The Continuing Urgency of Business Unusual

Nigeria’s growth prospects for the next three years have improved thanks to a more robust
recovery in the non-oil economy and higher global oil prices.
The services and agriculture sectors have performed better than expected, while tertiary
activities have rebounded. Higher oil prices stemming from the Ukraine war will boost Nigeria's
economic growth, but not fully due to lower oil output. Fiscal gains are offset by the continuing
petrol subsidy.
Nigeria's macroeconomic framework is deteriorating due to lack of concerted efforts to reduce
inflation, address fiscal pressures, and strengthen exchange rate management. Inflation is
expected to be two percentage points higher in 2022-2023, and the general government fiscal
deficit has been revised upwards from 5.3 to 5.8%. Global risks have risen in the last six months,
including the war in Ukraine and monetary tightening by central banks.
The government has kept a "business-as-usual" policy stance that hinders economic growth and
job creation, with multiple exchange rates, trade restrictions, and financing of the public deficit.
This has led to a potential fiscal time bomb due to elections, high inflation, and higher global
interest rates.
Inflation in 2022 is projected to be higher than anticipated due to policy distortions, trade
restrictions, and conflicting monetary policy goals. In May 2022, the Central Bank of Nigeria
increased the interest rate for the first time in 18 months.
Increased inflationary pressures following the Ukraine war are expected to push even more
Nigerians into poverty, resulting in 15 million more Nigerians living in poverty between 2020
and 2022. Despite higher oil prices, the fiscal situation is deteriorating, limiting the
government's ability to support the recovery and protect the poor. In 2022, Nigeria is not
expected to benefit from higher oil prices fully due to low oil production, a larger unit petrol
subsidy, a weaker currency, and higher apparent petrol consumption. The first four months of
2022 saw the lowest oil production in two decades due to force majeures, funding shortfalls, a
lack of adequate maintenance, and other factors. The cost of the petrol subsidy will increase
significantly as higher global petrol prices will entail larger subsidy payouts.

The 2022 amended budget allocates N4 trillion for the petrol subsidy, higher than the combined
budget allocated for education, health, and social protection. The NNPC makes other
deductions from oil and gas revenues to finance government gas projects, refining and
exploration costs, pipeline maintenance, and strategic reserve holdings. The worsening revenue
collection at the federation level is increasing budgetary pressures for the States, leading to a
precarious fiscal position.
Increased inflationary pressures following the Ukraine war are expected to push up to 15
million more Nigerians into poverty between 2020 and 2021. This "inflation shock" is estimated
to result in a 4 percent increase in net oil revenues in Nigeria in 2021, driven by low oil
production, a larger unit petrol subsidy, a weaker currency, and higher apparent petrol
consumption. Despite this, the fiscal situation is deteriorating, limiting the government's ability
to support the recovery and protect the poor. In 2022, Nigeria is not expected to benefit fiscally
from higher oil prices fully. FAAC is an international organization that manages oil and non-
value added tax (VAT) transfers.
In 2022, the FOB allocated N4 trillion (almost 2 percent of GDP) for the petrol subsidy, higher
than the combined budget allocated for education, health, and social protection. The NNPC also
makes other deductions from oil and gas revenues such as finance government gas projects,
refining and exploration costs, pipeline maintenance, and strategic reserve holdings. This has
caused a rise in budgetary pressures for the States, and debt servicing expenditures are also
mounting due to a decline in gross statutory account revenue transfers from the federation
account allocation committee (FAAC). The lower FAAC transfers in 2022 will not be
compensated by the expected higher VAT collection or improvements in independently
generated revenues.
Agriculture grew by 2.1% in 2021 and is expected to grow by 3.2% in 2022, but has lagged its
average growth of 5.4% over the last two decades. Oil and gas output contracted by 8.3% in
2021 due to technical and security issues. Nigeria's non-oil industry grew by 4.4% in 2021,
recovering from its 2020 contraction, but is expected to grow at a lower rate in 2022 due to
supply constraints, rising costs for inputs and services, and foreign exchange shortages.
Services, which account for the largest share of Nigeria's GDP, contributed the most to GDP
growth in 2021, driven by ICT and financial services.
The war in Ukraine is affecting the Nigerian economy through direct and indirect channels, such
as trade disruption, commodity prices, and tightening of global financial conditions. Trade
disruptions are causing supply shortfalls and increases in the international prices of
commodities, such as fuel and food staples. Higher commodity prices exacerbate pre-existing
inflationary pressures, eroding purchasing power and hurting the poor. Price movements for
essential food items may be leaving some Nigerians especially worse-off and at risk of falling
into poverty. Raw wheat prices have increased dramatically since the start of the war, rising by
35% between January and March 2022.

This demonstrates the interlinked nature of international and domestic markets for raw and
refined commodities. The higher crude oil prices triggered by the war have had a negative
impact on Nigeria's current account and fiscal position, with the fiscal deficit expected to grow
to 5.8 percent of GDP in 2022. However, the income effects of higher oil prices on secondary
and tertiary economic activities are expected to result in higher growth in 2022 than initially
anticipated. Global financial conditions have also led to higher interest rates in advanced
economies, diverting capital away from EMDEs such as Nigeria, and foreign aid flows may tilt in
the direction of Ukraine.
Nigeria has not realized its oil production potential due to high production, high security risks,
the inability of the Federation to pay fully and on time for its share of costs in joint-venture
operations, and in the past uncertainties about the future fiscal terms, now set out in the
Petroleum Industry Act. Ending the petrol subsidy will go a long way in reversing the decline in
oil production. Further, the global energy transition has made investors increasingly selective
about where to invest. To remain competitive, Nigeria will need to slash gas flaring, venting,
and fugitive methane emissions; concurrently, the government and the national oil company
will need to enhance administrative
efficiency.
Nigeria's oil production has been declining for many years due to security concerns, tense
relationships with workers and communities, high costs, and the Federation's failure to finance
the production of equity oil. Attacks on oil production infrastructure, work stoppages, and
disturbances in oil-producing communities have led to the suspension of oil production on
numerous occasions. The NNPC reports various incidents disrupting oil and gas production to
FAAC on a monthly basis, which have been publicly disclosed since January 2020. Production in
Nigeria is more expensive and has been limited to drilling new wells in existing license areas.
Onshore oil production is vulnerable to vandalism and high costs due to complex, opaque and
slow contract approval processes.

Nigeria's National Petroleum Policy called for a "fundamental overhaul" of the procurement
process to strengthen efficiency, transparency and cost control. Brazil's local content rules have
been criticized for fostering corruption and cost increases. Even without corruption, if only a
handful of local companies are capable of delivering the required services, there would be
inadequate competition and higher prices. The NNPC's failure to pay for the Federation's share
of costs in joint-venture operations has had a significant impact on oil production, with the
Federation owed US$972 million in arrears as of March 2022. The lack of payment discipline has
also threatened Nigeria's ability to produce oil and gas and supply electricity, with chronic
power shortages caused by the failure of power generation companies to pay gas producers.
Improving payment discipline is essential for Nigeria's energy security and economic
development.
Understanding how poverty has changed over time can provide vital insights into the
effectiveness of poverty-reducing policies. Data constraints have traditionally complicated the
assessment of poverty dynamics in Nigeria, but the application of specialized statistical
techniques reveals that, even before COVID-19, poverty reduction in the country was stalling.
Moreover, when Nigeria was growing in the early 2010s, it was richer Nigerians that benefited
the most. This underscores the importance of reforms that not only bolster growth, but also
ensure that the proceeds of growth are shared among all Nigerians, and especially the poor.
Such reforms may include broad macroeconomic transformation to aid job creation, supporting
productivity in small-scale household enterprises, and investing in infrastructure. These policies,
guided by data, can help Nigeria make substantial strides toward poverty reduction.