Nigeria (Bi-monthly)

Economic Outlook
Impact of global economic trends
on Nigeria's foreign exchange and
the way forward

October 2023
PwC
 Content
1 Macroeconomic Context

2 Economic Outlook

3 Impact of Global Economic Trends on Nigeria FX

Market and Way Forward

4 PwC Economics Services

Internal
PwC
Macroeconomic dashboard

GDP Growth Rate Exchange Rate- Official ₦ $ Exchange rate- Parallel ₦ $ Monetary Policy Rate

2.5% ₦769.3/$ ₦1,008/$ 18.75%

Period Q-o-Q% Previous Period M-o-M% Previous* Period M-o-M% Previous* Period M-o-M% Previous*
Q2 8.7% 2.3% Sept 29 -0.35% ₦772/$ Sept 29 9.5% ₦920/$ July 1.4% 18.5%

$
Oil Production FX Reserves Market Capitalisation ₦ Inflation

1.4mbpd $33.2bn ₦36.3tn 25.8%

Period M-o-M% Previous Period M-o-M% Previous* Period M-o-M% Previous Period M-o-M% Previous
Aug 7.7% 1.3mbpd Sept 29 -1.5% $33.7bn Sept 29 2.2% ₦36.4tn Aug 7.1% 24.1%

Source: NBS, CBN, FMDQ, NGX, Aboki FX, PwCAnalysis NB: The cut off date is as of September 29, 2023

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 3
Setting the context (1/2)

• The marginal growth in GDP by 2.5% in Q2 2023 from 2.3% in Q1 2023 was caused by the lingering effect of the cash crunch. PwC projects 2.8%
growth rate for Nigeria in 2023 and 3% in 2024. This marginal growth projection may be due to the emerging effects of the implementation domestic
fiscal reforms by the ministerial and economic management team of the country
• The fastest growing sectors were utilities (31.8%), financial services (26.8%), information & communication ( 8.6%), and construction (3.4%). The
Macro dynamics growth in the activities of the utility sector may be partly attributed to the increase in the number of metered customers by 3.1% to 5.47
million people while increase in interest income, digital transactions and forex revaluation gains may be responsible for the growth in
financial services

• Inflation rose to 25.8% in August from 24.1% in July fueled by both food (29.3%) and transportation inflation rates (27.1%). We expect that the full
effect of the PMS subsidy removal will continue to be a key driver of inflation in the short to medium term
• FTSE Russell downgrade of Nigeria from frontline to unclassified market due to low FX liquidity, triggered sell-offs which drove the
decline in the All Share Index (ASI) by 1.2% or $1.4 billion (N463.7billion) in market capitalisation on September 13th. Further downgrades
may continue to weigh negatively on investor sentiment
Prices and markets • To reduce food inflation, wheat import bill and enhance improve food security, the Federal Government secured $163m AfDB loan for
development domestic wheat production

• Real income still under pressure as inflation (25.8% as of August 2023) continues to rise and national minimum wage remains unchanged in the
short-term. In addition, input costs (including the Y-o-Y increase of 216% in PMS from January to September) will continue to pass through to
consumer prices further worsening the affordability of goods and services in the economy in the short to medium term
Consumer and
• Provisional increase in wages of N35,000 to all Federal workers for a period of 6 months. The temporary increase is aimed at alleviating the
demand
impact of subsidy removal in the short-term

• Meter prices reviewed upwards by the National Electricity Regulatory Commission (NERC). The price of single-phase and three-phase meters
Regulatory and were raised by 39.7% and 31.1% respectively. The increase is aimed at ensuring balance between reasonable cost recovery for Meter Asset Providers
policy environment (MAPs) and affordable pricing for consumers, ensuring sustainable meter provision
• Implementation of the Finance Act 2023 from September 1st, 2023. The Act introduces key reforms for expansion of the tax base:
Regulatory and policy • VAT withholding and collection: VAT must be remitted by appointed persons to the FIRS no later than the 14th of the month following collection (e.g.,
development (1) VAT collected in August 2023 should be remitted by September 14, 2023)
• Revised building definition: Certain structures like masts, transmission lines, caravans, and trailers are no longer exempt and are now subject to VAT
starting from September 1, 2023
Source: NBS, CBN, PwC Analysis
Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 4
Setting the context (2/2)

• Increased Tertiary Education Tax (TET) rate: The TET rate has been raised from 2.5% to 3% of a company's assessable profits for accounting
periods ending on or after September 1, 2023
• Repealed tax benefits: The Companies Income Tax Act (CITA) no longer provides benefits for investment allowances, rural investment
Regulatory and policy allowances, and tax exemptions on income earned in convertible currencies by hotels from September 1, 2023 onwards
development (2) • Imposition of a 0.5% levy on goods imported into Nigeria from outside Africa

• Public debt rose by 4.6% Q-o-Q to $113bn in Q2 2023 from $108bn in Q1 2023. The rise in public debt is attributed to the securitisation of ways
and means (N22.7tn), a 67% depreciation of the naira which resulted in the increase of total debt by $5bn (see Page 6)
₦ • Manufacturing, finance & insurance activities and information and communication accounted for 45% of total collection of CIT & VAT.
It implies that revenue collection is not well diversified across the 21 sectors of the economy. This may have implications for reaching the
Fiscal dynamics targeted tax to GDP of 18% by 2026 and government revenue generation capacity in the short to medium term

• Foreign suppliers may not accept letters of credit amid unsettled $7 billion FX obligations to domestic lenders. This may lead to less imports
of the much-needed inputs and goods for manufacturing and retail/wholesale trade which may heighten inflationary pressures and negatively impact
GDP growth
CBN Introduced new directives:
₦ • Directives to banks to cease from utilising their FX revaluation gains for dividends and operational expenditures. This is to enable banks to
set aside FX revaluation gains for counter-cyclical buffers to mitigate potential unfavourable fluctuations in FX rates
• Directives to all International Money Transfer Operators (IMTOs) operating within the country to strictly follow the allowable limit of -2.5% to
Monetary dynamics +2.5% foreign exchange guideline. This enables the IMTOs to sell forex above the 2.5% of the preceding day’s NAFEX rates. However, there are
still compliance concerns on the ability of the CBN to enforce the directive. Enforcing this directive may help narrow the gap between the official
exchange rate and the parallel exchange rate, therefore fostering stability within the foreign exchange (FX) market (see Page 27 for
recommendations on closing the gap)
CBN introduces new policies:
• The reintroduction of Bureau De Change to increase the supply of foreign exchange, reduce the divergence between the forex markets and strengthen
the Naira in the medium to long-term. This raises concerns over the absence of long-term planning by the monetary policy authority.
• The launch of a Foreign Exchange (FX) Price Verification System (PVS) to enable importers gain access to forex. This may help regularise and
standardise the prices of goods and services that people wish to import, potentially reducing the demand for the dollar within the economy

Source: NBS, CBN, NGX, Proshare, PwCAnalysis

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 5
The rise in Nigeria’s public debt to N87.4trillion in Q2 2023 could be attributed to the impact of securitisation of
ways & means, and the naira devaluation

The Dynamics of Nigeria’s Public Debt (N’trillion)

Q1 total debt Impact of securitised ways and *Impact of devaluation *Others Q2 total debt
means

*External debt as of Q2 2023 was $43.2billion at an exchange rate of N770.38/$ while the exchange rate as of Q1 2023 was 460.35 Source: DMO, PwC Analysis
*The impact of devaluation was calculated using the difference in official exchange rates in Q1 and Q2 2023 multiplied by the external debt in Q2 2023 to
obtain the revaluation gain
*Others are estimated and may include new borrowings

Insights
• The securitisation of ways and means, and the impact of the devaluation of the naira accounted for 59.1% and 34.9% respectively of the rise in public debt in Q2 2023.
A sustained rise in public debt may negatively affect the country's credit ratings, subsequently increasing the cost of borrowing

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 6
The rise in all energy pressure points may further squeeze consumer’s purchasing power

Energy Pressure Points (Naira)

Brent crude oil price recorded an eight-year high of USD140
per barrel in March 2022, which was exclusively due to the
Russia–Ukraine war which disrupted global supply chains
The fuel subsidy
removal led to a jump
in PMS prices by more
than 200%

1400 5000
4500
1200
4000
1000 3500

800 3000
2500
600 2000
400 1500
1000
200
500
0 0

Kerosene per litre (LHA) PMS per litre (LHA) Automotive Gas Oil (Diesel) per litre (LHA) Liquefied Petroleum Gas (5KG) (RHA)

LHS – Left Hand Side, RHS – Right Hand Side Source: NBS, PwC Analysis

Insights
• All identified energy pressure points which include kerosene, PMS, Automotive Gas Oil, and Liquified Petroleum Gas have been deregulated by the government.
This implies that they may likely move in the same direction with the trends in the international oil price.
• The rise in energy pressure points due to increases in international oil price will further squeeze consumer’s purchasing power
• Although the prices of petroleum products may possibly be moving in the same direction, the price of PMS may not be on par with the other products due
to the likelihood of partial subsidy being reintroduced to cushion the effect of a rise in PMS price, in the absence of increase in the minimum wage for the labour force
and palliative measures for the poor

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 7
Slowdown of GDP growth in Q2 2023 to 2.5% was attributed to continued effect of naira redesign policy

The Dynamics of Nigeria’s GDP Growth Rate

The CBN’s policy on

naira redesign and
The economic recession in 2016 withdrawal limits
Covid-19 disruptions which
was caused by a decline in oil caused a slowdown in
6 caused massive breakdown of
prices and oil production shocks economic activities
economic activities caused the
4 economy to contract to its lowest
level in over 10 years.
2

-2

-4

-6

-8
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2016 2017 2018 2019 2020 2021 2022 2023

Source: NBS, PwC Analysis

Insights
• The marginal growth in GDP by 2.5% in Q2 2023 from 2.3% in Q1 2023 was caused by the lingering effect of the cash crunch and the emerging effect of domestic reforms
(subsidy removal and FX liberalisation)
• GDP is expected to grow marginally in Q3 2023 due to slowdown of economic activities occasioned by prevailing macroeconomic headwinds. PwC projects 2.8%
growth rate for Nigeria in 2023 and 3% in 2024
• Transportation (-50.6%) and Mining & quarrying (-12.2%) sectors recorded growth contractions while agriculture (1.5%), real estate (1.9%), and manufacturing (2.2%)
recorded slow growth. The negative growth in the mining and quarrying sector is due to business contractions in the oil and gas sector, while the increase in PMS
prices accounts for the contraction in the transportation sector

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 8
Information & communication sector is the only fast growing dominant sector
Dominant sectors
Fast growing Slow growing Key insights

• The information and communication sector is the only

dominant sector with a fast growth of 8.6%. The
• Information & • Trade – 2.4% growth in the sector may be attributed to the increase in
communication – 8.6% • Manufacturing – 2.2% consumption of data services and subscriber number
• Agriculture – 1.5%
• Financial and insurance sector growth of 26.8% may be
attributed to the rise in interest income, digital
transactions and forex revaluation gains

01 02 • The transportation and storage sector in Nigeria

experienced a significant contraction primarily due to
the Federal Government's removal of the PMS
03 04 subsidy. This decision resulted in higher PMS prices,
prompting many private car owners to opt for public
• Transportation & storage – transportation especially those with lower income to
• Financial & insurance – 26.8% (-50.6%) reduce their travel. As a result, transportation fares for
• Construction – 3.4% • Mining & quarrying – (-12.1%) both local and inter-state journeys have risen,
• Accommodation & food services • Arts, entertainment & recreation –
deterring many from commuting and impacting their
– 3.4% 2.5%
personal and business activities

• Professional, scientific & technical

services – 2.9%
Fast growing Slow and contracting
Small sectors
*Assumptions
1. Sectors with more than or equal to N1trillion activity are classified as dominant economy while sectors below N1trillion are small sectors
2. Fast growing sectors are sectors with growth rate more than 3% while slow growth rate are below 3%

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 9
Economic context and outlook
Key Assumption Drivers Likely Impacts
Growth
• Inflation is expected to rise in the short to medium-term
• Continued inflationary growth and rise in the cost of living may lead to marginal real
on the basis of increased petroleum prices and a economic growth in the medium term
devalued naira on food, transport and non-food prices • PwC projects 2.8% growth rate for Nigeria in 2023 and 3% in 2024
Prices and markets • Petroleum products expected to rise on the back of the
rise in the international oil price. This will impact the food, Investment
development
transport and core inflation • Capital reallocation from the Nigeria’s economy may continue to impact foreign investment
flows in the short to medium term
• Investors may adopt a wait and see approach due to lack of forward guidance on FX policy
• Consumers are expected to be pressured by higher (see Page 21-25)
prices causing demand to slow down • The unsettled FX backlogs may lead to scarcity of goods and inputs for manufacturing
Consumer and
• Wage adjustments unlikely to be on par with and trade leading to further increase in prices
demand
inflation simultaneously and proportionately
Government Spending
• Government spending will rise but continue to be constrained by debt servicing obligations
• Newly installed ministerial cabinet to drive economic and huge fiscal deficit
direction and fiscal policy management Consumer Demand
• Implementation of the Finance Act 2023 from • Rise in energy, food, transportation and import costs may dampen consumer spending on
₦ September 1st. The Act introduces key reforms for non-discretionary items
expansion of the tax base • S&P projects 2.8% growth in consumption demand in 2023 and 2.9% in 2024
Fiscal dynamics • Brent crude oil price rose to $94/b on September 13,
the highest since November 2022. Goldman Sachs Production
predicts that oil prices will reach $107/b by end of 2024 • High FX rates may drive up cost of goods & services and impact negatively on firm
performance
• Businesses may likely incur losses due to the impact of increased interest rates,
• Lack of forward guidance on FX policy and unsettled devaluation losses, among other challenges
backlog of FX obligations may continue to impact • The reintroduction of BDCs and adoption of the FX Price Verification System to improve
₦ investor sentiment accessibility and accountability in the long term. In the short-term we expect that FX will still
• Reintroduction of BDCs to provide relief from the be in short supply
continued devaluation of the naira in the short to • S&P projects -1.6% in industrial production in 2023 and growth of 6.7% in 2024
Monetary dynamics
medium term
• The appointment of a new CBN governor and Net Exports
management team will shape the direction of the • Net exports will continue to be pressured given FX unavailability
monetary policy
Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market Source: S&P, PwC Analysis October 2023 10
Framing the relationships between global trends and Nigeria FX market

Five global trends FX Market Local trends

Supply dynamics
Tightening monetary environment
to curtail inflation Fiscal policy + development
Net flows
(fiscal balance, debt)
• Cost of funding
• Capital reallocation Demand dynamics
Concerns on debt sustainability • Trade balance
• Remittances Local economy growth/
• Confidence performance
Investors + market
(exports and Imports, inflation
confidence
etc.)
Heightened geopolitical risk

Market Mechanisms and Governance: Access,

Friction, Transparency, Market Debt and Financial and capital market
Weakening global trade Financial Instruments, Price Discovery
activities

Slowing GDP growth Monetary+ FX Market Strategy + Policy

FX Outcomes
• Stability + volatility
• Price evolution
• Flexibility to shocks
Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 11
Key global trends

• Monetary policy tightening to curtail inflation led to the US Fed and ECB raising rates 11 and 10 consecutive times respectively. The
ECB raised policy interest rate by 25 basis points to 4% in September. On the other hand, the Federal Reserve and BoE held
the interest rate steady in September. But the Federal reserve stiffened its hawkish stance by projecting further rate increase
Tightening monetary
by the end of the year
environment to curtail
inflation • As the fight to bring inflation back to target continues, the IMF expects global interest rates to remain high for quite some time

• In 2022, global public debt – comprising general government domestic and external debt – reached a record $92 trillion. Developing
countries owe almost 30% of the total, of which roughly 70% is attributable to China, India and Brazil
Concerns on debt • Economies already susceptible to weaknesses may encounter additional rises in borrowing expenses. Several nations, including Zambia,
sustainability Sri Lanka, Ghana, Pakistan, and Tunisia, face mounting challenges in servicing their debts

• Elevated levels of global energy and commodity (oil, uranium and grain) supply risks from political tensions in Gabon, Niger and the
Russia-Ukraine conflict. These geopolitical challenges is coupled with the coalition of voluntary supply cuts led by Saudi and Russia
• Fueled by the pandemic and Russia’s war in Ukraine, the IMF foresees an increasingly fragmented world For instance, FDI is now
Heightened
increasingly driven by geopolitical preference
geopolitical risk

• China's trade performance showed a 8.8% (y/y) decrease in exports and a 7.3% drop in imports in August. While the United State’
recorded a slow growth in import and export (y/y) by 1.7% and 1.6% respectively
• Due to supply chain disruptions and national security concerns trade restrictions by countries have increased significantly. These trade
Weakening global
policy actions could pose a serious threat to global prosperity
trade

• Global GDP growth is expected to slow down with economic projections falling short of historical growth
• IMF projects that GDP growth in the United States, the EU and the UK is expected to decline to 1.8%, 0.9% and 0.4%
respectively in 2023
Slowing GDP growth

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 12
The impact of the global transmission mechanisms on price discovery, liquidity, and friction in forex access in
Nigeria

Transmission Assessing the transmission mechanism on price discovery, liquidity, and friction in forex access
Mechanism

1 Cost of Increase in debt concerns which has led to lowering of credit ratings may lead to increase in the cost of
funding international fund. This may increase the demand pressure on forex to meet future FX debt service obligations. This
is evident in the decline in capital importation from $24 billion in 2018 to $5.3 billion in 2022

2 Capital • The increase in global Central Bank’s policy rate may lead to capital reallocation away from Nigeria financial
reallocation market to other markets with more attractive yields on investment. This may reduce FX flows to the economy
• The Nigeria MSCI index recorded a significant decline of 113%, from 23.5% in 2020 to -3.02% in 2022,
reflecting capital reallocation to other economies
3 Trade balance A marginal trade surplus may lead to an increased pressure on FX threatening liquidity in the forex market. In Q2
2023, Nigeria recorded a positive balance of trade of $2.3 billion. The positive trade balance could be attributed to
the growth of total export by 9% (y/y) to $12.5 billion

4 Remittances A weak global economic growth may negatively affect remittance flows into the economy. The decline in remittance
flows may reduce FX flows to the economy. Though remittances to Nigeria accounted for 38% of the total flows
to the region, it increased by only 3.3% to $20.1 billion

5 Confidence Lower credit ratings due to Nigeria’s widening fiscal deficit, debt service to revenue ratio may reduce confidence in
the Nigeria economy. This may lead to reallocation of funds from the Nigerian economy and reduction in FX
flows

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 13
The global financial landscape is more challenging (1/2)

Emerging Market (EM) Net Portfolio Flows (% of GDP, 4 quarter

rolling sum)
8

Inflows
4

Outflows
-2

-4

-6

China Other EM Total

Sources: IMF, 2023 External Sector Report and IMF staff calculations

Insights

• Since the U.S. began its tightening cycle 18 months ago, EM dollar bond yields rose by roughly 200 basis points, foreign currency bond issuance fell significantly, and
portfolio flows to major EMs sharply declined

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 14
 •
15
20

10

0
5
January-08
April-08

Insights
July-08
October-08
January-09
April-09
July-09
October-09
January-10
April-10

Source: DMO, Investing.com, PwC Analysis

July-10
October-10
January-11
April-11
July-11
October-11
January-12
April-12

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market

July-12
October-12
January-13
April-13
July-13
October-13
January-14
April-14
July-14
October-14
January-15
April-15
July-15
October-15
Nigeria 10-Year Bond Yield

January-16
The global financial landscape is more challenging (2/2)

April-16
July-16
October-16
(%, US$ denominated)

January-17
Sovereign Bond Yields

April-17
July-17
October-17
January-18
April-18
July-18
October-18
January-19
April-19
July-19
USA 10-Year Bond Yield

October-19
January-20
April-20
July-20
The nominal yields on 10-year US Treasury bonds have risen above 4%, reaching their highest point since the Global Financial Crisis

October-20
January-21
April-21
July-21
October-21
January-22
April-22
July-22
October-22
January-23
April-23
October 2023

July-23
15
0.0
0.5
1.0
3.0
3.5
4.0
4.5
5.0

1.5
2.0
2.5
Increase in interest rates may lead to reallocation of capital from frontier markets

Federal Funds Rate vs MSCI* Index

The ECB, BOE, and Federal reserve raised
rates to curtail the rise in inflation. This led to
capital reallocation from frontier and
emerging markets to advanced markets
3,500 6

3,000 5

2,500
4
2,000
3
1,500
2
1,000

500 1

0 0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Frontier Market Emerging Market World Market Federal funds rate (%) ECB Interest rate BOE interest rate (%)

Source: NBS, MSCI, PwC Analysis

Insights

• Following the increase in the fed funds rate to a target range of 5.25%-5.5%, there has been a rise the MSCI index of the developed markets as investors move
capital from the frontier markets to take advantage of higher attractive yields

• The Nigeria MSCI index outperformed both the MSCI frontier index (23.52% vs. 1.43%) and the ACWI index (23.52% vs. 16.25%). However, between 2020 and
2022, the Nigeria MSCI index experienced a significant decline of 113% to -3.02% in 2022. This suggests a notable capital flight from Nigeria during that period

• Frontier Markets countries include: Bahrain, Bangladesh, Burkina Faso, Benin, Croatia, Estonia, Guinea-Bissau, Iceland, Ivory Coast, Jordan, Kenya, Lithuania, Kazakhstan, Mauritius, Mali,
Morocco, Niger, Nigeria, Oman, Pakistan, Romania, Serbia, Senegal, Slovenia, Sri Lanka, Togo, Tunisia and Vietnam.
• MSCI is an acronym for Morgan Stanley Capital International*

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 16
Rising debt service to revenue ratio has led to the reallocation of capital away from the economy

Nigeria’s Debt Dynamics vs Capital Importation

120

100

80

60

40

20

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Capital importation ($'billion) Debt service as a (%) of revenue Fiscal deficit as a percentage of GDP (%)

Source: NBS, World Bank, PwC Analysis

Insights

• Nigeria debt service to revenue ratio increased to 96% in 2022 raising concerns about its widening fiscal deficit, high debt servicing to revenue and rising debt to
GDP ratios. This led to low credit rating (Moody, Fitch) which implies access to international funding will be costly and investors are likely to reallocate funds to other
attractive and stable markets

• This is evident in the decline in capital importation from $24 billion in 2018 to $5.3 billion in 2022

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 17
The prevalence of geoeconomic disintegration is on the rise

Trade Tension Increasing

(Number of harmful trade restriction measures imposed)
2,500

2,000

1,500

1,000

500

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Goods Services Investment

Sources: Global Trade Alert; IMF World Economic Outlook (April 2023)

Insights
• Around 3,000 trade restrictions were imposed last year—nearly 3 times the number imposed in 2019. The pandemic and Russia-Ukraine war has led to the rise
in trade restriction because of the supply chain disruptions and national security concerns it caused

• For example, Nigeria currently produces only 10% of the wheat it consumes, making it highly dependent on imports (import stood at $2.1 billion in 2022, 4% of total
import). Therefore, Russia’s exit from the Black Sea grain deal is affecting Nigeria’s effort to become self-reliant in industries that rely on wheat as a key input in local
production. The country was already facing challenges in growing wheat because of climate change and insecurity

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 18
Decline in global trade growth may adversely affect Nigeria’s trade balance and FX inflows

Nigeria’s Trade Balance vs Global Trade Growth

4,000 The pandemic induced lockdown led to the 30
contraction in global trade. Nigeria recorded a
deficit trade balance of N178billion in the same 25
3,000
period attributed to the contraction in global trade
20
2,000 15

10
1,000
5
0
0

-1,000 -5

-10
-2,000
-15

-3,000 -20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Nigeria trade balance (N'billion) (LHA) Global trade growth (%) (RHA)

Source: NBS, World Bank, PwC Analysis

Insights
• After two quarters of decline, global trade improved in Q1 2023 by about 2% compared to Q1 2022. This was due to China's economic resurgence after lifting
lockdown measures. However, UNCTAD predicts weak growth in Q2 2023 due to persistent inflation, financial vulnerabilities, the Ukraine conflict, and geopolitical
tensions, all negatively impacting global trade. Overall, the outlook for global trade in the latter half of 2023 is pessimistic due to these prevailing negative factors
• In line with the above trade projections, China’s July exports dropped by double digits. According to the Country’s customs data, exports fell to $281.8 billion.
Demand for Chinese exports cooled after the Federal Reserve and Central Banks in Europe and Asia started raising interest rates last year to cool inflation that was
at multi-decade highs

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 19
Weakening global growth may decelerate remittance flows to the country

Nigeria’s Total Direct Remittances vs Global GDP Growth Rate

The COVID-19
30 pandemic caused 8
a contraction in
GDP growth rate
The financial crisis by
25 6
induced contraction -3.1%. The
of -1.3% in 2009 led slowdown in global
to the decline in activities led to the
20 4
remittance flow by decline in
5% in 2009 remittance flow to
15 Nigeria by 28% 2

10 0

5 -2

0 -4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Total direct remittances ($'billion) (LHA) Global GDP growth rate (%) (RHA)

Source: CBN, World Bank, PwC Analysis

Insights
• Remittance flows to low and middle-income countries is expected to remain resilient but slow to $656 billion (2022: $647 billion), which represents growth of
1.4% by 2023 compared to 8% growth in 2022
• The slow growth is due to the softening of economic activity in remittance source countries, limiting employment and wage gains for migrants. Remittance flows to
Sub-Saharan Africa in 2022 was largely driven by strong remittance growth in Tanzania (25%), Rwanda (21%), Uganda (17%), Ghana (12%), and Kenya (8.5%).
Though remittances to Nigeria accounted for 38% of the total flows to the region, it increased by only 3.3% to $20.1billion
• In 2023, growth in remittances to SSA is expected to ease to 1.3%. Sending $200 to the region cost on average 8% in the fourth quarter of 2022, up
from 7.8% a year ago (World Bank)

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 20
WDAS/RDAS utilisation and FX intervention accounted for 70% of FX outflows between 2004 and 2021

Forex Outflows (US$' Million)

70,000

60,000

50,000

40,000

30,000

20,000

10,000

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

WDAS/RDAS Utilisation/FX Intervention Drawings on L/C External Debt Service

National Indpt Priority Projects (NIPP) Other Official Payments Bank Charges
Funds Returned to Remitters 3RD Party MDA Transfer Through Autonomous Sources
Source: CBN, PwC Analysis

Insights

• WDAS/RDAS utilisation and FX Intervention accounted for 70% of all FX outflows between 2004 and 2021. This was closely followed by other official payments
which accounted for 15% of the total outflows within the same period

• External debt service has been on a rise as a result of an imbalance in dollar supply. External debt grew from 1% in 2015 to 37% in 2021

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 21
59% of annual FX inflows were from autonomous sources in 2022

USD Inflows to the Nigerian Economy

160 100%
146
142

80%
120 123
119 116
107 105 105
100
94 60%
91 88
80
74 72
67 40%
63
59
51
40
35 20%

0 0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

CBN inflows ($'billion) (LHA) Non-CBN inflows ($'billion) (LHA) Annual inflows ($'billion) (RHA)
Source: CBN, PwC Analysis

Insights

• Over time, there has been a rise in the inflows of FX from autonomous or non-CBN sources, which has led to the widening divergence between the official and
parallel market rates. Since 2007, the FX inflows from autonomous sources exceeded inflows from the CBN
• The implication official interventions may not accurately reflect the market demand and supply dynamics as annual inflows is skewed towards unofficial sources

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 22
Parallel market premium widened in 2023 with the rise in import bills and the decline in crude oil exports

Parallel Market Premiums

60%
52%
49%
50%

40%

28%
30% 25%

20% 15% 16%

13%
8% 9% 8%
10% 6% 7%
4% 3%
1% 2% 2% 2% 0%
0%
-1%
-10%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Source: CBN, PwC Analysis
Note: The data for 2023 is as of September 25

Insights

• The Central Bank of Nigeria (CBN) maintained control over the official foreign exchange (FX) market by offering a more favourable exchange rate and using the threat
of sanctions. This allowed them to finance over 60% of USD import demand from 2005 to 2013, giving them significant influence over FX rates for goods and services.

• However, Nigeria's external accounts were changing due to an artificially strong exchange rate. Non-tradable services in the import basket grew, driven by increased
consumption of foreign transportation, education, health, and financial assets. The other big shift in dollar demand composition was in oil imports which rose
from 10-15% in 2005 to 20-22% of total imports at end of 2022

• The rise in Nigeria’s import basket and the decline in crude oil exports relative to autonomous flows widened the gap between the parallel market and the official rate

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 23
Total net flows through the CBN and autonomous sources has been declining

USD Net Flows to the Nigerian Economy (USD’ billion)

140

120

100

80

60

40

20

-20

-40
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Netflow through the CBN Netflow through Autonomous Sources Total Netflow

Insights

• Net flow through the CBN is negative, indicative of the decline in both oil sector receipts and non-oil sector inflows from autonomous sources. Since 2007 more USD
came into the market via autonomous sources peaking at $103 billion in 2013
• The gap between the official and parallel market rate widened abnormally in 2016Q1 as a result of a fall in oil price to $35/barrel toward the end of February 2016
accompanied by a depreciation of the naira in 2016

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 24
Trade-offs in exchange rate policy trilemma

Capital Mobility

Floating exchange Rate & Pegged exchange rate &

Monetary autonomy Capital mobility

Financial Pegged Exchange

Autonomy rate

Pegged exchange rate &

Monetary autonomy
Source: The Brookings Institution

Insights

• More exchange-rate flexibility is associated with greater monetary-policy autonomy, so there is some rounding of that corner of the policy trilemma; but temporary,
narrowly targeted capital controls do not enable a country with a fixed exchange rate to have greater monetary-policy autonomy than it has under full capital mobility

• Widely applied, longstanding capital controls break the link between domestic and foreign interest rates under a fixed exchange-rate system

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 25
Framing the relationships between global trends and Nigeria FX market preliminary, not
exhaustive

3
Five global trends FX Market Local trends

Supply dynamics
Tightening monetary environment
to curtail inflation 2 Fiscal policy + development
5 Net flows 4
(fiscal balance, debt)
• Cost of funding
• Capital reallocation Demand dynamics
Concerns on debt sustainability • Trade balance
• Remittances Local economy growth/
• Confidence performance 4
Investors + market
1 (exports and Imports, inflation
confidence
etc.)
Heightened geopolitical risk

Market Mechanisms and Governance: Access,

Friction, Transparency, Market Debt and Financial and capital market
Weakening global trade 2 Financial Instruments, Price Discovery
activities

Slowing GDP growth Monetary+ FX Market Strategy + Policy

FX Outcomes
• Stability + volatility X See next slide
• Price evolution
• Flexibility to shocks
Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 26
Way forward

Manage for flexibility

Boosting of Investors’ 1 2
and shocks – withstand
Confidence - Clear external shocks with a
Nigeria FX Management pocket of sequenced policy
Story. execution

3
Short-term fix to
5
Deepening of financial
enhance foreign markets
exchange liquidity
.
4

Longer term sectorial policy to

maximise exports or deepen
domestic consumption
Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 27
PwC Economics team proposition

Measure and assess our client’s

• Economic Impact Assessment (EIA)/Socio-Economic Impact Assessment
impact on the economy, 01 (SEIA)
competition and markets
• Regulatory Impact Analysis (RIA)
• Competition economics
• Policy analysis and development

01
02 • Macroeconomic and political research
• Market entry and sectoral analysis
Help our client make decision Help our client plan for future • Country and industry risk assessments
on investment and risk macroeconomic, mega trend
and sustainability scenarios

• ESG scenario planning

03 • Economic and political scenario planning
• Industry and macroeconomic modelling
02 03

Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 28
 Contact Us
Olusegun Zacchaeus
Partner and West Africa Lead, Strategy&
[email protected]

Omomia Omosomi
Lead Economist & Researcher
[email protected]

Adesola Borokini
Senior economist & Researcher
[email protected]

Nigeria's economic outlook July 2023

PwC 16
Impact of Global Economic Trends on Nigeria’s Foreign Exchange Market October 2023 29