Author:
Stephen Onyeiwu
(MENAFN- The Conversation)
Nigerians may be wondering whether the year 2025 will bring the“renewed hope” promised by the President Bola Tinubu administration – or whether they are in for another year of economic despair.
Nigerians are facing unprecedented economic challenges, arising from the removal of fuel subsidies. This has raised the price of petrol by nearly 500% within one year.
What's more, the liberalisation of the foreign exchange market resulted in an over 100% depreciation in the value of the domestic currency between October 2023 and October 2024.
And to rein in headline inflation, which stood at 34.6% in November 2024, the Central Bank of Nigeria has been pursuing a contractionary monetary policy – attempt to fend off inflation by reducing money supply. It increased the interest rate from 15.5% in October 2023 to 27.25% in September 2024.
These policies have reduced the living standards of Nigerians. People must now pay higher prices for food, transportation, energy, health and education.
The government has also introduced tax reforms , a student loan scheme and a new minimum wage .
Nigerians have voiced their dissatisfaction. In early August 2024, there were widespread protests , tagged #EndBadGovernance, across the country. This was followed in October by similar protests .
While Nigerians resent Tinubu's economic policies, the World Bank has applauded the administration for decisively addressing long-standing problems, and urged it to stay the course.
The administration has appealed to Nigerians to be patient, promising that its economic reforms will yield positive results soon. The question is: how soon?
Economic forecasting is not a science free of errors. But as a development economist who has been studying the Nigerian economy for more than 40 years, I believe certain trends are likely to play out in 2025.
The government's policies are unlikely to have a positive impact on the living conditions of Nigerians in 2025. Positive effects of policies usually become noticeable after about three years.
Economic growth
Economic growth drives much of what happens across the economy, including employment, education, health and living standards.
Nigeria, like many countries in the world, experienced a post-COVID economic rebound. It posted a respectable economic growth rate of 3.6% in 2021, 3.3% in 2022 and 2.9% in 2023. Growth is expected by the IMF to continue in 2025, though at a subdued rate of about 3%, less than the 4% projected for sub-Saharan African countries in 2025.
The lower growth rate is attributable to lower-than-expected oil production, insecurity in many parts of the country, and scarcity of foreign exchange, which has made it difficult for manufacturers to import the inputs they need for production.
Nigeria needs a growth rate of at least 6% for three consecutive years to make a significant impact on living standards.
Growth in the country has been driven by the services sector, which expanded by 3.8% in the second quarter of 2024. Industry was the second biggest driver at 3.5%.
The trend is expected to continue in 2025. But services – finance, construction, entertainment, hospitality, government – are concentrated in urban areas. Most Nigerians who live in rural areas will not feel the effects of any job creation arising from economic growth. The growth of the manufacturing sector, which is typically a major source of employment, will be anaemic in 2025.
Inflation and food prices
After a decline in the inflation rate between June and August 2024, inflation has been rising since then. It increased from 32.15% in August, to 34.6% in November 2024. This upward trend is likely to continue, at least in the first quarter of 2025. Nigerians should not expect pre-COVID prices anytime soon (inflation was 11% in 2019).
In response to the recent uptick in inflation, the Central Bank of Nigeria is likely to sustain interest rate hikes in 2025. But this is unlikely to tame inflation in a significant way, as much of the inflation in Nigeria is structural, rather than monetary.
The reason for this is that food inflation, currently at about 40% will not be resolved in 2025.
Food supply constraints include insecurity, severe weather events (especially flooding), low productivity, high transportation costs, depreciation of the naira, and the war in Ukraine, which has adversely affected the prices of imported grains. Then there's the fact that Nigerian farmers are ageing and few young farmers are replacing them. Shortages of farmers loom large.
Another factor that will keep inflation high is that many businesses have already invested in 2025 production and services based on 2024 input prices. For their part, vendors and operators in the informal sector who did not benefit from the new minimum wage payments will want to share in the bounty by raising their prices.
The naira
The naira has been on a roller-coaster ride in 2024. Although the recently introduced Electronic Foreign Exchange Matching System (EFEMS) by the Central Bank of Nigeria is expected to infuse transparency and discourage speculation in the forex market, the naira will remain weak in 2025.
Nigeria is an import-dependent economy. So a weak naira will result in higher prices for imported goods.
In a bid to rein in rising prices, the Tinubu administration has suspended import tariffs on some imported foods. But this is unlikely to affect price pressures, as the number of affected products is limited and the policy is temporary.
The demand for foreign exchange will increase and supply shortfalls will worsen. The crude oil price is expected to fall by about US$6 per barrel in 2025, which will reduce the flow of foreign exchange into Nigeria.
This projected global oil price has factored in the possible effects of conflict and instability in the Middle East.
The last quarter of 2025 will be particularly tough for the Nigerian foreign exchange market, as politicians warm up for party primaries in 2026 ahead of the 2027 general elections . Contestants will be building a war chest of funds (mostly in foreign exchange) and other resources.
This is expected to increase demand for foreign currencies. Supply is unlikely to meet this demand, causing the naira to plunge.
The Nigerian National Petroleum Corporation started selling crude oil in naira to Dangote Refinery in October 2024. Nigerian oil marketers are expected to purchase Dangote gasoline in naira.
The net effect of this new policy on the foreign exchange market in 2025 is difficult to predict. It will boost the foreign exchange market if the foreign exchange savings from replacing imported fuel with Dangote's gasoline exceed the foreign exchange loss from selling crude oil to Dangote in naira.
Some oil importers outside Nigeria have expressed interest in Dangote oil, which could boost liquidity in Nigeria's forex market.
Living conditions
Living conditions usually improve when:
many high-paying job opportunities are generated, especially in manufacturing.
an enabling environment for entrepreneurship, innovation and small business development is created.
social investment spending by the government increases (more safety nets) and benefits a significant number of the population.
food and energy prices decline.
access to health, education and infrastructure improves, following more government spending and aid.
None of these is likely to happen substantially in Nigeria in 2025.
Prices (especially food) will not fall precipitously enough to make much difference to purchasing power and standard of living. If anything, inflation could rise in 2025.
When real purchasing power declines, rational consumers shift spending from health, education and housing to food consumption. This will have the effect of increasing multidimensional poverty
Multidimensional poverty measures poverty by income and by the access people have to health, education and living standard indicators. These include sanitation, drinking water, electricity and housing. About 63% of Nigerians were multidimensionally poor in 2022, the last time a nationwide poverty survey was undertaken.
Given high inflation, lack of good-paying jobs, limited safety nets, and inadequate access to health, quality housing, education, transportation and energy, the multidimensional poverty rate is likely to increase in 2025.
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