Nigeria's economic outlook shaped by key reforms

Nigeria, the largest economy in Africa, has implemented or proposed several policies in 2023 that will shape its economic and business landscape in 2024 and beyond. These include tax reforms, fuel subsidy removal, a unified foreign exchange regime, and minimum wage review, among others. The policies have the potential to benefit the country’s growth, fiscal health, social welfare, and business competitiveness. However, they also pose some challenges. Here’s a breakdown of what they mean for Nigeria and its people.

Fuel subsidy removal: A bold move to save resources and boost investment

Nigeria is optimistic about the growth prospects in 2024, following its decision to remove fuel subsidies in 2023. The move is expected to free up resources for vital sectors and attract more investment, thereby boosting the country’s economic growth.

The removal of fuel subsidies was part of President Bola Tinubu’s economic reform agenda aimed at reducing fiscal deficits, enhancing transparency, and improving governance. The move was initially met with resistance and protests from some segments of the population, who raised concerns over higher fuel prices and inflation.

The Nigerian government has implemented a series of measures to cushion the impact of the subsidy removal, including expanding social safety nets, increasing minimum wages, and providing targeted cash transfers to the poor.

According to the World Bank, Nigeria’s economy is expected to grow by 3.5% in 2024, up from 3.2% in 2023, as the subsidy removal boosts domestic revenue and creates fiscal space for more productive spending. The bank also praised Nigeria’s efforts to diversify the economy away from oil dependence, and to improve its business environment and competitiveness.

“The petrol subsidy and FX management reforms are critical steps in the right direction towards improving Nigeria’s economic outlook,” World Bank Country Director for Nigeria, Shubham Chaudhuri, said in the latest Nigeria Development Update, a twice-yearly report series that assesses recent economic and social developments and prospects in Nigeria.

“Continued reform implementation can ensure that Nigeria benefits from the difficult adjustments underway. This includes ensuring that improved oil revenues following the sharply increased PMS price accrue to the Federation. In the medium-term, the economy will then begin to benefit from increasing fiscal space for development spending, including power and transport infrastructure, as well as human capital.”

The removal of fuel subsidies is widely seen as a landmark reform that has transformed Nigeria’s economic landscape and prospects. As the country enters a new year, it faces the challenge of sustaining the momentum of its reforms, and ensuring that the benefits are shared by all segments of its population.

Unified exchange rate: A bold step towards economic growth and investment attraction

The Central Bank of Nigeria (CBN) has replaced the previous multiple exchange rate regime with a unified exchange rate, which took effect on June, 2023. The new rate is determined by market forces at the Investors and Exporters (I&E) window, where all eligible transactions can access foreign exchange at their preferred rates. The CBN also abolished the segmentation of the market into different windows, and reintroduced the “Willing Buyer, Willing Seller” model, among other changes.

The CBN has said it will intervene occasionally to stabilize the currency, but has also pledged to respect the market mechanism and avoid excessive interference, as the unified exchange rate faces some challenges, such as the volatility of the naira, which depreciated by 41% against the dollar in 2023, reflecting the supply and demand dynamics of the market.

Last week, the Nigerian government hinted it would require as much as $1.5 billion of funding from the World Bank to help alleviate a severe dollar shortage that has contributed to the naira’s steep decline.

“We’re hoping to get $1 billion or $1.5 billion from the World Bank,” Finance Minister Wale Edun told Bloomberg last Wednesday in Davos. “It is a matter of discussion at the moment, but we think we will get the support because we are continuing with our reforms.”

The unified exchange rate is widely seen as a bold and necessary step that has improved the efficiency and transparency of Nigeria’s foreign exchange market and enhanced its economic prospects. As the country enters a new year, it faces the opportunity and challenge of managing the exchange rate, and ensuring that it supports its growth and development goals.

New minimum wage: A morally and politically correct step towards inclusive growth and social welfare

Nigeria will implement a new national living wage for its workers this year, according to President Bola Tinubu’s new year message to the nation. “We are going to implement a new national living wage for our industrious workers this new year,” Tinubu said in a January 1 broadcast. “It’s not only good economics to do this, it is also a morally and politically correct thing to do” 

Tinubu did not disclose the amount of the new minimum wage, which is currently around N30,000 ($33) per month. A committee comprising representatives of the government, labor unions, and the private sector is expected to work out the details and submit a report by March .

The president is betting on the new minimum wage to boost the purchasing power of Nigerian workers, stimulate the economy, and reduce poverty and inequality. He also said the government would implement measures to ensure that the wage increase does not lead to inflation or fiscal imbalances .

The new minimum wage is part of Tinubu’s economic reform agenda, which also includes removing fuel subsidies, restructuring the state-owned oil company, diversifying the economy away from oil dependence, and improving the business environment and competitiveness. Tinubu, who took office in 2023, has pledged to lift millions of Nigerians out of poverty and achieve inclusive and sustainable growth .

The new minimum wage, however, faces some challenges, such as the resistance from some state governments and employers, who may find it difficult to pay the increased wages. The new wage also requires the amendment of some existing laws and the enactment of new ones, which may take time and political will to achieve.

The new minimum wage is widely seen as a bold and necessary step that will improve the living standards of Nigerian workers and boost the country's economic prospects. As the country enters a new year, it faces the opportunity and challenge of implementing the new wage, and ensuring that it benefits all segments of its population.

Tax reforms: A balancing act between revenue generation and business incentives

Nigeria plans to slash taxes to boost business in 2024. The country is planning to reduce the number of taxes levied by federal and state governments from more than 60 to fewer than 10, as part of its efforts to simplify the tax system and make it more efficient for businesses to operate in the country. 

The tax reform, which is expected to be implemented in 2024, aims to reduce the compliance burden and cost for taxpayers, especially small and medium enterprises (SMEs), which account for about 90% of the country’s businesses and 50% of its gross domestic product (GDP).

According to Taiwo Oyedele, President Bola Tinubu’s advisor on tax reform, the reform will also harmonize the tax rates and bases across the federal and state levels, and eliminate multiple taxation and overlapping jurisdictions. He said the reform will help Nigeria to improve its tax-to-GDP ratio, which is one of the lowest in the world at about 10.8%, compared to the average of 15.6% for sub-Saharan Africa.

The tax reform is expected to boost Nigeria’s economic recovery from the impact of the Covid-19 pandemic, which caused the country to slip into its second recession in five years in 2020. The reform is also expected to attract more foreign and domestic investment, as Nigeria seeks to position itself as a regional hub for trade and commerce. Nigeria is a signatory to the African Continental Free Trade Area (AfCFTA), which came into effect in 2021, and aims to create a single market of 1.3 billion people and a combined GDP of $3.4 trillion.

However, the tax reform faces some challenges, such as the resistance from some state governments and interest groups, who may fear losing their revenue sources or benefits. The reform also requires the amendment of some existing laws and the enactment of new ones, which may take time and political will to achieve.

The tax reform is widely seen as a bold and necessary step that will transform Nigeria's fiscal system and prospects. As the country begins a new year, it faces the opportunity and challenge of implementing the reform, and ensuring that it delivers on its promises of simplifying the tax system and boosting business in Nigeria.

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