Election Year 2023: Analysts weigh in on economic, political outlook, see GDP deceleration

BY BEN EGUZOZIE 

• EIU, AfDB in number crunching

As Nigeria enters into national elections this year, beginning with presidential poll in quarter one, international analysts group, the Economist Intelligence Unit (EIU), and the pan-African development finance institution,  the African Development Bank (AfDB) have predicted an economic and political outlook of instability, with possible gross domestic product (GDP) deceleration, tinged with food and energy inflation.

The EIU and AfDB while projecting a not-too-rosy economic and political outlook for Nigeria, Africa’s largest economy, also project a deceleration of Nigeria’s GDP on account of national election hiccups, as well as new headwinds that would face West Africa regional nations.

“A potentially divisive and tight 2023 presidential election (that) will dominate the first half of the year, with a high chance of a run-off,” projects the EIU, pointing out that the presidential campaigns for the 2023 election “will reach fever pitch by January, with Bola Tinubu of the ruling All Progressives Congress (APC), Atiku Abubakar of the People’s Democratic Party (PDP), and Peter Obi of the Labour Party, the three leading aspirants to replace the incumbent, Muhammadu Buhari, will try to maximise their appeal to about 94 million voters, with 12.3 million (13%) of them newly registered.”

The London-based global economic intelligence outfit predicted that the result of the presidential election could be tight enough to require a run-off, possibly between Tinubu and Obi.

“Security will remain a giant problem for Nigeria in 2023,” said the EIU. “There is a clear determination by each of the leading presidential candidates to make Nigeria safer, but the scale of the problem far exceeds available resources. Insecurity has worsened over 2022, mainly because of the multitude of separate crises facing Nigeria, which spreads the army too thin. Military operations are ongoing against bandits in the north-west, Islamist terrorist groups in the north-east and oil thieves in the south, each covering a large area. The 2022 security budget of N29.9 trillion (US$5.2 billion at the mid-November exchange rate) is small in comparison with the scale of the challenges, even though the largest weapons purchase spree for a generation has reportedly been making some difference.”

The globally acclaimed economic intelligence company has revised down the country’s real GDP growth estimate for 2023 down to 2.8% from 3.1%, owing to tighter credit conditions, floods and widening insecurity.

“Hard currency remains in short supply and the Central Bank of Nigeria (CBN) is bent on curbing the parallel foreign-exchange market. Inflation is expected to remain in double digits and monetary conditions will be tight, with the central bank’s policy rate expected to peak at 17% by end-2022 or early 2023, and to be maintained at this level throughout the year. On politics, insecurity is likely to worsen ahead of the February 2023 election and during the transition period from February to May, when the new president takes the oath of office,” the EIU said in its report titled, “Things to watch in Nigeria in 2023”.

Post-election reforms push

The EIU, however, predicted that “an era of reform following the election is expected to begin, but slowly at first. Petrol subsidies are expected to be reduced, partly relieving fiscal strains. Interest-rate rises should begin to tame inflation, but economic growth will slow. High global energy demand should make Nigerian oil assets more attractive, and a recent oil sector law will be tested with respect to governance of the industry.”

It also predicted a post-election push for reforms. One of which is ending petrol subsidies, the bill for which has caused the fiscal deficit to balloon in 2022. “We estimate a shortfall of 5.1% of GDP, the largest for a generation. Cutting the bill will invite a severe backlash from unions and the wider public, and be a serious security risk, but there is bipartisan political recognition that petrol subsidies are unsustainable and that, without action, Nigeria could be on a path towards debt distress. Total public debt of N42.8trn (US$103.3bn), or 23% of GDP, at end-June is not especially concerning, but debt-service costs have at times exceeded government revenue in 2022, mostly because of the petrol subsidy (which is deducted from federal takings) combined with low oil production,” EIU report said.

Taxes to rise but not until 2024:

EIU estimated that Nigeria may likely raise taxes to reap much needed revenue. It said the country’s value-added tax (VAT) rate at 7.5% remains low by international standards, though it generates a third of non-oil revenue as most firms and workers are outside the tax net, as a culture of no paying persists.

“The federal revenue service is inefficient, and low governability creates a set of additional challenges. The 2023 budget—being a pre-election package—omitted any mention of tough choices on tax. A mid-year review is possible as the next administration uses its political capital to see through unpopular reforms, but what we see as an inevitable shift from the outdated petro-state model to a greater dependency on regressive taxes such as VAT will probably only take place over the longer term. In 2023 this means more debt, and growing market concern about how the government can service its obligations. Nigeria is expected to remain cut off from the international capital market in 2023,” the group said.

The EIU noted that foreign investment in oil and gas will be one to watch, as Europe looks to permanently wean itself of Russian energy. A landmark piece of legislation, the Petroleum Industry Act, was passed in 2021 and is aimed at making Nigeria a more attractive destination for foreign direct investment, it explained.

On its part, the AfDB in a recent West Africa Economic Outlook, predicted that Nigeria’s economy would likely face new headwinds as the West Africa regional gross domestic product (GDP) decelerates to 4.2 percent.

Nigeria’s economy is still fragile from the current poor fiscal policy framework by the current Muhammadu Buhari administration. The new headwinds in 2023 for West Africa’s regional GDP is projected to decelerate to 4.2% in the coming year, an African Development Bank’s (AfDB) fourth quarter 2022 economic outlook indicated.

The pan-African multilateral development finance institution said though the West Africa region rebounded in 2021, showing signs of a V-shaped recovery, nevertheless, countries in the region have not yet come out of the woods.

“New headwinds have emerged, including the resurgence of COVID-19 in China; shifts in monetary policy in advanced economies; the Ukraine-Russia war, which is worsening inflation; and climate change, which is causing extreme weather events. These headwinds have dampened West Africa’s medium-term outlook and created new monetary, fiscal, and external policy challenges for macroeconomic management. As in 2021, policy makers have limited policy space and could struggle to find the right policy mix,” the bank said.

“GDP growth (in West Africa) is projected to decelerate to 4.1% in 2022 and 4.2% 2023. It is also expected that headline inflation may surge to 13.6% in 2022 and decline to 10.2% in 2023, driven by food and energy inflation. The impact is expected to be pronounced in countries whose local currency is depreciating, and that have little of the fiscal buffer needed to cushion the effects of global inflation on domestic prices,” the AfDB report said.

It added that the fiscal deficit (in West Africa) is projected to narrow slightly because of better revenue collection, reaching 5.4% of GDP in 2022 and 5.3% in 2023. But if the war drags on and international financial market conditions worsen, it is highly likely that fiscal deficits will grow. The current account deficit is projected to narrow to 2% of GDP in 2022 and 2023.

The AfDB West Africa outlook indicated that, should the headwinds strengthen, policy makers could be confronted with an even tighter policy space that makes it more difficult to protect vulnerable groups in the immediate term, support recovery in the short-to-medium term, and build resilience to shocks through structural change in the medium-to-longer term.

It listed risks to the outlook to include prolongation of the Russia-Ukraine war, further tightening of liquidity in the international financial market, a recession among the region’s trading partners, the resurgence of the COVID-19 pandemic amid slow vaccine rollout, and adverse weather conditions. Risk mitigation measures include growth-friendly fiscal consolidation programs, financial support from the international community, an information campaign to counter vaccine hesitancy, and the acceleration of structural reforms.

The development finance institution advised countries of the region thus: “In the immediate term, where policy space allows it, countries could focus on better coordinating monetary and fiscal policy to stimulate growth and protect the development gains of the past decade.

“This implies cushioning vulnerable groups from rising food and energy prices through targeted subsidies and transfers. Commodity-exporting countries that benefit from the surge in commodity prices could use the additional revenues for this purpose. Where policy space is limited, countries need to reprioritize government expenditure. In these cases, support from the international community is warranted” it noted.

Oil sector’s possible attraction:

As Europe looks to permanently discourage itself of Russian energy, EIU believes Nigeria’s oil industry remains one to watch with potential foreign investment. It alluded that investments will trickle in via the Petroleum Industry Act, passed in 2021, and aimed at making Nigeria a more attractive destination for foreign direct investment.

Heightened production quota:

“We expect production of 1.22 million b/d for 2022 for the year. Even as oil prices subside from an estimated average of US$101.1/barrel in 2022 to US$89.9/b in 2023, this level of production will be sufficient to generate a current-account surplus,” EIU said.

Naira pressure to ease after February 2023:

The EIU estimated that the pressure on the naira would ease after the February 2023 presidential election. “Assuming no devaluations of the naira, we forecast that average consumer price inflation will slow to 15.1% in 2023, from an estimated 19.3% in 2022. We expect the central bank’s policy rate to peak at 17% either in November or in early 2023.”