Seeks strict rules to stabilise financial market
The sustenance of monetary tightening, reduction in the use of Ways and Means advances by the federal government, more stable naira, base effects and consumer resistance will cause inflation to reach an inflection point by mid-2024, and begin a gradual decline to an average of 26 per cent in 2024, Agusto & Co., a research agency, has said.
In its monthly newsletter, ‘2024: A Year of Reckoning, Turning Points and Balancing Acts’, the agency provided a proviso that growing insecurity in major food-producing parts of the country’s middle belt and the possibility of a weaker naira and higher petrol prices are major risks to this forecast.
It added that the possible escalation of the Israel-Hamas conflict into a regional crisis would trigger a spike in oil prices, with consequences for domestic petrol pricing.
The rating agency said it is optimistic that the services sector particularly telecommunications and financial services will remain the biggest driver of growth in 2024, and with the 2024 budget signed into law, policy direction, and priorities, have been given more clarity, and, as a result, it expects less uncertainty and improvements in business confidence, adding, “overall, we forecast a modest increase in GDP growth to 3.1 per cent in 2024.”
Though the immediate future may look bright, the rating agency noted that in 2024, the impact of the policy-induced shocks, which cascaded through the Nigerian economy in 2023 and severely weakened the macro picture, is expected to linger.
It explained: “This is due to and despite significant progress, at least theoretically, in the dismantling of some of the deep-rooted structural and policy impediments that have constrained Nigeria’s economic performance for decades. The pace and scale of pro-market reforms (petrol subsidy ‘reduction’ and exchange rate liberalisation), once heralded as unprecedented, have lost steam.”
It lamented that high energy costs, multiple taxations and foreign exchange illiquidity continue to constrain the business environment, which is triggering the exit of multinational manufacturers and intensifying the wave of emigration of middle-class Nigerians.
It declared that the tepid economic growth, elevated price levels, a weakening naira, deteriorating debt, and poverty statistics all paint a bleak picture and raise several questions.
Amid the glaring glooms, it noted the gradual resurrection of crude oil production, which is supported by security measures to combat theft and vandalism, with a 16 per cent increase to an average of 1.3 million barrels per day in 2023, Nigeria’s OPEC-sanctioned quota of 1.5 million barrels per day poses a significant limitation to export earnings.
In this recovering matrix, the agency said the expected resumption of domestic crude oil refining with the Dangote refinery and the re-commencement of operations at the Port Harcourt oil refinery coming onstream soon.
BUA Group’s 250,000 bpd refinery and petrochemical plant in Akwa Ibom State which is expected to start operations in late 2024 will push Nigeria’s combined refining capacity to 1.4 million barrels per day of crude oil by the end of the year.
Overall, the report said it expects a likely increase in foreign exchange supply, and stability, on the back of improved crude oil production and some foreign currency-denominated inflows will benefit manufacturing, trade and other import-dependent activities.
However, it was quick to note that the manufacturing output will suffer from the negative effects of the recent divestments in the sector, saying, “we anticipate a marginal increase in aggregate consumption, spurred by the expected modest increase in the minimum wage, but the sustained impact of higher petrol prices and a weaker naira will weigh this down. High borrowing costs could trend even higher as a rejuvenated CBN tightens its policy stance further in response to the need to rein in inflation and attempt to push real returns to positive territory. This would heighten credit risks, limit lending to the real sector and weigh on the country’s GDP growth prospects. However, it is worth mentioning that the need to manage the FGN’s borrowing costs and keep them in check may restrict the potential increase in interest rates.”
Expressing worries over the domino effects of the discontinuation of intervention measures by the CBN as well as the recent escalation of conflict in major food-producing areas in the country’s middle belt have cast a shadow of gloom over crop production prospects.
The report maintained that President Bola Tinubu’s perceived preference for lower interest rates to support economic growth at a time when the policy environment is poised to remain tight and restrictive raises the risk of inaction and will be a true test of the CBN’s independence.
It stated that this year, it believes that the risk of further depreciation of the naira looms large as external imbalances persist, adding, “this is despite expectations of higher export earnings from improved oil production and still high oil prices. However, capital inflows will likely remain constrained on low investor confidence as FX illiquidity lingers.”
In the meantime, head of Financial Institutions Ratings at the agency, Ayokunle Olubunmi, said implementing stricter capital adequacy rules would help improve financial stability for the Basel III transition.
Olubunmi explained that the macroeconomic downturn and economic slowdown could increase loan defaults and impact banks’ earnings, leading banks to more competition from non-bank players in digital payments.
According to him, policy changes, economic conditions and technological advancements are some of the factors that will influence the banking sector’s performance in 2024.
Olubunmi stated that predicting the exact outcome was difficult due to the dynamic interplay of related issues.
He noted that banks that would leverage opportunities presented by these factors would likely emerge stronger and more successful, stressing that these require flexibility, innovation and a clear understanding of the shifting landscape.
Olubunmi outlined some of the themes that could impact the Nigerian banking sector in 2024 including a more accommodating Central Bank, hawkish monetary policy, reform of the foreign exchange market, lower FX gains and muted international trade.
He said that expanding Nigerian banks abroad could diversify risk but could lead to facing new challenges, noting that strengthening banks’ capital base could improve stability and lending capacity.
Olubunmi added that consolidation could create larger, more efficient banks but potentially reduce competition adding that issuing new licenses could increase competition and innovation, but potentially fragment the market.
He also stated that the shake-up in the merchant banking segment could create opportunities for some banks and challenges for others while the reform of the cash reserve requirement when modified could affect banks’ liquidity and profitability.
Olubunmi pointed out that the level of interest rate, inflation rate and the rate of foreign exchange will drive Nigeria’s GDP growth to 2.6 per cent in a severe case scenario, three per cent as a base case scenario, but at best, will not exceed five per cent this year.
Specifically, Olubunmi mentioned that interest rate is a very good tool that the monetary policy authorities use to monitor and fight inflation and even exchange rates.