The Lagos Chamber, in fulfilling its role as an economic thinktank and an advocacy body reviews the economy at regular intervals through various events, platforms, and on various private sector issues. The Chamber, in 2022, considered various issues as they emerged looking at how these issues affected the business community and made very useful and practical recommendations towards having a thriving and enabling business environment. In this statement, the Chamber has reviewed the year 2022 and projected an outlook for the year 2023.
As we enter the year 2023, the global economy, beyond the mounting uncertainties, may continue to face a confluence of challenges. From persistently high inflation and aggressive global monetary policy tightening to the continued disruptions caused by the Russia-Ukraine war and the energy crisis, weak consumer demand and political upheavals, our projected outlook remains a hard landing. With several shocks suffered by many economies and over a greater portion of 2022, various projections and analysis of economic conditions across regional blocs point to the likelihood of a recession or a significant slowdown of growth in 2023 due to spiralling inflation, high energy cost, monetary policy tightening, and weakening consumer demand. Global growth, though positive, slowed down by about 50 percent between 2019 and 2022.
Looking further into 2023, the war in Ukraine and mounting sanctions on Russia may all continue to impact supply chains for commodities and shocks to financial systems across the world. The likely failings of the G7 countries’ agreement on Russian oil price cap, resurgence of Covid infections and likely return of restrictions, and renewed tensions in the Middle East may all continue to keep oil price upward and volatile in the short term. Oil prices rose by 44.87 percent in 2022, the highest in five years.
For Nigeria, the base factors that may continue to drive the major economic indicators are the rising inflation rate, tight monetary policies, an unstable currency, foreign exchange scarcity, debt burden, currency management, food supply disruptions, exchange rate volatility, and election spending.
Monetary Policy Developments
During the year 2022, the Central Bank of Nigeria (CBN), in response to the spiralling inflation rate, deployed a tightening monetary policy to stabilize prices. The rates rose from 11.5% in January and peaked at 16.5% as at November 2022. This is expected to rise further during the MPC meeting in January to 17% to curb the persistent inflation and prevent capital flight. The Chamber had earlier recommended that rate hikes alone would not curb inflation except the real factors like food supply disruptions, high energy cost, scarcity of FOREX, and the security challenges around agricultural production locations that have fuelled low production and high logistics cost. In 2023, we need fiscal interventions to support strategic sectors like manufacturing, agriculture, transport logistics, and more allocation of FOREX to productive sectors.
The Nigerian economy in 2022 recorded growth in the first three quarters but slowing down from 3.54% in Q2 to 2.25% in Q3. We expect to have a growth reported for the last quarter of 2022. The slowdown was driven by decline in aggregate demand in the face of inflation spikes, commodities’ supply chain disruption, high energy cost, and FOREX scarcity. In 2023, we expect to see growth in sectors like manufacturing, agriculture, transport, telecommunications, and trade.
With Nigeria having the third largest subscriber base in Africa (after South Africa and Egypt), the telecoms sub-sector is expected to record growth above the 10.1% achieved in Q3 2022 driven by the growing deployment of Payment Service Banks (PSB) by the telcos, increase in subscribers using more telcos’ services, and the expected innovation coming with the launch of the 5G technology. The Government needs to be more sensitive to the regulation of the ICT sector to promote growth and support private sector operations.
The agriculture sector witnessed quite a lot of challenges ranging from insecurity, poor road network to connect markets, high cost of farm inputs to recently, the flooding disaster caused by climate change. Despite these challenges, the sector recorded growth all through the year 2022. In 2023, government’s intervention through targeted financing support to this sector can boost agricultural production, create jobs, and lower the spiking food inflation that has been responsible mainly for the rising headline inflation all through 2022. The African Continental Free Trade Agreement (AfCFTA) provides huge opportunity to explore the African markets with our agricultural products. We urge the Federal Government to scale up plans of establishing special economic zones where agro-processing activities are supported to produce finished food products for our markets and for export. With some of these challenges resolved, we expect to see a higher growth rate at above 3% higher than the less than average 2% recorded in 2022. We reiterate our call earlier made that government at all levels should invest more on prevention of climate change induced natural disasters like flooding.
The manufacturing sector suffered from headwinds like scarcity of FOREX for import of inputs, weakened consumer demand due to weak purchasing power, high energy cost, logistical challenges, policy uncertainties, and harsh regulatory environment. With these factors persisting into 2023, we may likely record a growth in the sector away from the negative growth of -1.9% as at Q3 of 2022. With lowering imports due to forex scarcity, local manufacturing could rev up in growth to meet the growing unmet local demand for hitherto imported finished products. However, this can only happen if we address issues like rising inflation, scarcity of FOREX, high energy cost, high interest rates, and logistics challenge due to insecurity in most parts of the country. In the case of subsidy removal by the new administration, we should expect some shocks to the economy in the short term with possibility of adjusted pricing and demand in response to market forces in the long run. The Dangote Refinery coming into operations by mid-year will boost production levels and support growth in the manufacturing sector. However, the contribution of manufacturing to GDP may fall from the 8.2% recorded during the third quarter of 2022 except the Government takes urgent and targeted financing support to critical productive infrastructure in the country.
Construction and Real Estate Sector
The construction and real estate sector will respond positively to a rise in investment from people wishing to store value through real estate investment. The last quarter of 2022 may have witnessed huge investment in this sector that would transmit into real growth in the first quarter of 2023. The coming on stream of Ajaokuta Steel Company is expected to support a solid growth in the construction sector. The recently approved access to pension funds for mortgage policies can have a positive effect on the real estate sector as more people are able to afford a mortgage to purchase houses. Some of these innovative financing options may support a robust growth in connected sectors. This, again, calls for best practice regulation by the Government to create an enabling environment where private sector operations can thrive. The windfall from the electioneering campaigns by some actors may also find their way into the real estate sector. With the dire need to boost foreign exchange earnings, the Government should invest more in export support infrastructure and create linkages into the African market where we can export more products like steel from the Ajaokuta Steel Company to earn foreign exchange in the long run. With all of these, the sector can contribute higher rate than the 5.2% recorded in Q3 2022.
As at the end of the first half of 2022, Total Debt Service stood at ₦2.597 trillion, higher than the prorated sum of ₦1.978 trillion .by ₦619.81 billion (31.33 percent). Also, the interest payments on Ways and Means collected from the Central Bank of Nigeria amounted to ₦714.74 billion. According to data from the Budget Office of the Federation, the sum of ₦1.333 trillion was used for domestic debt servicing, a difference of ₦52.34 billion (4.09 percent) from the prorated half year projection, while ₦549.70 billion was spent on external debt servicing during the period under review. With the approved plan of the Federal Government to restructure its Ways and Means loans of N23 trillion, Nigeria’s total debt stood effectively at N67.7 trillion by end of 2022. Clearly, we must watch the cost implications of our borrowing and spending.
The Federal Government needs to sustain its targeted interventions in selected critical sectors like agriculture, manufacturing, export infrastructure, tackling insecurity, and free more money from subsidy payments. It is very imperative that we need sound monitoring and evaluation over the budget allocations to capital projects and defence spendings to respectively tackle infrastructural deficit and the fight against insurgency. We urge the government to tackle oil theft to earn more foreign exchange, borrow from cheaper sources to reduce the burden of debt servicing, and pave way for the removal of the fuel subsidy by the incoming government. With increased spending by the government for census and general elections, the government must block revenue leakages, reduce costs, and empower the private sector to create jobs and generate more revenue to the government.
Dr. Chinyere Almona, FCA
Lagos Chamber of Commerce & Industry
Monday 2nd January 2023