Report: Election Uncertainty, Debt Burden, Others to Expose Nigeria’s Economy to External Shocks in 2023

*Elevated oil prices to bolster foreign reserves, reduce pressure on naira 

*FDC insists Nigeria’s fiscal space overheating 

*Predicts country may approach IMF for debt restructuring

Emmanuel Addeh in Abuja

Financial Derivatives Company Limited (FDC), one of Nigeria’s foremost sources of business information and economic data, has predicted that the uncertainties surrounding next month’s elections and the country’s growing debt burden will constitute a major risk to the Nigerian economy this year, making it more vulnerable to external shocks.

In its monthly economic update for December, the Bismarck Rewane-led group listed other local risk factors to look out for during the new year as: Forex pressures, inflation, rising borrowing and logistics costs as well as declining demand in major export markets.
However, on the bright side, FDC posited that elevated oil prices will likely boost Nigeria’s depleting foreign reserves in 2023, thereby reducing pressure on the naira, but on the condition that the country continues to ramp up its crude oil production.

The National Assembly recently passed a N21.8 trillion budget, pegging Nigeria’s crude oil benchmark at $75 per barrel from the previous $70 per barrel while production for 2023 was put at 1.69 million barrels per day. Although production data for December 2022, had yet to be released, in November, Nigeria produced roughly 1.2 million bpd.

With the Russian war likely to continue throughout 2023, FDC noted that it will persist in impacting Nigeria’s economy, particularly through supply chain disruptions and higher commodity prices.
“The internal crises facing Nigeria are making the country less resilient to external shocks. It, therefore, brings to mind the question: In 2023, how deeply will Nigeria feel the strains of these externally induced shocks?

“Beyond the influence of external forces, Nigeria’s domestic economic landscape remains rough. The economic uncertainty created by election expectations, a heavy debt service burden, forex pressures, and inflation are a few of the challenges Nigeria’s economy is facing, which will continue to make the country vulnerable to external shocks.

“In addition, adverse weather conditions, rising borrowing and logistics costs, and declining demand in major export markets may subdue economic growth in 2023,” the document released at the weekend explained.
Regardless, it noted that to tame hyperinflation in the country, protect the currency peg to the US dollar and reverse capital flight, the Central Bank of Nigeria (CBN) will likely maintain its increase in interest rates.

In addition, it stressed that borrowing costs will stay high, discouraging excess borrowing from consumers for  consumption purposes and dwindling the appetite of firms towards collecting loans because of high  interest payments.
Nevertheless, it stated that Nigeria’s inflation is projected to taper  by the end of the year due to the lag effect of the  central bank’s interest rate hike.
“Also, the demand for crude oil at the global market is rising. The increased demand is expected to keep the oil price elevated. The oil price is expected to average $85 per barrel in 2023.

“The expected rise in oil prices above the 2023 budget benchmark is expected to bolster external reserves, which may help alleviate the pressure in the forex market currently stoking inflation,” the report said.
But it stated that this does not change the fact that the exchange rate premium may not vanish in 2023, predicting that the divergence between the official and parallel rates could persist in the coming year, due to forex supply shortages.

“To this end, exchange rate policy reform in 2023 is inevitable as it is the panacea to easing the current pressure in the forex market,” FDC noted.
Another important trend to watch out for in 2023, the report said, is fiscal balance, with a budget worth N21.8 trillion, having been passed and fiscal deficit now amounting to N11.1 trillion while debt service payments are estimated at N6.6 trillion.

It pointed out that Nigeria faced a limited fiscal space in 2022, and is expected to worsen in the coming year due to high level of consumption and low oil production as subsidies continue to erode a substantial part of government revenue, thereby worsening the fiscal crisis in the country.
Given the decline in oil production amid oil theft and vandalism, it expressed doubt whether Nigeria may be able to achieve the targeted earnings from the crude oil sale to fund the 2023 budget.

“The narrow non-oil revenue base is not helping the situation. Nigeria is challenged by high fiscal pressure. The government’s deficit will grow as spending exceeds expenditure.
“The fiscal deficit has widened from 4 per cent of Gross Domestic Product (GDP) to approximately 5.2 per cent of GDP between 2021 and 2022. The fiscal sustainability criteria for most countries is typically 3 per cent. Nigeria’s fiscal deficit is already above the threshold, suggesting that Nigeria’s fiscal space is overheating.

“Though fiscal deficit is expected to slightly ease in  2023 owing to more efficient utilisation of revenue and expected gradual removal of subsidy, Nigeria’s public debt profile is becoming concerning,” the document added.
Aside the worrisome macroeconomic situation, the FDC maintained that the outcome of the 2023 general elections remains a burning issue since who becomes the next president of Nigeria could ultimately define a new path of recovery for the country.

On the contrary, it stated that the next leader could also continue to raise the eyebrows of the international community on the possibility of Nigeria steering its way back to growth like it did in the early 2000s.

The Lagos-based FDC stated that the astronomical increase in Nigeria’s debt stock in the past decade is pushing Nigeria to the brinks of sovereign default.
“In 2023, Nigeria will have no choice than to approach the International Monetary Fund (IMF) and could commence policy support instruments (PSI) programmes that could see her move to restructure its debts.

“By 2023, Nigeria’s debt-to-GDP ratio is expected to cross the 40 per cent mark with debt-service revenue ratio of nearly 100 per cent. This will shrink the fiscal headroom, making it difficult to finance critical developmental projects,” it added.

According to the report, although tight and unprecedented three-way race for the presidency is being envisaged, FDC noted that it expects that whoever that picks the mantle of leadership in 2023 will have no other choice than to undertake critical and far-reaching reforms