Economist Explains Why There Was Huge Difference in Growth of Financial Services and the Rest of the Economy in 2024 in Nigeria

Dr. Muda Yusuf, Director of the Centre for the Promotion of Private Enterprise (CPPE) stated that the disparity in growth between Nigeria’s financial services sector and the broader economy in 2024 was because of the detachment of financial markets from the real economy. He explains that the financial sector's robust 32 percent growth, compared to the sluggish performance of agriculture and manufacturing, highlights a troubling misalignment. This gap stems from a failure in the financial sector's intermediation role, which traditionally channels funds into productive sectors that drive employment and inclusive growth. Instead, investing in financial instruments has become more attractive due to lower risks and higher profitability, thereby sidelining sectors crucial for job creation and poverty reduction.

Yusuf’s analysis, presented in his report Nigeria 2024 Economic Review and 2025 Outlook, underscores that while Nigeria’s overall Gross Domestic Product (GDP) displayed resilience, growing at 2.98 percent in the first quarter, 3.19 percent in the second quarter, and 3.46 percent in the third quarter, the real sectors of the economy underperformed. Agriculture grew by a mere 1.14 percent, and manufacturing managed only 0.92 percent growth in the third quarter of 2024. This contrast between financial sector dynamism and real-sector stagnation signifies a critical economic imbalance. The sectors with high employment potential and broad economic inclusion, such as agriculture, manufacturing, and textile industries, remained mired in recession. Air transport, quarrying and mining, petroleum refining, and textile production all failed to rebound, further illustrating the uneven distribution of growth across the economy.

The dominance of financial sector profitability reflects a shift where speculative investments offer better returns than traditional production-oriented ventures. According to Yusuf, this trend presents a significant dysfunctionality that threatens Nigeria's broader economic aspirations. Policymakers must address this imbalance by implementing strategies that make real-sector investments more attractive. Enhancing the profitability and reducing the risks associated with agriculture, manufacturing, and other production sectors is imperative to reversing the current crowding out of the real economy by financial markets.

Yusuf pointed out that financial services, by their very nature, should act as intermediaries, facilitating access to capital for businesses engaged in production, innovation, and trade. However, in 2024, the sector largely operated as an independent engine of growth, decoupled from the productive economy. This phenomenon has broader implications for unemployment and poverty. When capital flows disproportionately into financial instruments rather than into businesses that generate goods, services, and jobs, economic disparities widen, undermining sustainable development goals.

The structure of Nigeria’s economy also reveals an imbalance between oil and non-oil sectors. Yusuf noted that the non-oil sector accounted for 94.43 percent of GDP in the third quarter of 2024, with the oil sector contributing only 5.57 percent. Despite its small GDP share, oil revenues remain a critical source of foreign exchange, highlighting the need for broader economic diversification. However, diversification efforts have been hampered by inadequate policy frameworks that fail to make non-oil investments sufficiently competitive or rewarding. The financial sector’s outsized growth relative to the real economy underscores this policy shortfall.

In addition, the profitability of financial instruments compared to the real economy reflects a risk-return imbalance. While financial investments carry minimal risks and promise high returns, sectors like agriculture and manufacturing are burdened with higher operational costs, policy uncertainties, and infrastructure deficits. This creates a disincentive for entrepreneurs and investors to engage in productive activities. Yusuf called for targeted policy interventions to recalibrate this imbalance. Such measures could include providing tax incentives for real-sector investments, improving access to credit for small and medium enterprises (SMEs), and strengthening infrastructure to reduce production costs.

The implications of the current economic structure extend beyond immediate growth metrics. High unemployment rates and persistent poverty levels are direct consequences of an economy where speculative financial gains outpace investments in human capital and industrial capacity. Yusuf emphasized the urgency of reversing this trend to achieve inclusive growth. Financial sector reforms must prioritize enhancing the sector’s intermediation role, ensuring that capital flows into productive areas with substantial economic and social returns.

The 2024 economic performance also highlights the challenges facing Nigeria’s transportation and manufacturing sectors. Despite the financial sector's rapid growth, key industries that should drive economic transformation remained stagnant or in decline. Rail transportation grew by 19.7 percent, and road transport expanded by 17.9 percent, indicating some positive movement. However, these gains are not sufficient to offset the broader struggles within manufacturing and agriculture. The real sectors need a comprehensive policy overhaul to improve competitiveness and resilience.