Financial Sectors’ Contribution to GDP Shrink 8.94% to N771.06bn on Inflation, FX Crisis

Kayode Tokede

Excluding the insurance sector, banks and other financial institutions contributed N771.06 billion to Nigeria’s real Gross Domestic Product (GDP) in third quarter of (Q3) 2023, a decline of 8.94 per cent from N846.77 billion in the corresponding period of 2023.

According to the National Bureau of Statistics (NBS), banks and other financial institutions’ contribution to GDP stood at N870.82 billion in Q1 2023.

Analysts have attributed the decline to unstable naira rates at the foreign exchange market, reforms in the Oil & gas sector by the federal government, and a double-digit inflation rate that has continually weakened consumers’ purchasing power and commercial banks’ lending to the real sector.  

With the inflation rate at 26.72 per cent as of September 2023 (27.33 per cent in October 2023), Stanbic IBTC Bank Nigeria’s Purchasing Managers’ Index (PMI) dropped to 49.1 basis points, down from September’s reading of 51.1 basis points, to signal the first contraction in the nation’s private sector since March this year.

New business decreased at a solid pace, thereby ending a six-month sequence of growth, as the steep inflationary environment acted to depress customer demand. Business activity also declined, falling for the second time in the past three months and to the largest extent since the cash crisis earlier in the year the PMI report by Stanbic IBTC Bank revealed.

The bureau, however, revealed that the banks & financial institutions, and insurance sectors contributed N2.73trillion to Nigeria’s economy in nine months of 2023, representing an increase of 25.3 per cent from N2.18 trillion reported in the corresponding period of 2022. 

The breakdown for the insurance sector, according to NBS showed that the insurance sector real GDP growth stood at N78.3billion in Q1 2023, and increased to N86.04billion in Q2 2023. It, however, dropped by 11.42per cent quarter-on-quarter (QoQ) to N76.22billion in Q3 2023.

NBS stated that the real terms growth in finance and insurance sectors totalled 28.21 per cent, higher by 15.52 percentage points from the rate recorded in Q3 2022 and higher by 1.37percentage points from the rate recorded in the preceding quarter.

“QoQ growth in real terms stood at -9.17per cent. The contribution of Finance and Insurance to real GDP totalled 4.36per cent, higher than the contribution of 3.49per cent recorded in the third quarter of 2022 by 0.87percentage points, and lower than 5.26 per cent recorded in Q2 2023 by 0.91percentage points, ”NBS disclosed in a report. 

NBS in its latest report disclosed that Nigeria’s GDP grew by 2.54 per cent (year-on-year) in real terms in Q3 2023, higher than 2.51 per cent in Q2 2023 and 2.25 per cent in Q3 2022.

It added, “The performance of the GDP in the third quarter of 2023 was driven mainly by the Services sector, which recorded a growth of 3.99per cent and contributed 52.70per cent to the aggregate GDP.”

S&P Global sector PMI survey data have shown resilient worldwide economic growth in early 2023 to have been fuelled by resurgent demand for consumer services amid a post-pandemic shift in spending away from goods towards activities such as travel, recreation and tourism.

Nigeria’s business environment is currently facing double-digit inflation, associated foreign exchange shortages that have impacted on prices of goods and services, and slow lending rates to customers.

Commenting on the finance and insurance sectors’ performance, a senior lecturer at Lagos Business School, Dr. Adi Bongo had predicted a further decline in financial institution contribution to GDP in Q3 2023 amid the removal of fuel subsidy and foreign exchange reforms.

“What is happening in the economy that has trigged inflation rate, the volume of business activities in Nigeria has significantly dropped and it may take a long time before the adjustment begins to happen.

“Nigeria is still stuck with a high level of infrastructure deficit, low energy production, and insecurity. These are the major indicators to drive the finance and insurance sectors and for now, no improvement and policy directions,” he said.

He stated that Nigeria’s economy is faced with the Central Bank of Nigeria (CBN) move to unify the Naira and federal government policy on subsidy as both reforms play a significant role in banks and finance sector real GDP growth.

According to him, the finance sector over the years has been resilient against the emergence of economic misfortune in Nigeria for obvious reasons. But for this time, the financial and insurance sectors were not insulated against the economic turmoil.

On his part, CEO Wyoming Capital and Partners, Mr. Tajudeen Olayinka said the decline in finance and insurance sector real GDP growth in Q3 2023 is a reflection of the state of the economy.

He said, “The fact that CBN has used more monetary policy tools to arrest inflationary pressure that is driven largely by supply-side factors, means that economic agents who rely more on demand-side improvement to survive would suffer severe setbacks, and that is the problem we are beginning to see in Banking and Insurance sectors.

“Rising inflation that is driven by supply side factors and CBN’s rate hikes in four quick successions are never going to be in the interest of demand side of the economy. A situation where financial instruments, including loans and advances by banks, are now being repriced on a continuous basis, means that the economy will suffer more severe setbacks from the resulting hardship.”

Also speaking, the Vice President, Highcap Securities Limited, Mr. David Adnori said that the bank and finance sector had recorded an aggressive growth rate through excessive use of online and internet banking facilities because of cash scarcity, but the reform of the new government, most especially in the foreign exchange market impacted on the financial sector GDP performance in Q2 2023. 

He added that, “The implication is that other key sectors like Agriculture and Manufacturing suffered the deficiency in the wrong implementation of currency redesign program and cash scarcity. The policy was badly mismanaged by CBN, and that is the result we are seeing today.”