Contributor: Edmund Minimah
Managing Partner, Freed Capitals

Date: 5th January 2023

“The global economy is poised to slow down this year, before rebounding next year. Growth will remain weak by historical standards, as the fight against inflation and Russia’s war in Ukraine weigh on activity,” Pierre-Olivier Gourinchas, the chief economist and director of IMF’s research department, said.

“The IMF has said that about 84 percent of countries are expected to have lower headline inflation in 2023.

“For us at Freed Capitals, we tend to look beyond statistics and numbers and go by antecedents and the current leadership disposition. The overarching theme in 2023 will be pre & post elections related issues and, perhaps on an equally vital note, how whoever emerges as leader deals with the unprecedented national debt (₦44.06 trillion), near-debilitating debt servicing costs (estimated at ₦5.24 trillion in 2022) and expensive yet popular petrol subsidies.

“The somewhat negative effects of previous electoral cycles on the Nigerian economy have been well-researched and documented. However, these are extraordinary times in Nigerian history, with the consensus being that the country is at a crossroads. Obtuse growth, high inflation, currency frailty, pervasive insecurity and worsening credit conditions have contrived to paint a grim macroeconomic picture and constrain the business environment.

Monetary Policy Pragmatism.

Treasury Bill rates (364-days) have declined by 1006bps to 4.78% in January 2023 from 2022’s peak of 14.84% (in November) despite the five Monetary Policy Rate (MPR) hikes (a cumulative of 600bps) since May 2022. As a result, we expect inflation to narrow in 2023 to 15-17%, also supported by the easing of global commodity prices from their peak in 2022. This prediction considers the impact of predicted floods and widespread insecurity on food production, as well as elevated energy prices, election-related spending, exchange rate pressures, and cost-reflective rates (petrol and electricity).

Nigeria’s total subsidy bill is forecast to reach ₦5 trillion in 2023 and this continues to limit expenditure on crucial infrastructure needed to galvanize economic growth in the medium to long term. While doing away with it would be inflationary and is likely to trigger backlash from unions and many sections of the wider public, it is critical to blocking one of the biggest controversies in Nigeria’s public finances. The removal of the subsidy will take away the incentive to smuggle petrol to neighboring countries where prices are market-oriented. At ₦185 ($0.41) per liter, the ninth cheapest globally, the petrol price in Nigeria is 38.3%, 35.6%, and 39.4% of prices in Benin ($1.07), Togo ($1.15), and Cameroon ($1.04) respectively.

Eliminating, or at least minimizing subsidies, will make way for further and more fundamental fiscal reforms. On evidence, higher oil prices ($100 per barrel in 2022) have become insufficient in balancing Nigeria’s budget – largely because of low oil production [1.1 million barrels per day (mbpd)] – 37.9% lower than its OPEC quota (1.8mbpd) and about 50% of 2013 levels (2.18mbpd).

Fiscal Overhang: Little Room to Maneuver

Nigeria's fiscal picture is bleak. Without additional (and increasingly expensive) borrowing, crucial spending on infrastructure, salaries, and debt payment will become nearly impossible. The 2023 budget (₦21.8 trillion) projects a fiscal deficit of ₦11.3 trillion (5% of GDP). This, in our view, going by precedent, is likely to overshoot on account of the historical retinue of poor revenue performance and petrol subsidy spending. The revenue expectations mean more debt and growing market concern about how the government can service its debt service obligations. Obtaining external financing is also complicated by high global interest rates.

The likely restructuring of the Ways and Means stock (estimated at ₦22.7 trillion) in 2023 will likely span several years to avert a liquidity crunch but is likely to tighten credit conditions if we assume largely domestic uptake by banks. This would also push up debt servicing costs significantly as Ways and Means Advances are projected to account for 30% (the largest chunk) of Nigeria's ₦77 trillion debt stock by May 2023.

The IMF has revised its economic growth projection for Nigeria downwards to 2.9% from 3.2% initially stated in June 2022. Freed Capitals has a slightly more optimistic forecast, at 3%, and believes GDP growth will be improved by election spending, improved oil output (to 1.3-1.4mbpd), and still high oil prices ($88pb). How quickly Nigeria can stem rampant oil theft and vandalism will be crucial to boosting foreign exchange earnings and providing the CBN with enough ammunition to intensify its interventions in the forex market.

In addition, Nigeria's insecurity challenge will continue to be a major issue in 2023. It worsened in 2022 and is now rife in many sections of the country. The scale of the challenge will require a more holistic approach – Identifying and confronting issues around human capital development and effectively deploying human and material resources to the military and police force, in combating these security challenges.

Forecasting the value of the naira is a bit tricky as the protectionist policy directions of the current administration have swayed the CBN's dogmatic obsession with holding on to the value of the currency. All three leading presidential candidates, on the surface, appear willing to 'allow' for a more market-determined exchange rate. We believe a successful election would ease frayed nerves and bolster investor confidence. We forecast a gradual downward adjustment of the official exchange rate to ₦480-500/$ and a simultaneous increase in FX supply, which would signal a willingness to shift ground and would likely trigger an appreciation of the naira in the parallel market to ₦650-680/$. This would narrow the parallel market premium and curb speculative activity.


2023 will be a pivotal year for Nigeria. Its development challenges are numerous and the choices facing the next government are far from easy. Voter suppression and apathy is unlikely to be as pervasive as in recent elections and the winner could have political capital to draw on. Despite these headwinds, the outlook is less gloomy than in our forecast, and could represent a turning point, with growth bottoming out and inflation declining.

However, all optimism at this point is on hold, at best, cautious. Nigeria is miles away from building a globally competitive non-oil export base. The first step on the path to accomplishing this is developing a strategy that is both coherent and comprehensive. The hope is that this is outlined and articulated by the time the next set of leaders come in by May 29, 2023, as the world is watching with eager anticipation.

The removal of subsidies, and the attendant incentive for smuggling, should finally bring an end to the confusion over how much petrol is consumed in Nigeria and, in theory, should also right-size petrol imports (which account for 15% of the total import bill), conserving valuable foreign exchange. However, the launch of the 650,000bpd Dangote refinery in January 2023 is a potential game-changer as it could eliminate Nigeria’s petrol imports. This hinges crucially on the complete price deregulation of petrol as the export market presents a significant opportunity that will be virtually impossible to pass up. The 60,000bpd Port Harcourt refinery is also expected to be completed and back on stream in Q1’23.

The largest underlying threat to Nigeria’s overall stability is the continued deterioration of economic conditions and living standards. While things are likely to get worse before they get better, you can’t make an omelette without breaking a few eggs.