Analysts at Afrinvest have highlighted the critical need for better coordination between Nigeria's fiscal and monetary policies to tackle inflation and foster economic growth.
Despite aggressive measures by the Central Bank of Nigeria (CBN), inflation remains stubbornly high to 33.69 per cent as of April.
The analysts attribute this to a disconnect between fiscal and monetary authorities, the adverse impact of continuous rate hikes on the real sector, and inefficiencies in policy implementation.
According to the analyst inflation has remained largely unresponsive to the CBN's aggressive push, on account of schism between fiscal and monetary authorities, the effect of successive rate hikes on the real sector, and inefficiencies in policy transmission channels.
They state: "We opine that it is highly improbable that raising the policy rates alone would be sufficient to address Nigeria's inflation quagmire considering the triplicate relationship between interest rate, inflation rate, and exchange rate (down 33.5 per cent YTD to N1,485.66/$1). We recommend the apex bank improves collaboration with the fiscal authority on the fight against inflation as isolated MPR hike would likely further devastate Nigeria's fragile macroeconomic fundamentals.
"The Nigerian economy expanded by 2.98 per cent y/y in real terms in Q1:2024, close to our base case projection of 2.93 per cent, but trailed Q4:2023 print of 3.54 per cent. The Q1 growth performance was supported in part by the sustained recovery in the oil economy which grew 5.7 per cent as against a 4.2 per cent contraction in Q1:2023, reflecting the modest improvement in average crude oil production to 1.57mbpd as against 1.51mbpd in the corresponding period of 2023. On the other hand, the non-oil economy grew 2.80 per cent compared to 2.77 per cent in Q1:2023, nonetheless underperformed Q4:2023 growth of 3.07 per cent. In all, the share of the oil economy rose to 6.38 per cent from 6.21 per cent in Q1:2023, while the share of the non-oil economy compressed mildly by 16bps y/y to 93.62 per cent."
Looking ahead, they said, "We maintain our conservative growth projection of 3.0 per cent for the full year 2024. This cautious stance is informed by the lingering impacts of ongoing reforms on growth potentials, challenging business environment, protracted security concerns, exchange rate volatility, dwindling Agric sector growth (the minuscule growth in Q1 is the lowest since negative print of 0.9 per cent in Q1:2023), and mounting risk in the external environment."
On his part, Head of Financial Institutions Ratings at Agusto & Co, Ayokunle Olubunmi noted that the GDP growth was higher than expected despite the devaluation.
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He explained that while the growth figures appear positive, they are almost parallel to the population growth rate, which limits their impact on catalysing significant economic change.
He said: "I think also its GDP growth was higher than what people expected given the level of devaluation. Although it looks better, it is not good at the same time because if you analyze it, you notice that it is almost at the rate at which the population is growing," Olubunmi stated.
"However, for the second quarter, the GDP growth may not be that high. The second quarter is where we had the full impact of the devaluation and economic activities were actually affected. Also, the second quarter is where the CBN's contractionary policies were implemented.
"So, in summary, the GDP growth is positive because it is not negative and also because it is almost at par with the population rate. However, it is not significant to catalyse the economy. Given the state of the economy, we need around 4 to 4.5 per cent growth, "he said.
Olubunmi emphasised that addressing structural issues and enhancing fiscal measures are essential to achieving higher growth rates.
"For now, it is going to be difficult for us to have a high growth rate because if you look at the contractionary policy of the CBN, it is going to reduce the volume of economic activities. Since the tightening, credit to the private sector has been reduced. However, for now, to increase growth, there have to be boosters from the fiscal side and resolve some structural issues we have in the economy. For instance, insecurity and also infrastructure issues such as power if improved can enhance manufacturing activities," he added.
