FDC Whispers – January 28, 2025

Dear Subscriber,

GDP Rebasing – feeling tall because of high-heeled shoes

The Nigerian GDP was last rebased in 2014. At that time, the GDP increased by 89%, rising to $510 billion from $270 billion. While it provided a meaningful basis for comparison with peer countries, it had a negative impact on Nigeria’s ability to negotiate for debt relief. This was because Nigeria was now classified as a middle-income country. The current size of the GDP in US dollars is approximately $214 billion. After the rebasing, we expect the GDP to reach as high as $520 billion. It sounds good and looks impressive, but it changes nothing.

The tough path to monetary policy normalization

Nigerians are likely to wake up to an announcement that inflation has fallen from 34.8% to 27%, as a result of the CPI basket reconstitution. It is natural for the CPI basket to be reconstituted every five years, but this has not happened since 2009. While the basket reconstitution is necessary, it may obfuscate the real issues, particularly the underlying structural drivers of inflation. Inflation in Nigeria is driven by output reductions and increases in money supply, which remain potent factors. Meanwhile, the expected decline in inflation could usher in an era of accommodative monetary policy. The EIU projects that interest rate cuts will begin in mid-2025 as the disinflation cycle gains traction, with the policy rate expected to settle at 23% by year-end.

Increased dollar liquidity and a stronger naira?

In the last few days, we have seen a notable appreciation of the naira, recording gains of 1.82% in the parallel market and 1.73% in the NAFEM. This improvement has been primarily driven by increased dollar liquidity, speculative trading, and short-term market interventions. However, this appreciation is unlikely to last long because the fundamental drivers of the currency (i.e., export earnings, agricultural production capacity and FDI) have not changed dramatically in the last few days. Therefore, one can conclude that the recent gains in the naira is more based on technical factors rather than an improvement in the underlying economic fundamentals.

In this latest edition of Whispers, the FDC Think Tank takes a deep dive into recent economic developments and their impact on your business and corporate strategy.

Enjoy your read!