KPMG: FG’s Target of 6% Annual GDP Growth Not Feasible

*Says it is overly ambitious amid very limited space for such progress

Bennett Oghifo

KPMG Nigeria in a memo released yesterday said Nigeria may not be able to achieve six percent average Gross Domestic Product (GDP) growth rate in four years as envisaged by President Bola Tinubu.

In his inaugural speech on May 29, Tinubu set a target to increase the GDP growth rate of the country by six percent on average in the next four years through budgetary reforms aimed at stimulating the real sector of the economy.
But KPMG in a flash note titled “Prospect for Attaining six percent Average Growth Rate in 4 years”, said the target might be difficult to attain within the timeframe set by the president.

KPMG states: “For example, the consensus of analysts is a GDP growth in 2023 of between 2.7% and 3.2%. Thus, if we assume a GDP growth of 3% in the first year, the economy will then have to grow by an average of 7% for the subsequent three years and moving growth from a forecasted 3% in 2023 to at least 7% in 2024 and afterwards, seems overly ambitious.”

KPMG said attaining a six percent real GDP growth on average from 2023 to 2026 means growing the value of real GDP from N74.6 trillion in 2022 to N92.5 trillion by 2026, representing an increase of N17 trillion in four years.

The professional services firm explained that within 12 years (2010 to 2022), real GDP grew by about N17 trillion which will have to be replicated in just four years and within a much more challenging macroenvironment that cuts across the fiscal, monetary, external, and real sectors.
The firm said while the six percent target is unlikely to be achieved, the best possible GDP growth rate to be achieved within the next four years would be between 4 and 4.5 percent.

KPMG explains further: “The role of economic growth in reducing poverty is well recognised, especially if the benefit of that growth is adequately distributed. Nigeria’s growth since 2019, has been fragile, not growing fast enough to contain population growth (2.6%-3.0%) and needs to be less inequitable (with a Gini coefficient of 35.1% in 2022). Accordingly, per capita income has contracted by over 40% since 2015.

“The fact that Nigeria’s GDP will need to grow by at least 6% to generate enough jobs to absorb labor market growth (about 4% per annum) and reduce poverty is well understood by President Tinubu’s administration. The president, during his inauguration speech, had set a target to increase the GDP growth rate of the country by 6% on average in the next 4 years through budgetary reforms aimed at stimulating the real sector of the economy.

“GDP, using the expenditure approach, is the cumulation of household and government consumption expenditure, private and public investment, and net exports which means the president will have to introduce policies and take decisions that will lead to growth across these variables. However, taking decisions in one variable can lead to a decline in another.

“For example, to grow government revenue to expand government consumption and investment, it might increase taxes and/or borrow from the private sector. However, increasing taxes can lower purchasing power and slow consumption expenditure growth. At the same time private investment may be curtailed as business earnings are squeezed from slowing demand, higher costs from higher taxes and higher interest rates as government borrowing crowds out private sector lending and then pushes rates up.

“The ability to maintain a fine and delicate balance across these variables will be important. But where will the required 6% average growth needed to meet the president’s target come from?
“Private investment which accounts for the second largest share of GDP is also limited by the high inflationary environment and the weakness in consumption expenditure. It is also constrained by the increase in finance costs with the CBN raising MPR from 11% to 18.5% and this high interest rate environment is expected to remain in the short to medium term.

“The sector’s expansion is also constrained by the overall high cost of operations, as well as supply and transport bottlenecks and power challenges. The initiatives government and the private sector may also have to put in place to cushion the effects of the removal of petrol subsidies may also worsen the costs of businesses and leave less for expansion in the short to medium term which covers the duration of the president’s first term and the focus of his growth targets.
“Net exports are currently characterised by crude oil exports which still account for most of total exports having challenges with production which has now been capped by OPEC. With respect to non-oil exports, it has not grown sufficiently due to challenges in production of its main export product, crude oil, and is unlikely to grow sufficiently in the next few years given continuous production challenges in the sector and the recent OPEC+ quota on output at 1.38mbbd.

“At the same time, non-oil exports are unlikely to record any dominant performance in the short to medium term as all the factors that need to be fixed for this to happen will take a longer period to be effective. At the same time import demand is set to continue, especially as border controls and import restrictions are relaxed. With exports unlikely to rise substantially in the short to medium term and imports not likely to slow, growth in net exports will also be difficult.
“Accordingly, the government’s major short-term growth strategy will therefore be to boost government investment and government expenditure (accounting for about 15% of GDP combined) to attempt to unlock the potential of the private sector and stimulate domestic consumption and exports.

“It may therefore have no option than to borrow more and/or increase tax collection given the low fiscal space and despite the already high debt and debt service environment of above 50% even after subsidy removal. This may however constrain GDP growth in the short term by squeezing households and businesses, this further indicates that 6% on average in 4 years is unlikely.

“In conclusion, while we expect stronger year on year growth over the next few years, we are of the opinion that there is very limited space to attain a 6% average real growth rate in four years or an increase in real GDP by N17 trillion.
“We are of the opinion that an average GDP growth rate of between 4% and 4.5% at the best is more feasible in the next four years. Even this will require the country to get its policies right and keep consistent faith with macroeconomic reforms.”