Driven both by the size of its population as well as by its vast energy reserves, Nigeria is one of Africa’s most dynamic economies. Oil production still accounts for a significant part of government revenue, but the country has seen increased contribution to growth from the non-oil sector in recent years. The services sector in particular has become an increasingly important engine of economic activity, with financial services, transport and telecommunications acting as key drivers of growth.
Overall, Nigeria was able to recover quickly from the impact of the Covid-19 pandemic and its toll on energy prices in 2020. However, while the majority of oil-producing countries around the world have benefitted from significant increases in hydrocarbons prices following the start of Russia’s invasion of Ukraine in February 2022, Nigeria has faced challenges leveraging the potential of its oil reserves (see Energy chapter). Related issues including oil theft and security concerns have continued to hamper the country’s economic prospects.
Oil Wealth
Vast energy resources have brought advantages and disadvantages. The rise in the importance of Nigeria’s oil production in the 1970s contributed to the underdevelopment of other key sectors, including exports of agricultural and nonoil mining commodities. In the second quarter of 2023 hydrocarbons accounted for 88.7% of total export value at around N5.6trn ($13.3bn) for crude and N639.4bn ($1.5bn) for liquefied natural gas, according to the National Bureau of Statistics (NBS).
Daily oil output has been in decline in recent years, a result of ongoing security concerns and oil theft. Nigeria produced 2.1m barrels per day (bpd) in 2015, though this number slowed to roughly 1.2m bpd as of the second quarter of 2023. This has left the country facing economic headwinds. Having previously prioritised oil and gas production over other economic areas, Nigeria has untapped potential in sectors that could become key export revenue contributors in the medium term.
However, with energy revenue decreasing over recent years, having sufficient resources to finance a structural diversification of government revenue and export earnings presents a challenge. Oil and gas accounted for 5.3% of GDP in the second quarter of 2023, down from 6.3% year-on-year.
Reaching these production levels would allow Nigeria to recoup more from its energy resources while prices remain relatively high. Improvements in security, production from new oil wells, and the restart of operations in two major oil pipelines contributed to government optimism in early 2023.
The current headwinds facing the oil sector underscore the importance of diversifying the economy and reducing the country’s long-held dependence on energy exports. “In order to mobilise sustainable economic growth, the government must make difficult but necessary macroeconomic decisions, including the reduction of public debt and the revocation of subsidies to unproductive industries, such as oil and fuel,” Kehinde Ogundimu, managing director and CEO of the Nigeria Mortgage Refinance Company, told OBG.
Economic Performance
With a population of 225.8m as of November 2023, significant territory and valuable natural resources, Nigeria has a powerful economy. GDP grew consistently from $297.5bn in 2009 to $568.5bn by 2014, according to figures from the IMF. But the decline in oil prices that year led to a contraction. By 2017 GDP had fallen to $375.8bn. While that figure increased intermittently over the following years, domestic constraints such as insecurity and rising oil theft were further exacerbated by global macroeconomic shocks.
Because it relies on oil exports for 90% of its foreign currency revenue, the country was affected by the fall in oil prices triggered by the pandemic in 2020. As a result of the health crisis and global macroeconomic consequences, GDP contracted by 1.8% in 2020. The economy bounced back the next year, with GDP growing by 3.6% in 2021. However, the year 2022 brought several challenges, including rising insecurity and currency depreciation. Additionally, flooding in September and October of that year – affecting 27 of Nigeria’s 36 states – negatively impacted agricultural production (see Agriculture chapter). Even so, GDP growth slowed slightly in 2022, to 3.3%. In October 2023 the IMF downgraded Nigeria’s growth projections 2023 to 2.9%, down from its 3.2% forecast in April of that year.
GDP Composition
The energy sector plays a key role in global markets, but the country also has a diversified economy with access to valuable natural resources and an increasingly competitive services sector. As of the second quarter of 2023 services accounted for 58.4% of GDP, followed by agriculture at 23% and industry at 18.6%. Although modernizing and expanding the agriculture sector is a significant undertaking, Nigeria has the capacity to grow vast amounts of key export crops such palm oil, cocoa beans and cashew nuts.
The predominance of small-scale and uncompetitive farming has been a barrier to increasing the agriculture sector’s overall contribution to GDP. “Nigeria has a diversified economy, but the country needs to further diversify the sources of government revenue,” Franklin Ngwu, professor of strategy, corporate governance and risk management at Lagos Business School, told OBG.
Another structural element policymakers have been looking to tackle was the country’s rising fuel subsidy bill, which traditionally limited the country’s ability to capitalise on the benefits of higher global energy prices. In May 2023 the government announced it eliminated the programme, a move that the saved as estimated $1.3bn as of late July of that year. Government expenditure on fuel subsidies totalled $9.6bn in 2022.
Federal Budget
The elimination of expensive fuel subsidies is expected to free up much-needed financial resources, with the World Bank estimating reforms could free up to N3.9trn ($9.3bn) by the close of 2023. Nigeria has long faced difficulties securing fiscal revenue. Figures from the government and the IMF put the country’s tax revenue from the 2015-19 period at an average of 7.9% of GDP. This is significantly lower than the 12.7% average in sub-Saharan Africa and 29.8% global average. The impact of weaker receipts from the energy sector can be seen in a decrease in Nigeria’s federally collected revenue, from 6.4% of GDP in 2015 to a projected 3.9% in 2023.
Despite this trend, recent years have seen increased spending. In late 2021 the government announced a 25% rise in expenditure in its N16.4trn ($39.1bn) budget for 2022. Admitting the need for further borrowing to cover the budget deficit, the government justified the increase in expenditure in order to support the restart of the economy following the health crisis and to finance government efforts to improve the security situation.
Although the country posted higher non-oil revenue relative to 2021, the budget deficit was expected to increase from 5.9% of GDP in 2021 to 6.2% in 2022, according to the IMF. Factors contributing to the fiscal situation include the cost of fuel subsidies and the rising weight of debt servicing.
For the 2023 budget, the authorities pushed for an additional 6.4% increase in spending to reach N21.8trn ($52bn). However, the government faced criticism for allocating a small fraction of the budget to social investment programmes that help segments of the population, such as free school lunches, cash transfers and other support mechanisms. Ongoing challenges with budgeting are likely to continue unless Nigeria is able to broaden its tax base, which the government is working to address through a series of measures (see analysis).
Inflation
As is the case in many economies around the world, Nigeria is confronting higher inflation rates, which pose challenges for public and private enterprises alike. A combination of elements have contributed to elevated inflation, including macroeconomic changes and government policy.
One contributing factor to high inflation rates was the closure of Nigeria’s land border with Benin in August 2019. This was followed by the closure of the land borders with Cameroon, Chad and Niger in October of that year. The decision was reportedly enacted as a way to stem food imports and spur domestic agricultural production. However, this measure resulted in increased domestic food prices.
The start of the health crisis in 2020 and associated logistics restrictions negatively affected the domestic availability of certain goods, pushing inflation further up. Higher prices have been especially visible in food products such as bread and cereals, potatoes, yams, meat, fish, fruits, and oils and fats. Overall inflation reached an average of 17% in 2021.
As in many markets, the start of Russia’s invasion of Ukraine in early 2022 has exacerbated inflationary trends, with added pressure stemming from recent monetary policy decisions and foreign exchange restrictions from the Central Bank of Nigeria (CBN). Inflation rose consistently throughout 2022, starting at 15.6% year-on-year as of January. Climate events further had an impact: in September and October large-scale floods affected farmlands and disrupted economic activity. According to the NBS, year-onyear headline inflation reached 26.7% in September 2023, nearly six percentage points higher than the 20.8% rate recorded in September 2022.
“For many citizens, prices have gone up by 30% to 100%, depending on which products they consume,” Muda Yusuf, founder and chief executive at the Centre for the Promotion of Private Enterprise, told OBG. “The Russian war has worsened inflation because of the effect on energy prices. But the foreign exchange challenge preceded the war and was already fuelling inflation.”
Inflation is having a significant daily impact on the lives of millions of people. The World Bank has estimated that as many as 13m Nigerians slid into poverty between 2020 and 2022 due to the rapid rate of price increases and resulting limited access to food staples in urban areas of the country. However, the 2022 harvest and improvement in food supplies were expected to help drive inflation rates lower after hitting 20.8% in 2023 to 15.8% in 2024 and 14.7% in 2025, according to IMF projections.
Ongoing security concerns have also contributed to rising inflation. “The security situation is disrupting economic activity; people are afraid to travel. A lot of people only travel if it is necessary. This affects trade as well, and so the price of daily goods has been rising,” Ngwu told OBG.
Attempting to curb inflation and increase the number of digital transactions, the authorities enacted a weekly limit on cash withdrawals from banks in early January 2023, restricting withdrawals to $44 and $11,000 per week for individuals and businesses, respectively. In an economy heavily dependent on cash, the measure had an impact on some business operations. However, in July of that year the CNB exempted microfinance banks and primary mortgage banks from the policy.
Foreign Exchange
Although domestic and international factors are partly driving inflation, monetary and foreign exchange policy options are also involved. Nigeria’s currency, the naira, lost a significant share of its value during the years of low oil prices beginning in 2014. More recently, however, the government’s decision to operate multiple official exchange rates, in addition to the black-market exchange rate, has created additional challenges. Aiming to drive economic activity during the health crisis, the CBN lowered interest rates in 2020. However, the authorities did not begin to tighten policy in order to curb rising inflation rates until May 2022.
In parallel, however, lenders have also been restricting access to foreign exchange. “Most of the manufacturing sector is dependent on imported raw materials and machinery. Additionally, agriculture is dependent on imported machinery, agrochemicals and some fertilisers. All of this has been affected by the exchange rate,” Yusuf told OBG.
According to the World Bank, foreign exchange restrictions expanded the difference between official and informal exchange rates from 37% to 71% between January and October of 2022. “The central bank’s approach presents a challenge for the economy, especially in the way that it allows Nigeria to work with a series of different exchange rates,” Ngwu told OBG. “It creates room for people to make money out of the gap between the different rates without being productive.”
To help address this and bolster stability, in June 2023 the government introduced a new exchange rate unification policy that entailed the free floating of the naira. The gap between the official and black market rate briefly converged following the policy announcement. However, the gap had widened to nearly 30% as of September 2023.
The depreciation of the naira has been disruptive for business activity, with effects particularly felt by smaller businesses. Restrictions on foreign currency access by the central bank have become cumbersome. “It creates a lot of uncertainty: you do not know how much foreign exchange you can get, or when you will get it,” Yusuf told OBG. “This makes it hard for businesses to plan ahead, to import spare parts or manufacturing inputs.”
Borrowing Policy
Government borrowing from the central bank to cover fiscal imbalances – known as Ways and Means Advances – often leads the CBN to print more money, increasing the volume of money in circulation and further adding to inflation. It also raises the risk of unsustainable debt and public finances. The CBN has lent the government N23.7trn ($53bn) since 2015. However, the current regulations governing Ways and Means Advances state that the total amount advanced by the central bank to the government in order to cover a temporary lack of money cannot exceed 15% of government revenue in the previous year.
In order to help the government repay its debt to the CBN, in May 2023 Parliament approved a programme that will restructure loans from the central bank worth N23.7trn ($56.5bn). The restructuring plan was originally introduced in December 2022 by then-President Muhammadu Buhari, who at the time suggested turning the government’s debt into a 40-year bond at a 9% annual interest rate. However, in October 2023 the CBN signalled it would pull away from direct financial interventions.
Debt Burden
Rising expenditure, coupled with existing gaps in tax collection and revenue mobilisation, have put pressure on public finances. The growing role of debt in financing the budget has affected the country’s debt outlook.
Between 2015 and 2023 public debt is estimated to have increased from 14% of GDP to 37%. IMF projections see public debt rising as high as 42.3% of GDP by 2027, with the fund stating in November 2022 that while this level of debt is deemed sustainable by the authorities, it is projected to take up nearly half of total government revenue in interest payments. This makes the country’s fiscal position increasingly vulnerable to real interest rate shocks and leaves little fiscal room for spending on important sectors such as education and health, where Nigeria has room for development compared to other sub-Saharan African countries.
Investment
Devaluation is likely to complicate foreign direct investment (FDI) plans throughout 2023. Although Nigeria remains a large economy with significant unexplored potential both within and outside its energy sector, the combined challenges of ongoing security concerns and restrictions on the access to foreign exchange have dampened the country’s attractiveness for foreign investors. According to the UN Conference on Trade and Development (UNCTAD), annual FDI flows have fluctuated in recent years. After measuring $3.4bn in 2016, FDI inflows decreased to $775m by 2018. However, a new increase in foreign investment saw figures climb up to $2.4bn in 2020 and $4.8bn in 2021. This doubling of FDI was partly driven by a rebound in investment in oil and gas, according to UNCTAD.
The most recent figures from the NBS showed FDI totalling $86m in the second quarter of 2023, accounting for 8.4% of total investment and up from $47.6m in the first quarter of the year. However, this amounted to a 2.4% decrease relative to the first quarter, reflecting general cautiousness from investors about emerging markets’ short-term prospects, as well as broader challenges facing the economy.
Employment
Improving the investment climate should help the government fight unemployment and underemployment. In the first half of 2023 economic performance was mostly led by the nonoil sector, especially the agriculture, trade and ICT sectors. These and other non-energy activities present significant opportunities for the workforce, although high economic growth rates will need to be sustained for the economy to create sufficient jobs in the coming years. Higher employment rates will also help to curb insecurity, which has continued to be a challenge for the overall business environment.
Another obstacle lies in gaps in the availability of measurement data. In its February 2023 Article IV Consultation with Nigeria, the IMF noted that the absence of recent unemployment figures made it difficult to assess the impact that the post-pandemic economic recovery – which has primarily focused on the non-oil sector – was having on job creation across the country. The most recent figures compiled by the government, dating from December 2020, reported a 33% unemployment rate.
Outlook
Nigeria remains well positioned to reduce its reliance on energy exports and allow other sectors of the economy to flourish. Over the coming years, the non-oil private sector is expected to increase its weight within the economy. The development of the non-oil sector has underlined the potential for employment creation and export diversification. Nigerian firms also stand to benefit significantly from an elimination of foreign exchange rate differences and improvements to the security situation, which continues to affect business operations in many regions. Key hurdles to be overcome in order to increase the government’s fiscal space include improving energy revenue and restricting the increase in debt. This will free up more resources to combat poverty and invest in much-needed infrastructure to improve connections to the hinterland.
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