West Africa economic outlook, August 2024
Ghana and Nigeria face tepid growth amid high inflation, currency pressures, elevated interest rates, and debt concerns. Both economies need government initiatives to drive sustained growth.
West Africa’s macroeconomic environment has remained challenging due to several factors, the prominent ones being high inflation, a high interest rate environment, currency weakness, and elevated debt levels. These challenges are likely to persist for the rest of 2024, driven by ongoing market reforms, weak consumer demand, and low foreign investment. As a result, consumers will likely face further declines in purchasing power, and businesses are likely to experience higher operating costs. Both households and businesses are already implementing belt-tightening measures to survive.
The resulting effect of these macroeconomic headwinds on productivity and overall aggregate demand is likely to stall the region’s economic growth for the year. In July, the International Monetary Fund (IMF) revised its 2024 growth forecast for Nigeria to 3.1% from its April forecast of 3.3%.1 The IMF also reduced sub-Saharan Africa’s growth forecast to 3.7% from 3.8% in April due to the downward revision in Nigeria’s growth outlook.2 Meanwhile, the IMF projects Ghana’s economy will grow 2.8% in 2024 and 4.4% in 2025.3
Around 50 countries across the world are heading to the polls this year—or have already done so—including West African countries.4 Ghanaians are going to the polls this December. The current state of the economy and citizens’ welfare will factor heavily into how voters evaluate campaign promises and determine the next leader of the nation, an economy heavily dependent on cocoa and gold. The election outcome will weigh on policy direction, as well as investor and market sentiment.
West Africa’s economic growth rates to remain tepid in 2024
West Africa’s economic output has been limited by the rising cost of goods and services, leading to an increase in interest rates as monetary authorities attempt to rein in inflation. Nigeria and Ghana have also been facing currency volatility, which has had a severe impact on their ability to import raw materials and equipment required to boost output. In the first six months of the year, the Nigerian naira has lost over 40% of its value, and the Ghanaian cedi over 20% of its value against the US dollar.5
Nigeria
Nigeria’s economy grew by 2.98% year on year in the first quarter of 2024. Although faster than the corresponding period in 2023, when the economy grew 2.31% (figure 1), it marked a slowdown from an even faster growth rate of nearly 3.5%, seen in the fourth quarter of 2023. Major growth drivers in the first quarter of 2024 include the finance and insurance sector, which grew 31.24% year on year, and the water supply, sewage, waste management, and remediation sector, which grew by 6.95%. The oil and gas sector—the country’s economic mainstay—grew by 5.7%, after a year of contraction. The agriculture sector, on the other hand, continued to trudge along with a growth rate of 0.18%.6
The sluggish pace of growth is indicative of multiple factors, including reduced spending and investment. Consumer spending has declined significantly due to rising consumer product prices. Investment spending in the country has also dwindled, primarily due to foreign exchange difficulties that have partly contributed to the exit of several multinational corporations.
Nigeria will likely experience tepid short-term growth due to ongoing macroeconomic headwinds. Ongoing public protests, targeted against rising cost of living, have been largely predominant in the northern regions of the country, with pockets of unrest in some southern states as well. Further degeneration—especially in the south, the commercial belt of the country—could severely affect the nation’s overall economic output.
The IMF recently reduced its 2024 growth forecast for Nigeria, but there is some good news: It retained its 2025 growth forecast at 3%.7 Ongoing pro-market reforms will likely have positive effects on the economy, contributing to growth in 2025 and onward.
Looking beyond 2025, economic output is expected to accelerate as inflationary pressures start to ease and monetary conditions follow suit. An increase in oil-refining output, driven by Dangote’s refinery, operations resuming at government-owned refineries, and the possible entry of other private sector players will likely boost the country’s net exports. This could significantly propel economic growth in the medium term as fuel imports decline, while fuel exports and domestic crude production both increase.
Ghana
Ghana, compared to Nigeria, appears to have stronger growth prospects. Its economy grew by 4.7% year on year in the first quarter of 2024, driven by rapid 6.8% year-on-year growth in the industrial sector (figure 2). The agriculture and services sectors grew at a slower pace of 4.1% and 3.3% year on year, respectively. The country is recovering from a debt-induced crisis, following the government’s ongoing restructuring of its US$30 million debt. The implementation of monetary policy measures by the Bank of Ghana has also helped reduce inflation. Ghana has been able to secure approval for two tranches of IMF disbursements so far this year, bringing cumulative disbursements from the IMF to US$1.56 billion since 2023.8
The outlook for the Ghanaian economy is favorable in the short to medium term. However, there are downside risks emanating from the forthcoming general elections in December, high inflation, and elevated interest rates, all of which are weighing on private consumption and investment spending in 2024. However, a faster pace of recovery is expected from 2025 onward, driven by an anticipated decline in consumer prices, which will trigger a further cut in interest rates. In addition, mining output is estimated to rise, supported by increased output from the recommissioned Bibiani gold mine and production from the Ahafo North gold mine.9 The country’s cocoa output—one of the main drivers of the economy—will encounter volatility as a result of climatic conditions, smuggling, diseases (cacao swollen shoot virus and the black pod, for instance), and global commodity price fluctuations.
Inflation: Upside risks persist in the region
Rising consumer prices have been one of the major macroeconomic challenges plaguing developing countries, especially in West Africa. While inflation in Ghana now seems to be on a downward slope, it rages on in Nigeria.
Nigeria
Inflationary pressures in Nigeria are a result of structural issues, as well as external imbalances. A food crisis, heightened insecurity, a misaligned exchange rate and dollar illiquidity, and supply chain disruptions are some key domestic contributors. At the mid-year mark, Nigeria’s inflation rate was 34.19%, year on year. Food inflation, the major driver of the uptick, is trending above 40% year on year, while core inflation was up 27.4%, year on year, in June (figure 3).10 Government reforms implemented have exacerbated the pressure on consumer prices and the cost of doing business due to the inflationary impact. Purchasing power has been severely eroded, and this has led to reduced consumer spending. Business profit margins have also thinned significantly, with many companies struggling to stay afloat.
President Bola Tinubu has approved a new minimum wage of 70,000 naira per month,11 which is over 130% higher than the current level of 30,000 naira. While this is a welcome development, the more pertinent question is how the state government will afford the new wage level, especially since most states are currently struggling to pay their workers. This implies that state governments will have to either borrow more or increase their revenue generation to bridge the fiscal gap. The senate has approved a supplementary budget of 6.2 trillion naira, of which three trillion naira would be used to finance the minimum wage. This has increased the FGN 2024 Appropriation Bill to 34.98 trillion naira and will further widen the fiscal deficit beyond the 3.4% of gross domestic product projected in the 2024 budget.12
The upward trend in the cost of goods and services is estimated to continue for the rest of the year. The government has a year-end inflation target of 21.4%. This is highly optimistic and may not be achieved, especially if policy implementation lags are considered. In addition, for a country that is highly import-dependent, the role of the exchange rate cannot be overemphasized.
The naira witnessed severe volatility in the early part of 2024 before stabilizing at around 1,500 per US dollar. The local currency touched a high of 1,050 per US dollar and a low of 1,800 per US dollar at the parallel market in the first six months of the year. In the official market, the local currency experienced similar volatility, closing at 1,510.10 per US dollar at the mid-year mark.13
The Central Bank of Nigeria’s foreign exchange measures, which include introducing a “willing buyer, willing seller” market, clearing of foreign exchange demand backlog, and releasing new regulations guiding the operations of the bureau de change’s foreign exchange subsegment, are restoring investor confidence in the economy. If the pace of reform is sustained, it should provide some stability in the market. More importantly, new dollar supply sources will be needed to augment the policies and whittle down speculative demand. Nigeria’s oil production level is also projected to increase marginally to 1.3 million barrels per day in 2024 and 1.35 million barrels per day in 2025,14 from 1.23 million barrels per day in 2023.15 This is expected to boost the country’s export proceeds and dollar supply.
A more stable naira will play a major role in dampening inflationary pressures in Nigeria. An average inflation rate above 30% is expected in 2024.16 However, this is likely to taper toward an average of 23.8% in 2025 due to base effects, and the impact of ongoing monetary tightening.17 Upside risks to this forecast will arise from a possible increase in taxes and tariffs as the government intensifies its revenue mobilization efforts. The government has recently suspended tariffs, duties, and taxes on some imported grains for 150 days to ameliorate the effects of the food crisis on consumer welfare.18 The implementation of other major reforms may also be put on hold in the short term to reduce the contracting effect on consumer pockets.
Ghana
Inflation in Ghana has been on a steady decline since August 2023, with one or two months standing out from the trend. The deceleration has been driven by a tight monetary policy stance, ongoing fiscal consolidation of the government, and relatively stable transportation fares. Ghana’s annual inflation rate has fallen from a record high of 54.1% in December 2022 to a 26-month low of 22.8% in June 2024 (figure 3).19
The disinflationary trend in Ghana is expected to continue over the second half of the year. The Bank of Ghana has a year-end inflation target of 15% (plus or minus 2%). While this appears probable to achieve, there are upside risks, which largely arise from election spending and bouts of local currency volatility. In the first half of 2024, the Ghanaian cedi lost over 20% of its value against the US dollar, due to a mismatch in foreign exchange demand and supply.20 Demand has been growing for US dollars to purchase petroleum products, fuel, and other consumer goods.
On the other hand, cocoa earnings—one of the country’s major sources of foreign exchange—have declined by about 49% in the first four months of the year, due to poor harvests and challenges like smuggling.21 The good news is that the government has made significant progress with its debt-restructuring deal with official creditors, which should fast-track the disbursement of another tranche of funds from the IMF.
The anticipated inflow should shore up external buffers and provide support to the Ghana cedi. This will, in turn, have a positive impact on imported inflation. As of the end of June, Ghana’s gross external reserves were at US$6.9 billion, providing coverage for 3.1 months of imports.22
The anticipated increase in election-related spending will increase the level of money supply in the system, which could spur demand-pull inflation.
Policy environment in West African economies
Monetary policy
The monetary policy environment in West Africa has been contractionary for the last two years, owing to rising inflationary pressures. The Central Bank of Nigeria has raised its benchmark interest rates by a cumulative 15.25% since it commenced its tightening stance in May 2022. As of July 2024, the monetary policy rate in Nigeria was 26.75%.23 The Bank of Ghana, on the other hand, raised its rate by an aggregate of 13% between May 2022 and December 2023, before implementing its first rate cut of 100 basis points in January 2024—Ghana’s monetary policy rate stands at 29% as of July 2024.24
Nigeria
Monetary policy will remain contractionary in Nigeria as long as inflationary pressures persist. The Central Bank of Nigeria has indicated that interest rates will remain elevated as long as inflation continues to rise.25 However, the pace of increase may slow to allow for the impact of previous hikes to take effect on the market.
Higher interest rates have negative implications for these markets in the short run, such as a higher cost of funds and reduced credit to the private sector, which will hinder the growth of the overall economy. We also expect to see a continued shift away from equities toward interest-bearing securities. The effectiveness of raising interest rates to curb inflation in Nigeria will require fiscal policy support, as the main driver of inflation is food inflation.
Ghana
Ghana, on the other hand, may cut interest rates further in the second half of 2024. The rate cuts are likely to be tapered to limit the risk of a resurgence in inflationary pressures. This is because a higher level of money supply is expected as a result of election spending. Beyond 2024, we expect more aggressive rate cuts as inflation falls towards single digits. This will spur an increase in domestic demand and the overall aggregate output of the Ghanaian economy.
Fiscal policy
Fiscal policy in West Africa revolves around two main themes, revenue mobilization and debt restructuring/sustainability. Nigeria and Ghana both have high debt profiles.
Ghana has an ongoing debt-restructuring plan that has helped it secure an IMF package and disbursements alongside securing agreements with its lenders.
Nigeria, on the other hand, is facing rising debt levels amid low revenue generation. The widening fiscal gap caused by the new minimum wage will have to be bridged by either new borrowings or an increase in revenue. Generating more revenue implies higher taxes and tariffs, which has an inflationary effect.