By JEFF ADE

As the year 2024 rolls into history and citizens rivet their gaze on what the New Year 2025 would bring, the Centre for the Promotion of Private Enterprise (CPPE) has done a holistic review of economic performance in 2024 with an outlook of things to expect in 2025.

In a statement, an economist and Director/CEO of CPPE, Dr. Muda Yusuf, reviewed the economy from the perspectives of:

Gross Domestic Product (GDP) Performance

According to him, the Nigerian economy exhibited resilience on account of GDP performance despite the intense macroeconomic headwinds in 2024. The GDP grew at 2.98% in the first quarter, 3.19% in the second quarter and 3.46% in the third quarter. It may close the year at about 3.6%. “This is at par with IMF forecasts for GDP growth for the sub-Saharan Africa which is 3.6% and better than global GDP forecast of 3.2%,” he observed.

Sectoral Growth Disparities

Dr Yusuf also stated that the service sector continued to dominate the sectoral growth performance for most part of the year. He said: “In Q3 2024, the financial services sector outperformed other sectors with a growth performance of 32%.Insurance grew by 19.8%, road transport grew by 17.9% and rail transportation 19.7%.”

He did not overlook the lacklustre performance of the real sector of the economy in 2024.His word: “However, real sector growth remained subdued during the year with agriculture posting a GDP growth of 1.14% and manufacturing, 0.92% in the third quarter of 2024.Air Transport, Quary & Minerals, Petroleum Refining and Textile sector remained in recession as at the third quarter of 2024.

“The implication is that sectors with high job creation potentials and prospects for economic inclusion are still struggling.This situation needs to be reversed to fix the current high unemployment and reduce poverty.

The huge disparities in the growth of financial services and the rest of the economy are a reflection of the growing decoupling of the financial services sector from the real economy. It also exemplifies the failure of the financial intermediation role of the financial services sector in the Nigerian economy. It is a significant dysfunctionality in the economy which deserves the urgent attention of policy makers. The current reality is that investing in financial instruments has become much more profitable than investing in the real economy. The risk is also very low. This is not consistent with our economic aspirations as it is a major disincentive to real sector investment.There is a need for appropriate policy measures to correct the huge disparity in the profitability between the real economy and the financial economy.There is also a progressive crowding out of the real economy in the financial markets.”

Oil and Non-Oil Sectors

On oil and non-oil sectors the CPPE CEO says that the non-oil sector continues to dominate the economic space with the sector contributing 94.43% of the country’s GDP in Q3 2024, especially from a structural perspective, while the oil sector contributed 5.57%.However, he said that the economy is characterized by a paradox of the oil sector contributing an estimated 90% of foreign exchange earnings while the non-oil sector accounts for about 10%.

This, he remarked, is a structural shortcoming in our economy which needs to be addressed as sectors that contribute hugely to GDP have no corresponding contribution to foreign exchange earnings. He stated: “However, it is noteworthy that the non-oil sector contribution to revenue had improved markedly in recent times. This economic structure reflects the enormous productivity and competitiveness challenges of the non-oil sector of the Nigerian economy.

The policy implication is that more should be done to fix the challenges of productivity and competitiveness of the non-oil sector of the economy. Most of these challenges are the structural issues, infrastructural challenges, funding constraints, regulatory issues and the general macroeconomic headwinds.”

Forex review and outlook

Dr Yusuf further stated that as at the close of the year, official exchange rate (NFEM) was N1,537 up from an average of N1,455.59 in January 2024and N907.1 in December 2023, noting that the rate had largely stabilized from July to December 2024 . The moderation in exchange rate volatility, he said, was informed by the series of regulatory reforms and the periodic intervention by the Central Bank in the forex market.On a positive note, he added: “Meanwhile the balance of outlook for the exchange rate in 2025 is on the upside based on the following expectations:

· Sustained improvement in foreign reserves which is currently in excess of $40 billion dollars.

· Improvement in accretion to reserves on the back of improved inflows from the IMTOs and diaspora remittances.

· Improved capacity of the CBN to moderate rate volatility through periodic intervention in the forex market.

· The positive impact of the $2 billion Euro Bond proceeds on reserves.

· Positive Impact of the successful domestic dollar bond of $500 million.

· The successful clearance of legacy forex obligations of about $7 billion by the CBN.

· The Import substitution effect of the Dangote and Port Harcourt refineries with the consequential easing of demand pressure on the forex market.

· Gradual recovery of the non-oil export sector and implications for forex inflows.”

Inflation Outlook

By his observation, high inflationary pressure was a major concern in 2024 with November inflation peaking at 34.2%. This situation, he said, unleashed general increase in the cost of living with consequential effect of aggravation of the poverty situation, elevated cost of operations and cost of production for businesses, significant erosion of profit margins of many businesses as additional costs that could not be transferred to consumers because of weak purchasing power of consumers, elevated risk of loan defaults, and high project costs across all sectors of the economy, with many cases of abandoned projects resulting from unforeseen cost escalation.

Inflation Outlook for 2025

On outlook of inflation in the New Year, Dr Yusuf said: “Inflation may moderate slightly on the expected reduction of the volatility of the exchange rate and possible rebound of the naira. Moderation in energy cost as the geopolitical tension eases as a result of the impact of the Trump presidency. There is a likely boost in global oil production as USA increases production and the embargo on Russia eases. These are likely outcomes of Trump’s presidency. There is also the factor of the base effect on the inflation numbers as inflation was generally elevated in 2024.”

However, he further stated that such key drivers of inflation as high energy cost including electricity tariff, exchange rate, transportation cost, high interest rate, high cargo clearing cost, impact of insecurity on agricultural output and food supply, climate change and flooding, and imported inflation resulting from geopolitical tensions, supply chain disruptions, trade war and tight global monetary conditions may not completely dissipate in 2025:

Monetary And Financial Conditions

He said: “Given the current disposition of the central bank of Nigeria, monetary conditions may remain tight in 2025. However, the degree of tightening may decelerate in 2025 given the current high levels of MPR and CRR. The space for further tightening has become limited.Some of the key factors that would shape the monetary outlook include the following:

· Strong ideological commitment of the CBN to orthodox monetary policy which may continue to result in hike in interest rates.

· Commitment of the CBN to philosophy of inflation targeting.

· Risk of elevated fiscal deficit and its inflationary implications. There is also the related risk of higher money supply growth in 2025.

· Risk of heightened debt levels and consequential implications for increased debt service.”

And the Policy Implication?

The CPPE boss said: “Government should expedite action to boost capitalization of the development finance institutions – BOI, BOA, NEXIM to deepen development finance interventions.

There is a need to revitalize and restructure the Bank of Agriculture to support the agricultural sector and agro-allied industries with the much-needed concessionary financing.Current high interest rate in the commercial banks continues to impede the recovery and growth of the Nigerian agricultural and agro-allied sectors of the economy.

The CBN should soften its tightening stance in order to support investment growth and job creation in the economy.

Current high interest regime foisted by the tightening regime increases the risk of loan defaults, increasing the prospects of higher non-performing loans in the financial sector.

High interest rate also increases debt service cost for the government with the current huge exposure to domestic debts.

High interest rates typically pose significant risks to business sustainability amidst numerous headwinds.

There is a need to protect the real economy from the adverse consequences of free market principles. This is the basis of government intervention in a market economy.”

On Energy Sector Outlook

Yusuf says: “The outlook for the Nigeria energy sector is moderately positive especially following the increased capacity in domestic refining of petroleum products.But this will require supportive fiscal and monetary policy support to unlock the full potentials of the domestic refineries and stimulate more investments in the sector. Factors that may drive the positive outlook for the sector include:

· Enhanced domestic petroleum refining capacity from the Dangote refineries, the Port Harcourt Refineries and others.

· Emerging competition among domestic refineries which may have a moderating effect on prices.

· Expectation of a slump in global energy prices on the back of the Trump presidency and the easing of geopolitical challenges in the 2025.

· Sustenance of the naira for crude arrangement which could help moderate prices of domestic refining of crude.

· More generous fiscal incentives for the CNG and renewable energy solutions.”

However, he adds: “the electricity pricing conundrum would remain a tricky issue in 2025. The economy is too fragile to absorb the shocks of a fully deregulated or commercial electricity market.The quality of the transmission infrastructures and the consequent frequent collapse of the transmission grid require significant investment which the government would have to struggle to provide.

“The outlook for the sector remains a major cause for worry in 2025.There are also the transition challenges of the states taking up regulatory responsibilities for electricity market. Not many states have the capacity to manage this transition. This is therefore a major source of risk for the electricity sector in 2025.”

Key Business Risks in 2025

His views are: “Businesses would have to worry about some critical risks as they craft their strategies for 2025. Exposure to the risks vary across sectors. Businesses would therefore need to calibrate their strategies according to the level of exposure to these risks. The risks include forex volatility risk, interest rate risk, inflation risk, financial and monetary policy risk, regulatory risk, cybersecurity risk, insecurity risk, political risk, corruption risk, especially with regard to public sector transactions and contracts, environmental /climate change risk.”

Silver Lining in The Current Reforms

Dr Yusuf remains optimistic that current economic reforms have their silver linings which include:

´ Enormous opportunities for import substitution across all sectors. It reduces cost, improves patronage and profitability. This is essentially about focusing more on backward integration initiatives.

´ Boost to recycling business because of the soaring cost of raw materials and other inputs.

´ Provision of domestic alternatives to medical tourism, education tourism and vacations abroad. Many Nigeria elites are now seeking domestic alternatives in these areas because of the forex situation. This offers new opportunities for domestic investors.

´ Local fabrications of spare parts and other mechanical devices.

´ High food prices offer new opportunities and incentives for investment in agriculture because of better profitability prospects.

´ Outlook for export business has become very positive because of the weak domestic currency. It enhances the competitiveness of domestically produced products or services.But the local content of such products must be very substantial to guarantee good profitability prospects.

´ The weak currency now offers bigger opportunities for diaspora Nigerians to invest at home.

´ There should be deliberate policy to promote legal migration abroad to fill skill gaps in many of the countries in Europe and North America, especially the United States and Canada.Many of these countries are also experiencing an aging population which offers opportunities for our youths, many of whom are currently unemployed.

´ Brighter prospects for outsourcing business for foreign companies.

´ Bigger Investment opportunities in the petroleum refineries and related industries following the deregulation of the sector.

´ Growing opportunities in renewable energy investment which are cheaper and more environment friendly.

´ New opportunities in the use of CNG, LPG in transportation.

´ Decentralization of electricity provision opens up numerous opportunities in the electricity value chain.

Business Resilience Strategies in 2025

He cautions business managers and owners to prioritize the following to ensure resilience in 2025.

· Leveraging technology to reduce cost and ensure competitiveness.

· Industries need to deepen backward integration to reduce the forex exposure.

· Reduction in debt financing to reduce the burden of high interest rate.

· Adoption of efficient energy solutions to reduce the pressure of high energy cost.

· Supply chains should be domesticated as much as possible.

· Focus on talent retention, especially in specialized job functions.

· Incorporate scenario planning framework in business strategy to manage uncertainties and volatilities.

· Businesses must ensure cost optimization.