The Central Bank of Nigeria (CBN) has expressed concerns that factors such as the removal of fuel subsidies, increased external debt servicing obligations, and rising import bills could threaten the growth of the country’s external reserves in the 2024/2025 fiscal years.
This was disclosed in the CBN’s Monetary, Credit, Foreign Trade and Exchange Policy guidelines for the upcoming fiscal periods.
While the apex bank acknowledged the risks, it also maintained an optimistic outlook for Nigeria’s economy, projecting positive growth driven by continued policy support in the agriculture and oil sectors, reforms in the foreign exchange market, and the effective implementation of key legislative measures like the Finance Act 2023 and the 2022-2025 Medium-Term National Development Plan (MTNDP).
“The outlook for Nigeria’s external sector in 2024/2025 is optimistic, on the expectation of favorable terms of trade, occasioned by sustained rally in crude oil prices and an improvement in domestic crude oil production,” the CBN stated.
It highlighted that the positive outlook is contingent on sustained crude oil prices, propelled by production cuts and capital inflows from remittances.
However, the CBN warned of downside risks to the external reserves, emphasizing that “lower crude oil earnings, fuel subsidy removal, rising import bills, and increased external debt servicing obligations could pose downside risks for the accretion to external reserves.”
In addition to these challenges, the CBN cautioned that ongoing monetary policy tightening by central banks in advanced economies increases the risk of capital outflows, which could further strain external reserves.
Positive Growth Prospects for 2024/2025:
Despite these risks, the CBN projected that Nigeria’s economy would maintain a positive growth trajectory through 2024/2025, supported by reforms in key sectors.
“Nigeria’s output growth is expected to maintain a positive trajectory in 2024/2025,” the CBN noted. The growth will be driven by continued policy support in the agriculture and oil sectors, foreign exchange market reforms, and the Finance Act 2023.
However, the CBN also recognized the significant headwinds that could hinder this growth, including rising energy prices stemming from the ongoing Russia-Ukraine war and persistent security and infrastructural challenges in the country. These issues, according to the CBN, could undermine the economic outlook in the short to medium term.
Inflation and Fiscal Sector Performance:
The CBN’s report also projected that inflation would remain elevated throughout 2024/2025 due to global supply constraints and the effects of exchange rate pass-through. The central bank further warned that security and infrastructural challenges could exacerbate inflationary pressures.
On the fiscal side, the CBN anticipated a positive recovery trajectory, contingent on the effective implementation of the Finance Act 2023 and the restructuring of key revenue-generating ministries, departments, and agencies (MDAs) to boost non-oil revenue. However, it also acknowledged that low domestic crude oil production, growing public debt, and global economic uncertainty pose risks to fiscal operations in the medium term.
Financial Sector Resilience:
Despite the challenges, the CBN was optimistic about the resilience of Nigeria’s financial sector in 2024/2025, attributing this to its ongoing monitoring of vulnerabilities and risks.
The central bank assured that it would continue to conduct stress tests, examination exercises, and implement risk mitigation strategies to ensure stability in the financial sector.
“The financial sector is expected to remain resilient in 2024/2025,” the CBN noted, emphasizing its commitment to safeguarding the system against emerging risks.
The report highlights the balancing act Nigeria must undertake in the face of global economic challenges, domestic policy reforms, and rising financial obligations, while maintaining optimism about the country’s growth potential in the coming years.