How Nigeria Can Unleash its Economic Potential

Over the past two years, Nigeria, Africa’s most populous nation, has undertaken challenging reforms aimed at addressing long-standing impediments weighing upon its economy. While these reforms are beginning to yield results, poverty and food insecurity remain considerable, and the uncertain global environment presents additional complexities. As highlighted in our latest annual assessment of the West African nation’s economic health, the adoption of appropriate policies can support Nigeria in realizing its potential as a significant African and global economic force.

A Difficult Starting Point

Upon assuming office in 2023, the new administration encountered conditions of weak growth and escalating poverty. Between 2014 and 2023, real per capita GDP experienced an average annual decline of 0.7 percent. In 2023, the poverty rate reached 42 percent. This difficult context was aggravated by restricted access to foreign currency, which compelled individuals to resort to the parallel currency market, thereby paying a substantially higher price than the official rate. Meanwhile, public finances were strained by an opaque system of fuel subsidies, leading to recurrent shortages of petrol. Furthermore, central bank financing of the fiscal deficit fueled inflationary pressures.

In response to these difficulties, Nigerian policymakers have initiated a series of significant reforms over the preceding two years. In 2023, the incoming government and the Central Bank of Nigeria liberalized the foreign exchange market, ceased central bank financing of the fiscal deficit, and reformed fuel subsidies. The government also worked to strengthen revenue collection, an area that remains among the weakest globally.

Since the implementation of these reforms, international reserves have grown, and access to foreign exchange is now available in the official market. Nigeria successfully re-entered international capital markets in December and has recently received upgrades from rating agencies. A new domestic, private refinery is facilitating Nigeria’s move up the value chain within a fully deregulated market.

The Work Continues

While progress has been encouraging thus far, substantial challenges persist. Inflation continues to exceed 20 percent. Inadequate infrastructure, particularly in the electricity sector, impedes economic activity. Poverty and food insecurity levels remain elevated. Nigeria currently lacks an effective social safety net capable of cushioning the impact of economic shocks on its most vulnerable populations.

Additionally, the global economic environment introduces further challenges, marked by heightened uncertainty and elevated borrowing costs. Nigeria is particularly susceptible to volatility in international oil prices, as oil revenues constitute a significant portion of government income—amounting to 30 percent in 2024.

Policy Priorities

To address these challenges effectively, Nigeria should concentrate on three primary policy priorities: Firstly, the nation requires stronger and more sustained economic growth to lift millions out of poverty and food insecurity, a focus area for the authorities. Achieving this will take time. In the interim, promoting more inclusive growth necessitates expanding the existing cash transfer system.

Secondly, as a critical requirement for economic development, Nigeria needs a robust budget framework. Ensuring effective investments in human capital and infrastructure demands realistic budgetary assumptions, stringent expenditure management, and transparent implementation and reporting—elements that, in turn, can enhance accountability. For its part, monetary policy should maintain its decisive approach to tackling inflation and reducing economic uncertainty.

Thirdly, the government should continue efforts to increase domestic revenue generation. This is crucial given Nigeria’s substantial funding requirements in areas vital for growth, such as agriculture, infrastructure (including electricity access), and climate adaptation. The government’s ongoing tax reforms aim to simplify tax payment processes and ensure compliance among all taxpayers. Over the longer term, once the current cost-of-living crisis subsides and the cash transfer system is fully operational, there will be scope to align tax rates with those in neighboring countries. Currently, the proportion of revenue allocated to interest payments leaves insufficient resources for investment in people and infrastructure. Consequently, it is imperative that the significant financial savings derived from the removal of fuel subsidies accrue to the government to finance priority expenditures.

While Nigeria’s potential is undeniable, realizing it will necessitate continued reforms and the establishment of an effective social safety net to support the most vulnerable segments of the population.