Stabilizing Nigeria’s Economy: Can Recent Reforms Deliver Long-Term Gains?

Nigeria's recent economic reforms, led by the World Bank and government agencies, are beginning to stabilize the economy and improve fiscal health but have increased short-term hardships for citizens. Sustained efforts in fiscal discipline, social protection, and structural reforms are essential to translate these gains into long-term growth and poverty reduction.

The recent Nigeria Development Update, prepared by the World Bank, outlines Nigeria’s economic trajectory amid complex reforms aimed at fostering stability and growth. Past policies marked by inflationary pressures, a heavily subsidized fuel economy, and a restrictive foreign exchange regime have hindered the country’s economic potential. To address these longstanding issues, Nigeria implemented significant reforms in 2023 targeting monetary, fiscal, and foreign exchange policies. Spearheaded by the Central Bank of Nigeria (CBN) and the Ministry of Finance, these reforms included ending deficit monetization, unifying the exchange rate, and phasing out the costly gasoline subsidy. The abrupt removal of subsidies led to an immediate rise in fuel prices, impacting the cost of living and sparking inflationary pressures across income levels. The CBN’s move to a unified, market-reflective exchange rate, which eliminated the premium between official and parallel market rates, was a key step in aligning the naira with true market conditions, addressing revenue losses, and boosting investor confidence. However, this transition has introduced significant hardships for Nigerians, particularly the economically vulnerable, as prices across essential goods, especially food, have continued to climb.

Emerging Gains Amid Economic Reforms

While these reforms have introduced short-term strains on households and businesses, the benefits of a market-driven economy are beginning to emerge. GDP growth, which remains modest, has shown slight improvements, bolstered by stabilization in the oil sector and robust activity in services. Nigeria’s external reserves have also experienced an uptick, moving from $32.9 billion at the close of 2023 to over $38.5 billion by October 2024. This increase in reserves has provided a buffer against external shocks, offering a measure of stability in an otherwise turbulent economic landscape. The country’s fiscal health, too, is showing signs of recovery, with a reduction in the fiscal deficit from 6.2% of GDP in the first half of 2023 to 4.4% in the same period in 2024. Revenue gains from tax reforms, improved remittances from government-owned entities, and the exchange rate unification have all contributed to this positive fiscal trend. However, challenges persist in translating these macroeconomic gains into broader benefits for Nigeria’s population, where over 115 million people live in poverty. Rising costs have hit households hard, particularly the urban poor, who face high food prices exacerbated by currency depreciation and inflationary pressures.

Fiscal Consolidation and Inflation Control

The World Bank’s report highlights that Nigeria’s macroeconomic outlook remains fragile but suggests that sustained reforms could create an enabling environment for private sector investment and job creation. Sustained fiscal consolidation and tight monetary policy are expected to help reduce inflation, forecasted to fall to around 14.3% by 2027. Non-oil revenue growth, spurred by digital tax systems and a more effective value-added tax structure, has shown promising results, moving from 5.5% of GDP in the first half of 2023 to 8.7% in the same period of 2024. As inflationary pressures ease, Nigeria’s businesses, particularly small and medium enterprises, may find a more favorable environment for growth and expansion. However, challenges remain, including the need to stabilize oil production and address structural issues that hinder productivity in non-oil sectors. The CBN’s policy of a flexible exchange rate has allowed the naira to adjust to global market conditions, enhancing Nigeria’s competitiveness on the international stage and making Nigerian goods more attractive for export.

Social Impact and Support Programs

The social impact of these reforms is profound, as the sharp rise in fuel and transportation costs has affected individuals across all income brackets. In response, the government has accelerated social protection programs, including cash transfers to low-income households. These transfers, aimed at cushioning the most vulnerable, are still hampered by issues related to coverage, as not all eligible Nigerians have the necessary identification to receive benefits. Despite these obstacles, over 4.4 million households have already received support, with plans to expand the program to reach more. To create long-term opportunities for the poor, policymakers are encouraged to enhance access to education and skills training, thereby aligning the workforce with emerging sectors that have potential for higher productivity. Youth and women, often excluded from productive work, are especially impacted by limited job availability and social constraints, further contributing to income inequality.

Toward Structural Reforms and Inclusive Growth

Looking to the medium term, the report emphasizes that sustainable growth requires deep structural reforms. For Nigeria to achieve inclusive growth, trade barriers need to be lowered, competition policy strengthened, and investment in infrastructure prioritized. Investments in transport and digital infrastructure, for instance, are seen as essential to integrating domestic markets, allowing Nigerian businesses to scale and access larger consumer bases. Reducing trade barriers, particularly by lifting bans on food imports, would alleviate cost pressures and ensure better food security, a critical issue in light of persistent inflation. The World Bank underscores the importance of addressing issues that inhibit productivity growth, from limited access to finance for small businesses to energy and power shortages that hamper industrial output. As Nigeria continues to transition towards a more open and competitive economy, creating a business-friendly environment remains critical to attracting both domestic and foreign investment. Enhanced transparency in the management of oil revenues, as well as a focus on reducing the cost of governance, are identified as necessary to support fiscal stability and economic resilience.

Staying the Course for Economic Transformation

While the Nigerian government’s reforms are creating foundational changes, the journey to broader economic recovery and poverty alleviation is far from complete. The report warns that any backsliding on these reforms, such as reintroducing subsidies or deficit monetization, could erode progress. Continued commitment to tight fiscal discipline and an enabling environment for private investment are crucial to ensure that Nigeria’s macroeconomic gains translate into real improvements in the livelihoods of its citizens. This strategy, combined with social protection for the most vulnerable, offers a pathway for Nigeria to not only stabilize but also grow inclusively, enabling its vast population to better share in the country’s economic gains.