capital mobility into the country and the CBN has a chance to improve the foreign exchange supply while also giving positive foreign guidance to foreign investors. Albeit the Cardoso-led monetary authority must carefully weigh the trade-offs and prioritise its objectives based on the prevailing economic conditions and long-term goals.

Outcomes Scenario Analysis

FGN Economic Agenda Status

The status of the Renewed Hope Agenda of the current administration in 2024 is mixed, with ongoing policy efforts in areas such as the removal of multiple and anti-investment taxes, monetary policy effectiveness, support for households, and trade growth, while there are yet uncertainties and promises on job-rich growth and capital inflow, among others (see table 10 below).

Table 10: 

In numbers, the scorecard of the current administration (from May 29, 2023, up to January 19, 2024) also suggests a mixed bag (see illustration 23 below).

Illustration 23:

Three Case Outcome Scenarios

In the best-case scenario, we expect the Nigerian economy to grow by an average of 3.2% in 2024 with high growth rates, improved investors’ confidence, and high liquidity. This will be driven by a slowdown in geopolitical tensions and geoeconomic fragmentation; reduction in oil theft and vandalism; operation of Port Harcourt and Dangote Refineries; moderating effects of fuel subsidy removal and FX liberalisation; growing FX reserve; and significant improvement in FX supply. 

In the base case scenario, we expect the Nigerian economy to grow by an average of 2.90% in 2024 with improved growth rates, investors’ confidence, and FX, fiscal, and systemic liquidities. This will be driven by persistent geopolitical tensions and geoeconomic fragmentation, low reporting of oil theft and vandalism, moderating effects of fuel subsidy removal and FX liberalisation, relatively low FX reserve, and relatively stable but inadequate FX supply. 

In the worst-case scenario, we expect the Nigerian economy to grow by an average of 2.45% in 2024, with growth remaining repressed; Liquidity challenges persist, low investors' confidence, and macroeconomic instability. This will also be driven by further disruption to global trade and economic integration, persistent large-scale oil theft and vandalism, shrinking FX reserve without adequate buffers, continuous FX depreciation, heightened cases of insecurities and/or flooding, and high energy cost (see chart 23 below). 

Chart 23: