Macroeconomic Report & Economic Updates

The Federal Government has approved the Medium-Term Fiscal Framework (MTFF) for 2022-2024. The framework is based on the following key parameters: crude oil price benchmark of $57 per barrel, crude oil production of 1.88 million barrel per day, exchange rate of N410.15/$, inflation rate of 13 percent and Gross Domestic Product (GDP) growth rate of 4.2 percent in 2022.¹ The framework further projects federal government budget to rise from N13.58 trillion in 2021 to N13.98 trillion in 2022 and revenue is to rise from N7.99 trillion to N8.36 trillion within the same period. The MTFF is important in setting benchmarks for government spending in the medium-term which breeds accountability, transparency, and organization. However, historical precedents suggest that adhering to the medium-term framework is difficult owing to the use of overly optimistic parameters. In this case, an inflation rate of 13 percent can be considered optimistic given that the current inflation rate is 18%. Consequently, revising these parameters to reflect the current trends in the economy is critical to achieving the budget targets. 

Crude oil price increased to the highest since 2019 while external reserve decreased in the week under review. The price of Nigeria’s bonny light increased by 3.5 percent to an average of $76.4 per barrel in the week under review.³ Despite the increase, external reserve fell by $246.9 million to an average of $33.59 billion. External reserves have been depleting since May 2021.⁴ The main source of foreign exchange earnings is from crude oil and an increase in crude oil price should be reflected in the external reserves. However, the increase in crude oil prices does not translate into increase in external reserves and revenue as Nigeria sells crude oil on contract.⁵ While crude oil prices are exogenous to the Nigerian economy, the rise in crude oil prices eventually will improve government revenue and external reserves. Furthermore, the depleting external reserves implies that the Nigerian economy is still heavily dependent on imports and reveals the importance of diversifying the Nigerian economy.

Inflation rate decreased for the second consecutive month in May 2021. More specifically, inflation rate fell to 17.93 percent in May 2021, 0.19 percent lower than the 18.12 percent recorded in April 2021.¹ The decrease was driven by the food component of inflation which fell to 22.28 percent from 22.72 percent in the preceding month. By contrast, core component of inflation increased by 0.41 percent to 13.15 percent in the review period. The marginal decrease in food inflation could be linked to improved security in food-producing regions in the past weeks. On the basis of improved security, the prices of food could continue to fall leading to a decline in overall inflation. The Central Bank of Nigeria can increase the Monetary Policy Rate (MPR) which should reflect in the interest rates offered by commercial banks and decrease bond prices to reduce the money supply and address the persistent rise in prices.

According to the World Bank, 7.2 million Nigerians could be pushed into poverty due to higher inflation rate and fall in purchasing power in 2020. Inflation rate rose every month in 2020 to reach a peak of 15.75 percent in December 2020.³ There are 86.8 million Nigerians currently living in poverty, and the economic situation in Nigeria means that the country may not be able to push households and individuals out of poverty in the nearest future. Food inflation is at an unprecedented level of 22.28 percent, unemployment and underemployment remains high and GDP growth rate in Q1 2021 stood at 0.51 percent in a country with a population growth rate of more than 2.5 percent. Ensuring inclusive growth process and empowering the poor, providing social protection for the poor and vulnerable, encouraging small and medium scale enterprises, and a sustained investment in education and health would alleviate poverty in Nigeria.

The value of total merchandise trade increased by 6.99 percent to N9,757.87 billion in the first quarter of 2021 when compared to the value recorded in preceding quarter.¹ The increase can be attributed to 15.61 percent increase in import and an 8.99 percent decrease in export resulting to a trade deficit of N3,943.45 billion within the review period. Furthermore, export accounted for 29.79 percent while import accounted for 70.21 percent of total trade. Major import partners were China (29.34 percent), Netherlands (10.60 percent) and United States of America (8.88 percent). Major export partners include India (16.79 percent), Spain (9.88 percent), and China (6.54 percent). The economic implication of the trade deficit implies that there is an additional pressure on the naira, leading to situations that propel currency depreciation which is inflationary. The CBN would need to put more effort in defending the naira in the foreign exchange market.