Market News

By Chinwendu Obienyi

Nigeria’s economic challenges, compounded by inflation, structural imbalances and monetary pressures, have cast a shadow over its economic outlook.

This is because inflation in Nigeria has remained persistently high, driven by increased food prices, high energy costs, and a depreciating currency.

In turn, this has eroded household purchasing power and increased the cost of living, further straining consumers and businesses.

According to the National Bureau of Statistics (NBS), consumer prices increased for the fourth straight month, rising by 20 basis points (bps) to 34.80% year-on-year (y/y) in December (November: 34.60% y/y), bringing the average headline inflation for 2024 to 33.18% (2023 FY average: 24.52%).

Parsing through the breakdown, food prices (-8bps to 39.84% y/y) slowed after three consecutive months of increase, driven in part by pre-emptive buying in anticipation of price hikes during the festive period and the delayed impact of the harvest season.

However, core inflation (+53bps to 29.28% y/y) increased for the third month in a row, primarily reflecting the impact of seasonal demand during the festive period and elevated energy costs on prices of core items. Although, on a month-on-month (m/m) basis, the headline inflation moderated by 20bps to 2.44% m/m (November: 2.64% m/m).

However, the issue of inflation is not only peculiar to Nigeria; the global economic outlook is not quite optimistic, with the International Monetary Fund in its October 2024 World Economic Outlook revealing that global growth would indeed stabilize at 3.2% over the medium term in and into 2025, reflecting a steady but underwhelming recovery compared to pre-pandemic trends.

But in its World Economic Outlook (WEO) titled Global Growth: Divergent and Uncertain, published at the weekend, the Washington-based lender raised its growth forecast for the global economy to 3.3% in 2025, up from a 3.2% projection in October 2024.

Just recently, the World Bank forecasted that Nigeria’s economy will grow by 3.5% in 2025 and rise slightly to 3.7% in 2026.

>span class="s2">According to the Bureau of Labor Statistics (BLS), consumer prices in the United States increased by 20bps to 2.9% y/y in December (November: 2.7% y/y). The increase was primarily due to the slower decline in gasoline prices and higher food prices.

However, in the United Kingdom, headline inflation pared below market expectations (+2.6% y/y) in December. According to the Office for National Statistics (ONS), headline inflation in the UK eased by 10bps to 2.5% y/y in December (November: +2.6% y/y).

To be fair, since the 2008 financial crisis, central banks have struggled to control inflation, with the COVID-19 pandemic and geopolitical tensions, particularly the war in Ukraine, further complicating these efforts. In Nigeria, these global inflationary pressures are compounded by unique local factors, resulting in severe macroeconomic uncertainty.

One factor, according to economic analysts, is the huge deficit spending that has bedeviled the economy for a few years now. For example, the 2025 budget, presented by President Bola Tinubu, includes a projected deficit of N13.08 trillion, approximately 3.89% of GDP.

However, this substantial deficit is likely to contribute to inflationary pressures this year as the FG’s continued reliance on deficit spending to fund its activities injects additional liquidity into the economy, thereby counteracting the Central Bank of Nigeria’s (CBN) efforts to control inflation through monetary tightening.

“The truth is that the FG has continued to borrow to fund its activities in 2024. According to data from the CBN, total government revenue cumulatively stood at N6.8 trillion, while total government expenditure for the same period was N19.61 trillion, and so if you consider that the government spent N19.61 trillion as at October 2024 and generated about N6.82 trillion, it then means that the government, in the first 10 months of the year, recorded a deficit of about N12.8 trillion.

Bear in mind that as at 2023, the government recorded a deficit of about N10 trillion.

Chukwu noted that persistent inflation in 2024 underscored Nigeria’s structural challenges, including weak food production, insecurity, inadequate infrastructure, high energy costs, and logistical inefficiencies.

He said, “Inflation may moderate if there is an improved crude, food production, and stability in the FX market. However, the FG’s deficit financing methods for 2025 could exacerbate inflationary trends.”

Seemingly agreeing with Chukwu’s view, analysts at Cordros Research said, “Looking ahead, we expect headline inflation to trend downwards in the near term, primarily due to the stability of the naira, reduced consumer demand, and ease in energy prices. Overall, we project headline inflation will moderate to 2.22% m/m in January, translating to a y/y reading of 34.30%. However, we note that the rebasing of the Consumer Price Index (CPI) could introduce a downside risk to our January inflation estimate, partly due to proposed weight adjustments.”

It would be recalled that the NBS announced that it would conclude the rebasing of Nigeria’s Consumer Price Index (CPI) by the end of January 2025, marking a significant update to the methodology used in tracking changes in price trends.

“This shift reflects the considerable evolution of Nigeria’s economy over the past 15 years, accounting for changes in household consumption patterns, the structure of the economy, and the impacts of global and domestic economic developments. One key aspect of the rebasing is the proposed re-weighting of inflationary components in the CPI basket.

To this, items such as food prices, electricity, gas, and other fuels are expected to have a lesser influence on the overall headline inflation figure under the revised methodology. This recalibration aims to provide a more accurate representation of current spending habits and living costs,” they said.

Conclusion

While inflation may moderate in the near term, the structural challenges highlighted (e.g., high logistics costs, inadequate infrastructure) could prevent a significant economic turnaround.

Thus, addressing underlying issues—such as improving transportation infrastructure, ensuring reliable energy supply, and fostering a more diversified economy—remains critical for achieving sustainable growth. Additionally, structural reforms and better-targeted fiscal incentives could unlock opportunities.