EIU: Inflation, Fiscal Pressures May Cause Serious Political Challenges for Nigeria

•Predicts currency devaluation as global oil prices dip by 2026 

•Says neglecting problems in ‘periphery states’ may lead to implosion

•Dollar demand by politicians piling pressure on local currency, reveals group

•Maintains impact of current insecurity will take decades to address

Emmanuel Addeh in Abuja

The rising inflation and fiscal pressures the country is currently experiencing may likely lead to serious political challenges for the current administration, the Economist Intelligence Unit (EIU), the research and analysis division of the Economist Group, has predicted.

As insecurity remained chronic in many areas, and inflation as well as unemployment accentuated the problem, a report by the organisation stated that the backdrop made much-needed but unpopular economic and fiscal reforms more difficult.

EIU said the situation will further worsen the economy, with other contributory factors being power supply issues and monetary tightening policies.

However, it predicted that growth will be stronger in 2023-25 owing to higher exports and lower imports in real terms, but added that it ultimately expects the economy to remain fragile and reliant on oil.

The report said, “Inflation and fiscal pressures will cause political problems for Nigeria. The Russia-Ukraine war will push up inflation through higher prices for diesel and for wheat, a staple. The fiscal deficit will widen to a multi-decade high as high world fuel prices push up the bill for petrol subsidies and as crude oil output remains low.”

In addition, it said that the current foreign-exchange scarcity might abate in 2022-25, as the current account moved into surplus in those years while devaluation of the naira was expected in 2026 as global oil prices dipped.

“We expect Nigeria to end monetary tightening from 2023, unlike central banks globally. The central bank is more concerned about output gaps than inflation, and will therefore fail to act aggressively enough to bring inflation down to target,” it said.

Although a signatory to an Africa-wide free-trade agreement, EIU stated that the government’s approach to regional trade would be protectionist in the short term.

The group further adjusted its forecast for the strengthening of the local currency on the back of upcoming election campaigns and as politicians massively mopped up the greenback.

It stated, “Demand for hard currency by campaigning politicians ahead of a general election in February 2023 has exerted pressure on the naira, and we have adjusted our exchange-rate forecast moderately from an average of N416:US$1 to N419.7:US$1 in 2022.

“We have revised up our annual average inflation forecast for 2022, from 17.3 per cent to 19.1 per cent, reflecting strong upward price pressures for food that have exceeded expectations.

“The Nigerian economy has been more resilient to multiple headwinds, both external and domestic, than anticipated, growing by 3.4 per cent in the second quarter of 2022 and powered by services. Our full-year growth rate forecast has inched up from 2.9 per cent to 3.1 per cent.”

On major risks to its forecast, EIU noted that the new Petroleum Industry Act (PIA) might inspire militancy in the Niger Delta, while social unrest forced government to make concessions on its reform agenda and the government adopted a permanently restrictive attitude towards regional trade.

It further predicted a moderate chance that Boko Haram activities might spread from northeastern to central Nigeria, while the banking sector underwent another crisis, which were risk scenarios that might substantially change the business operating environment over the coming two years.

Stressing that the Muhammadu Buhari presidency had been undermined by a sharp deterioration in security conditions across the country, the report noted that the problem had reached a scale that could take several generations to address.

The report said, “Ethno-linguistic and religious divides are compounded by mass poverty, and the government lacks the resources (and often the will) to make federal Nigeria function as a whole.

“The military and police are overstretched and unable to tackle the multiple security crises simultaneously. Emergencies will be triaged, with military resources deployed to whichever emergency is considered most pressing.

“There will be unceasing conflict in the north-east, particularly in Borno state, between the military and two Islamist terrorist groups, Boko Haram and Islamic State West Africa Province. Insufficient military resources will prevent the government from regaining full control over that region.”

According to the group, unrest in the South-east will be driven by Biafran secessionist groups, with Biafran perceptions of under-representation in politics growing stronger over time, and by militants in the oil-producing South-south.

It argued that oil theft and sabotage remained major risks to crude oil production, partly because communities in oil-producing areas felt they did not benefit sufficiently from Nigeria’s oil wealth.

“ This will hold crude production back in the short term, especially, as military operations are carried out,” the report said.

With a broader surge in kidnappings and banditry by heavily armed and organised criminal networks expanding their activities into central Nigeria and merging with terrorist cells, EIU stated that although keeping the capital safe might be achievable, leaving the troubled states neglected would cause serious problems.

The report added, “EIU’s baseline assumption is that Nigeria’s federal government will remain able to assert control over ‘core’ areas, such as Abuja, the capital, and other places of economic and political importance, at the expense of periphery regions long mired in conflict.

“This will be enough to keep the government in power but will leave much of the country highly dysfunctional. There is an outside possibility that neglect of the periphery could reach an implosion point in 2023-26, resulting in civil war.”