Weak naira threatens Tinubu’s $1 trillion economy ambition as devaluation lessens GDP value in dollar terms

The instability in the forex exchange market and the weakness of the naira pose a significant threat to Nigeria’s ambition of becoming a $1 trillion economy.

Analysis by Nairametrics shows that naira devaluation has triggered a loss of about $193 billion in the country’s gross domestic product (GDP) when converted from naira to dollar.

Our analysis reveals that the country amassed a total GDP of N224.54 trillion for the year-long period from Q4 2022 to Q3 2023.

Converted to U.S. dollars at the exchange rate on the website of the Central Bank of Nigeria (CBN) at the end of September 2023 (N768.76/$1, Nigeria’s GDP stands at approximately $292.08 billion.

However, using the exchange rate before the FX unification policy of about $462.88/$, Nigeria’s GDP would have been at approximately $485.09 billion.

The naira devaluation of 39.79% also triggered a loss of value in the GDP in dollar terms at the same rate.

Although there was a decline in dollar terms, an increase was observed in the quarterly naira value of the country’s GDP.

It hit a high of N62.05 trillion in Q3 2023, which is higher than the value in Q2 2023 (N52.76 trillion) and Q1 2023 (N51.95 trillion), and even Q3 2022 (N53.18 trillion).

Despite the growth in naira terms, Nigeria has witnessed a depreciation of up to 40% in its currency’s value for the current year, based on official exchange rates, which means that the country is plagued by currency volatility.

Nigeria still leading African economy

After Nigeria, South Africa is the next country in line, but they haven’t released their GDP numbers for Q3 2023 yet.

The South African economy generated ZAR4.6 trillion, according to GDP Q2 figures from the country’s statistics bureau.

South Africa’s GDP is around $243.4 billion when converted to US dollars using the official exchange rate of about ZAR18.98/$1. With these figures, Nigeria is the leading economy in Africa.

Just like Nigeria, South Africa’s currency has also declined but not as high as the naira. The value of South Africa’s currency declined by around 15%.

Further analysis demonstrates that for Nigeria’s GDP to fall below South Africa’s when measured in US dollars, the naira would need to decline to approximately N900/$1.

Although the naira’s black market rate is currently above N1000/$1, this analysis has just considered the official exchange rates, assuming they are not artificially fixed.

And while the official rates have often sold above N900/$1, the NAFEX rates have yet to touch the N900/$1 rate.

The base year for constant prices utilized by both nations is another important factor to think about. While South Africa has changed its base year to 2015, Nigeria is still using 2010 for constant prices.

Although the current figures still favour Nigeria, this can change the relative values of the GDPs of the two nations.

Also, South Africa reported a real GDP growth rate of 1.6% for the second quarter of 2023. This is lower than Nigeria’s real GDP growth rate of 2.51% in the same period and 2.54% in Q3 2023.

FG not anticipating a $1 trillion economy by 2026

In its 2024-2026 Medium-Term Expenditure Framework and Fiscal Strategy Paper (MTEF/FSP), which was recently approved by the National Assembly, the Federal Government targets an exchange rate of 669.79/$ and GDP of N292.52 trillion.

Based on the projection in MTEF/FSP 2024-2026, Nigeria’s GDP will be $436.73 billion by 2026, which is far from its $1 trillion ambition.

This may either mean that the Federal Government is not serious about this ambition or is just throwing figures around to attract investors.

For Nigeria to hit the $1 trillion economy by 2026 at a GDP of N292.52 trillion, naira must appreciate to N292.52/$ which is highly unlikely given the current macroeconomic conditions.

The current exchange rate, however, implies that Nigeria’s economy will need to quadruple in growth over the next three years if it is to reach $1 trillion in GDP.

That is, assuming, of course, the exchange rate remains unchanged, which is highly improbable.

Rebasing the economy, as the NBS did in 2010, is another possible means by which it could approach there more rapidly.

According to some economists, the economy needs to be rebased because the economy’s form has evolved and the existing method of calculating GDP may not be reflecting its true size, particularly in areas such as healthcare, real estate, fintech, and trade.

More Insight

In June 2023, the CBN announced the unification of all segments of the forex market, collapsing all windows into one.

This was part of an effort to drive liquidity and stability in the forex market in Nigeria.

However, this seems to have had a counter-effect, as it triggered further instability in the market.

President Bola Tinubu recently set an ambitious target of growing the economy to $1 trillion by 2026 and increasing it to $3 trillion by the end of the decade in 2030.

The President disclosed this while delivering the opening address at the 29th edition of the Nigeria Economic Summit held in the nation’s capital, Abuja.

Tinubu also assured Nigerians and investors that his government inherited the assets and liabilities of the government concerning the foreign exchange and financial market.

He noted that the administration has a good line of sight about FX liquidity and will honour all foreign exchange forward contracts entered by the government.

The CBN said it has made tranche payments to 31 banks to clear the backlog of foreign exchange forward obligations.

The apex bank has also established some foreign exchange frameworks to address the FX issues in the country.

It is hoped that the recent reforms will eventually strengthen the naira against the dollar, and boost Nigeria’s GDP in dollar terms.