The Nigerian economy experienced a slower growth rate in the first quarter of 2023 due to a cash crunch caused by the country’s currency redesign. This has had a significant impact on business activities, and analysts predict that the growth of the economy will remain uncertain, with growth likely to fall below the forecast for 2023. According to the National Bureau of Statistics (NBS), real GDP for the first quarter of 2023 grew slowly by 2.31% year on year, compared to 3.52% in the last quarter of 2022. The latest GDP data also shows that Nigeria’s manufacturing sector growth has slowed to the lowest in three years due to the cash shortage that crippled the economy during the period.
The deceleration in growth is attributed to the impact of the naira scarcity on aggregate demand, uncertainties about the new administration, and existing structural problems. The ongoing fuel shortages experienced at the start of the year, the war in Ukraine which disrupted global trade, and the impact of the COVID-19 pandemic, which brought about higher unemployment, are also driving factors to this slowdown. Although the outlook for the Nigerian economy looks uncertain, with less optimism due to anticipated low-impacts from global monetary tightening and soaring inflation, there is potential for growth to pick up in the coming quarters if the government can address some of the challenges it is facing.
A cursory examination of the breakdown of GDP figures showed that the oil sector declined at a slower pace, contracting by 4.21% year on year compared to a 13.38% contraction in Q4 2022. The non-oil sector maintained its positive growth path but grew moderately by 2.77% year on year in Q1-23. Meanwhile, the new GDP report by the NBS showed that the manufacturing sector grew by 1.61% (year-on-year) in real terms in Q1 2023, down from 2.83% in Q4 2022 and 5.89% in the same period last year. The trade sector also slowed to 1.31% in Q1, the lowest in two years from 4.54% in the previous quarter and 6.54% in Q1 2022.
Since the beginning of the year, Nigerians have been buffeted by a chronic shortage of cash caused by the naira redesign policy of the Central Bank of Nigeria (CBN). This has disrupted economic activities and negatively impacted the livelihoods of Nigerians. Data from the CBN show that the currency in circulation dropped to the lowest level in 14 years and five months to N982.1 billion in February from N1.39 trillion in the previous month. But it rose by 71.41% to N1.68 trillion in March after the CBN moved naira notes from its vault to deposit money banks in response to the Supreme Court order to extend the legal tender status of the old N200, N500, and N1,000 notes to December 31, 2023.
The reduction in growth is attributed to the adverse effects of the cash crunch experienced during the quarter. Every aspect of the economy was affected by the cash crunch, and it significantly reduced the GDP of the country. Manufacturers were the worst hit because they already carried trunk costs like raw materials and warehouses full of goods. However, the sector is expected to improve in the second quarter as money gradually comes into the economy. The latest monthly Purchasing Managers’ Index (PMI) by Stanbic IBTC Bank improved to 53.8 last month after contracting in March (42.3) and February (44.7).
In conclusion, the Nigerian economy’s growth remains subdued over the past years, with an average real GDP growth of 1.45% within the last eight years. The country needs to achieve GDP growth of over six percent to achieve more inclusive growth and move closer to its long-run GDP potential.
