Failure to scrap fuel subsidy presents major fiscal risk to Nigeria, as Dangote Refinery presents upside risk – report

Key highlights

• The report said Nigeria faces a major fiscal challenge if it fails to remove fuel subsidies.

• Nigeria’s economic growth is predicted to cool in 2023 due to double-digit inflation and high borrowing costs.
• The non-oil sector of Nigeria’s economy has been the engine of growth, with growth in the agricultural sector gaining steam, while the country’s oil sector continues to be a drag on overall growth.

Analysts at macroeconomic intelligence provider, FocusEconomics, have said that the failure to scrap fuel subsidies presents a major fiscal risk to Nigeria.

This was stated in its April 2023 Consensus Forecast report, which was seen by Nairametrics. According to the report, Nigeria’s economic growth will cool in 2023 amid double-digit inflation and high borrowing costs. The report stated:

• “Failure to scrap the government’s fuel subsidy is a major fiscal risk, as is the evolution of the cash shortage. Widespread insecurity is a key downside risk, while the coming online of the Dangote refinery is an upside risk.
• “Nigeria’s oil sector has continued to be a drag on overall growth, albeit less so than in previous quarters. In Q4, the sector posted a 13.4% decline, a more moderate contraction than Q3’s 22.7% plunge.
• “Oil production rose to an average of 1.34 million barrels per day (mbpd) in Q4 from 1.20 million barrels per day (m/bpd) in the previous three months. The improvement in production was largely due to the government’s ongoing crackdown on oil theft and the restoration of operations at a terminal in November.
• “The non-oil sector of the economy was the engine of growth—as it has been since late 2020. Growth in the sector picked up to 4.4% year on year in Q4 (Q3: +4.3% year-on-year). The acceleration chiefly reflected the agricultural sector gaining steam and growing 2.0% in Q4 (Q3: +1.3% year-on-year).”

The FocusEconomics report highlights the fact that inflation surprised markets on the upside once again in February 2023, stating that it came in at a near 18-year high of 21.9% (January: 21.8%), further above the upper bound of the Central Bank’s 6.0–9.0% target band. Analysts project that in 2023, inflation should gradually moderate from current highs, pressured by tighter monetary policy. Also, currency depreciation remains a key upside risk.

What you should know

FocusEconomics panellists see GDP growth coming in at 2.7% in 2023, which is up 0.1 percentage points from last month’s forecast, and 2.9% in 2024.

Meanwhile, the panellists project that in 2023, weaker performances in larger economies such as Ghana, Nigeria and South Africa will overshadow more robust momentum elsewhere. 

• “Risks remain skewed to the downside and include extreme weather events, above-target inflation and higher interest rates that bode ill for debt servicing costs and debt sustainability.
• “Regional inflation ticked up to 16.9% in January (December: 16.6%) as stronger price pressures in Nigeria more than offset cooling inflation in Ghana and South Africa. Inflation across most countries in the region is set to cool in 2023 but remain above central banks’ targets,” the report added.