Key Policy Reforms That Can Stabilise Nigeria’s Economy

Nigeria’s economic narrative is painted with a spectrum of hues, from the buoyancy of a 3.3% projected GDP growth to the shadows cast by factors like inflationary pressures, rising unemployment, and the persistent depreciation of the Naira. In this interview with Olaotan Fawehinmi, Associate Director at Mediacraft Associates, his insights unravel the complexities of these dynamics and shed light on how to confront these multifaceted economic challenges facing Nigeria, specifically highlighting crucial policy reforms that could stimulate and stabilise growth, reduce high youth unemployment, and contain rising inflation in 2024.

? What significant factors drive Nigeria’s high youth unemployment rate, and what policy changes or programs could help address this?

Data released by the National Bureau of Statistics (NBS) in 2022 indicates that a substantial portion of our youth demographic, precisely about 53.40 per cent, is unemployed. The lack of corresponding economic development and job opportunities has created challenges in integrating the increasing number of job seekers. This is a pressing issue within the country’s labour market, and it calls for targeted interventions and policies to address youth unemployment and foster economic opportunities for this demographic.

Compounding these issues is Nigeria’s heavy reliance on a single revenue source, primarily oil, which adversely affects the availability of jobs in other sectors. This dependence has led to a rise in unemployment rates, causing many businesses to cease operations. The unemployment rate in Q2’23 was 4.2%, according to the Nigeria Labour Force Survey Q2’23 released by NBS. The inadequate infrastructure further impedes business growth and deters investment, exacerbating the unemployment crisis.

Interventions like the Technical Working Group (TWG) on Youth Employment and Skill Development in collaboration with the World Bank are positive, but much more needs to be done. With transparency, National Social Investment Programmes like the N-Power and the Government Enterprises Empowerment Programme (GEEP) can continue, expand and make an impact.

Addressing these challenges requires a collaborative effort from the government, private sector, and civil society. The stakes are high and evident. The mandate is to make our country better, and President Bola Ahmed Tinubu acknowledged this in his New Year’s Day speech. He highlighted the urgent and dire need to revamp our economy, restore security within our borders, revitalise our floundering industrial sector, boost agricultural production, increase national productivity, and set our country on an irreversible path towards national greatness that we and future generations will forever be proud of. Government intervention should include a comprehensive reform of the education system, emphasising practical skills and aligning curricula with the real needs of the job market.

Reflecting on the past, when industries like cocoa, groundnut, textile, and sawmilling thrived, provides insights into the potential success of diversified sectors. However, to adapt to the evolving economic landscape, there must be a commitment to regular policy evaluations and adjustments.

A holistic approach involving education reform, infrastructure development, economic diversification, and adaptable policies is essential for addressing Nigeria’s current economic challenges and fostering sustainable growth.

? With continued population growth in Nigeria, what sectors promise job growth and absorption of new labour market entrants? Do you think the youth are training for the relevant skills in today’s job market?

As of August 25, 2022, Nigeria’s population was estimated to be 217 million, with an impressive 70 per cent comprising the youth, totalling approximately 151 million. We have the quantity, but do we have the quality?

There is a substantial gap between the knowledge acquired by our current education system and the skills demanded by the job market. Rote learning stifles critical thinking and limits career paths for many. This mismatch results in individuals possessing skills that diverge from the opportunities available in the job market.

Amid the global drive for digital transformation, the technology sector and digital economy have robust sources for job creation. The World Economic Forum anticipates that, by 2025, technology will generate at least 12 million more jobs than it displaces.

Agriculture, a fundamental sector in Nigeria, is highly underutilised. Despite abundant land and labour, the lack of skills, capital, and an entrepreneurial mindset hinders its potential. Encouraging local manufacturing and industrialisation could remedy this, generating employment across the agricultural value chain, including production, logistics, and supply chain management.

The global push for sustainable energy aligns with the imperative for clean energy projects. Supporting such initiatives will address environmental concerns and nurture a skilled workforce in these burgeoning fields.

Nigeria’s rich cultural heritage and natural treasures offer tremendous prospects for growth in tourism, travel, and hospitality. However, realising this potential necessitates a supportive environment for entrepreneurs in these sectors.

While our demographic numbers are substantial, optimising their potential requires addressing the skills gap, fostering entrepreneurship, and investing strategically in sectors with high job creation potential. Only then can Nigeria transition from being predominantly a consumer to a producer and realise the true worth of its human capital.

? What reforms would you recommend to diversify the economy and encourage private enterprise and manufacturing to create jobs? Are there regulatory hurdles that need to be addressed?

There are growing concerns regarding regulatory obstacles and policies stifling businesses in Nigeria. The frequent changes in regulatory policies, particularly in the financial sector, contribute to business disruptions and financial burdens. The arbitrary interpretation of regulatory actions, especially when regulatory bodies exercise discretion and extract payments from businesses, notably Small and Medium Enterprises (SMEs), is a troubling trend. Additionally, the business landscape faces the challenge of regulatory risk, where abrupt changes in regulations, often on short notice, result in the collapse of some enterprises.

The bureaucratic procedures in Nigeria are characterised by administrative hurdles, delays, and complexity, creating obstacles for businesses. The lack of uniformity in regulations poses challenges for enterprises operating across state borders. The intricacies of Nigeria’s tax system, marked by frequent alterations, introduce uncertainty and impact the financial planning of businesses.

To earnestly pursue economic diversification, encourage private enterprise, and boost manufacturing for job creation, it is imperative to streamline and simplify registration and licensing processes. This will reduce bureaucratic impediments and foster entrepreneurship. Nigeria should establish policies to facilitate more access to credit for SMEs.

Encouraging private-sector investment in research and development through well-defined policies is crucial for fostering innovation and technological advancement. Simplifying customs procedures to expedite the exportation is necessary to reduce delays and associated costs.

Reviewing and updating regulatory frameworks to be more business-friendly and aligned with industry needs is essential. This will eliminate redundant regulations and overcome bureaucratic bottlenecks that hinder smooth business operations.

Fostering collaboration among the government, industry associations, and private enterprises is crucial. This collaboration should focus on developing tailored policies for critical sectors with high growth potential. Such strategic partnerships can contribute significantly to creating an enabling environment for business success, stimulating economic growth and job creation.

? Does access to financing and credit continue to be a constraint for small businesses and startups as job creators? What policy improvements could help here?

Access to financing and credit remains a significant constraint for small businesses and startups, a challenge common to Nigeria and prevalent in many economies worldwide. According to the World Bank, SMEs are pivotal contributors to global economies, accounting for approximately 90% of businesses and over 50% of employment globally. In emerging economies, formal SMEs contribute up to 40% of national income (GDP), and the development of SMEs is seen as crucial to creating the 600 million jobs needed by 2030.

Despite their vital role, SMEs face obstacles in obtaining bank loans, relying instead on internal funds or support from friends and family. Financial constraints are exacerbated by difficulties in producing bankable business plans demonstrating economically viable financial projections. There is also a lack of track records and collateral limitations. Additionally, a knowledge gap between SME principals and lending institutions often hinders the growth of SME ventures. Traditional credit risk assessments, which focus on the credit history and accumulated wealth of small business owners, often neglect the prospects of the SME.

Export efforts of SMEs are further hampered by their inability to access the required financial resources to navigate non-tariff measures for goods and regulatory requirements for services. Challenges in conducting adequate market research and generating critical market intelligence pose additional hurdles in the current international trade landscape dominated by behind-the-border measures.

For us to address these challenges, a comprehensive strategy is needed to improve SMEs’ access to finance. We need holistic approaches that integrate advisory and lending services. The World Bank suggests several vital components, such as financial sector assessments, implementation support for initiatives, enhancement of credit infrastructure, and the introduction of innovative practices in SME finance. A collaborative and multifaceted approach involving policy improvements and innovative financial instruments is crucial to overcoming these constraints and fostering the growth of SMEs in Nigeria and beyond.

? With high debt levels, how much can the government do in using fiscal policy tools to stimulate job creation or cushion economic shocks over the next year?

As per NBS data, Nigeria’s public debt, comprising both external and domestic debt, reached N87.38 trillion (US$113.42 billion) in Q2’23, compared to N49.85 trillion (US$108.30 billion) in Q1’23, reflecting a substantial 75.27% increase on a quarter-on-quarter basis. The breakdown shows that total external debt accounted for N33.25 trillion (US$43.16 billion), constituting 38.05% of the total in Q2’23, while total domestic debt stood at N54.13 trillion (US$70.26 billion), making up 61.95%.

Notably, most of the debt is domestically held and denominated in the national currency, providing the government with flexibility in managing and servicing the debt without causing significant disruptions. However, the economy is experiencing a severe downturn, making fiscal stimulus measures essential for boosting demand and job creation. The current high interest rate of 18.75% poses challenges for the government to take on additional debt without adverse consequences.

For effective fiscal policies, the government needs fiscal credibility, discipline, and the trust of markets and the public. These are necessary to implement responsible fiscal measures, and the risk of increased debt levels leading to higher borrowing costs and reduced confidence from creditors looms large. External factors, such as trade dynamics and global economic trends, also play a crucial role in influencing the success of fiscal measures.

In the 2024 budget presentation to the National Assembly, the President outlined eight priority areas: national defence and internal security, job creation, macroeconomic stability, investment environment optimisation, human capital development, poverty reduction, and social security. Structural reforms in these areas are seen as more impactful in the long term than short-term fiscal measures. Such reforms can address underlying economic issues, improve the business environment, enhance productivity, and contribute to building a more resilient economy.

? If there are roles that Nigeria’s employable population can play towards job creation and economic empowerment, what would they be?

The urgent requirement for Nigeria’s young population is a fundamental shift in perspective. Contrary to popular belief that a lack of “financial capital” is the primary obstacle, the actual hindrance is the absence of “moral and intellectual capital.”

NBS reported that in Q2’23, the proportion of youth (15–24 years) identified as NEET was 13.8% — an increase from 12.1% and 10% in Q4’22 and Q1’23, respectively. The share of youth who are not engaged in education, employment or training is expressed as the acronym “NEET”, and the expansion of the focus from unemployment to this broader concept responds to the need also to consider youth who have given up looking for work or who are unwilling to join the labour market.

The persistent challenges of youth unproductivity and dissatisfaction demand a profound reassessment of their essence. Youth is a crucial stage where spirits evolve to shape society’s future, and considering their untapped potential, they must be taught how to direct their youthful energy towards constructive pursuits.

Youths must unlock their individual capabilities and intellectual capital to transcend the pursuit of ready-made success and make unique contributions to society. This requires self-discovery, nurturing creativity, and prioritising personal fulfilment over mere material success.

By galvanising towards quintessential self-actualisation, understanding their inner self-configuration, and harnessing conceptual sciences and technologies, youths can become catalysts for genuine success. Recognising the uniqueness of their mindset based on their background equips them for actualisation.

Individual talents serve as untapped resources that can lead to innovative solutions for unemployment. By nurturing and leveraging these talents, youths can emerge as entrepreneurs, contributing to economic growth and job creation.

Every youth, regardless of gender, should be encouraged and equipped to manifest their vast potential for societal benefit. Empowering and developing the youth is not merely an economic concern but a holistic approach to building a fulfilled, creative, and harmonious society. Through self-discovery, education, and support systems, youth can harness their potential to drive meaningful change across various aspects of societal development.

? With oil prices fluctuating, how can the government best insulate economic growth from oil price instability?

Fluctuations in oil prices result from a combination of internal and external factors. These changes have far-reaching implications for the economic growth of oil-exporting nations, a concern heightened by the demand-driven nature of these fluctuations. Global economic slowdowns and technological advancements reducing oil importers’ reliance on oil imports contribute to these shifts.

Nigeria, heavily dependent on oil exports, is particularly susceptible to the impact of oil price shocks, leading to adverse effects such as reduced aggregate demand, fiscal challenges, and economic recessions. The intricate relationship between oil prices and financial indicators like aggregate demand, inflation, and monetary policy underscores the complexities faced by the Nigerian economy.

Various sectors, including manufacturing, agriculture, and services, experience diverse consequences due to changes in oil prices. Speculative activities, financialisation, and global factors further contribute to oil price volatility, making the market dynamic.

Given Nigeria’s status as an oil-producing economy relying on imports for non-oil products, oil prices significantly influence the exchange rate, interest rate, and inflation rate. It is essential to monitor domestic and global economic conditions, especially regarding the cost of borrowing.

Diversifying the economy away from oil dependency is crucial. Policymakers should focus on non-oil sectors for economic development, necessitating a comprehensive understanding of the intricate relationship between oil prices and various economic parameters for effective policy formulation and sustainable growth.

Establishing solid institutions that promote economic stability and good governance is essential. We need transparent fiscal management, adequate legal frameworks, and a robust regulatory environment. The current complexity in exchange rate policies poses challenges for currency adjustments to external shocks, emphasising the need for international cooperation and trade agreements to reduce dependence on a single market for oil exports and enhance economic resilience.

? Do you foresee a rebound in economic growth in 2024? What factors could lead to higher or lower growth?

2023 was challenging for Nigeria because of the cash crunch, the pre and post-election troubles, the removal of the petrol subsidy and the naira devaluation that increased inflation pressures, poverty, and unemployment in the country. The World Bank reported that the poverty rate in Nigeria, due to sluggish growth and rising inflation, increased to 46 per cent in 2023, representing 104 million Nigerians below the national poverty line.

Though the World Bank predicted that the recent reforms of President Bola Tinubu will undo the increase in the poverty rate from 2024 onward, projecting a reversal of the rise to 44 per cent in 2026, realistically speaking, the outlook for economic growth in Nigeria in 2024 is uncertain, and the potential for a rebound will depend on various factors.

An improvement in oil production, primarily through offshore exploration with less susceptibility to theft, could contribute to higher revenue for the government, as the oil sector still plays a significant role in Nigeria’s economy. The resilience of the non-oil sector, particularly the services sector and the gradual recovery in agriculture and manufacturing could provide a strong foundation for economic growth.

If foreign investors’ sentiments improve due to favourable monetary policies and attractive naira assets, foreign direct investment may increase, contributing to economic growth. Successful implementation of monetary policy measures to control inflation and stabilise the exchange rate could positively impact the business environment and consumer confidence, leading to higher economic growth.

Structural reforms that focus on improving investment conditions, human capital, and infrastructure could create a conducive environment for economic growth. A positive global economic environment, especially if inflation continues to trend downwards globally, could reduce the impact of imported inflation on local prices.

Conversely, there could be lower growth if global oil prices get more volatile. This could impact Nigeria’s revenue from the oil sector, affecting the overall economic outlook. The anticipation of rising unemployment rates and economic uncertainties could lead to reduced consumer spending, hindering economic growth.

The current economic condition has badly hit the health sector, FMCGs, and others. Recently, a company once hailed as Africa’s largest syringe manufacturing company declared temporary redundancy and halted its operations in Nigeria, citing unforeseen circumstances affecting business operations. This development adds to the trend of multinational companies, including Procter & Gamble, GlaxoSmithKline, Sanofi-Aventis, and Equinor, shutting down operations in Nigeria due to economic uncertainties. The unemployment rate may rise as companies struggle to stay afloat in a challenging economic environment.

Forex unavailability and pressure on foreign reserves may limit the ability to attract foreign investments and affect the operational capacity of companies, potentially leading to lower growth. If inflation remains high and the CBN struggles to control it, that will negatively impact consumer purchasing power and overall economic activities.

Any unfavourable trends in global commodity prices could affect Nigeria’s export revenue and contribute to lower economic growth. The success or failure of government reforms, including the gradual phasing out of petrol subsidies and effective implementation of monetary policies, will significantly influence economic growth.

While there are positive indicators such as projected GDP growth and potential improvements in various sectors, uncertainties and challenges, including those related to the oil sector, inflation, and unemployment, may pose risks to achieving a robust economic rebound in 2024.

? With high inflation in 2023, how well positioned is the Central Bank to contain rising prices going into 2024?

The CBN has said it is taking measures to contain rising prices and stabilise the economy in 2024 with actions to tighten monetary policy, including reducing financial system liquidity. This is a common strategy to control inflation by limiting the money supply in the economy.

The CBN is working to make naira assets attractive to foreign investors. Additionally, there are expectations of FX inflows of up to $10 billion from various sources. This can contribute to stabilising the exchange rate and managing inflationary pressures.

The impact of petrol subsidy removal and FX reforms on the non-oil sector might be gradually phased out, and this would potentially reduce the need for financing from the CBN, leading to lower money supply growth and mitigating inflationary pressures.

The CBN might have a better grip on inflation in 2024. If it can effectively manage inflation expectations, that may positively impact economic activities. Maintaining price stability, anchoring inflation expectations, and increasing incentives for holding the Naira are also crucial. These objectives align with its efforts to control inflation.

While we must acknowledge the challenges and risks, such as the removal of fuel subsidies in 2023 and the continued tightening of monetary policy, the CBN must actively work towards containing rising prices in 2024. The success of these efforts will depend on various factors, including the effectiveness of monetary policy measures, global economic conditions, and the country’s ability to attract foreign investment.

? What inflation rate is realistic to expect in 2024, and how will monetary policies aim to control rising consumer prices? Could tightening impact growth?

Inflation in Nigeria increased to 28.2% in November 2023, and experts have predicted that the CBN will aim to have a better grip on inflation in 2024. While presenting the proposed N27 trillion 2024 budget at the national assembly, President Bola Tinubu said his government projected that inflation would moderate to 21.4 per cent in 2024 because the country is currently reviewing its tax and fiscal policies.

If the monetary policy tightening and exchange rate stability pull through, inflation may gradually decline in 2024. The President also said the government aims to increase the revenue ratio to GDP from less than 10 per cent currently to 18 per cent within the term of his administration.

The measures to control rising consumer prices will likely include a continuation of monetary policy tightening, which typically involves increasing interest rates and reducing the money supply to curb inflationary pressures. This could be achieved through various tools at the disposal of the CBN, such as open market operations and adjustments to the monetary policy rate.

By tightening monetary policy, the CBN can reduce the growth of the money supply and control inflation by limiting the availability of money in the economy. Raising interest rates is a standard tool for tightening monetary policy, but higher interest rates make borrowing more expensive, which can reduce consumer spending and investment, thereby helping to control inflation.

The focus on exchange rate stability is another aspect of monetary policy. A stable exchange rate can contribute to controlling imported inflation and reducing the impact of currency depreciation on local prices. Efforts to attract foreign investors and increase FX inflows can contribute to a more stable economic environment and support the local currency’s stability.

However, it’s important to note that while tightening monetary policy can effectively control inflation, it may also affect economic growth. Higher interest rates and reduced money supply growth can lead to slow economic activity. The challenge for the CBN is to strike a balance between controlling inflation and supporting economic growth.

? Do revenue projections for 2024 seem achievable, given slower GDP growth estimates? Could we see a more conservative federal budget next year?

While there are positive indicators for 2024, such as the recovery of the oil sector, potential improvements in the non-oil sector, and projections of 3.3% GDP growth, there are also challenges, such as inflation, unemployment, and uncertainties in the global economic environment.

Given the potential risks and uncertainties, it is possible that revenue projections for 2024 may face challenges, and there could be a need for a more conservative federal budget. The removal of fuel subsidies in 2023 and the impact on inflation and continued monetary policy tightening pose risks to the economic environment. Inflation was already high in November 2023, and efforts to control it may limit consumer spending and business activities.

The anticipation of a rise in the unemployment rate due to economic challenges suggests that the workforce may face difficulties, impacting income levels and, consequently, tax revenues. The expected continued depreciation of the Naira may affect the cost of imports, leading to higher prices for essential commodities, contributing to economic challenges and impacting government revenue.

The global economic environment, including oil prices and international trade conditions, can significantly influence Nigeria’s revenue. External shocks or uncertainties may impact revenue projections.

Considering these factors, it is reasonable to expect the government to adopt a more conservative approach in 2024. This could involve setting realistic revenue targets, controlling expenditures, and focusing on key economic sectors to stimulate growth.

While the optimistic projections suggest potential economic improvements in 2024, the presence of challenges and uncertainties raises concerns about the achievability of revenue projections. A more conservative federal budget may be prudent to navigate the economic landscape and ensure fiscal stability.