By Onome Amuge.
Petrol subsidy removal and the adoption of a managed float exchange rate system is likely to mount additional pressure on Nigeria’s persistent high inflation, with continued volatility in the foreign exchange market in August,according to PricewaterhouseCoopers (PwC).
The professional service provider, in a recent report titled ‘’Nigeria Economic Outlook for August 2023’’, warned that Nigerians may need to brace up for more hard times in August as the impact of recent economic reforms by the government and low disposable income will continue to weigh heavily on their spending. It also projected that wage adjustments may not be made simultaneously and proportionately.
PWC believes that further inflationary growth and rise in the cost of living may slow real economic growth in the medium term, while high FX rates may drive up production costs and impact negatively on firm performance.
The firm also said naira floating is expected to drive up the cost of imported raw materials.
“The naira value since the implementation of the policy had ranged between N472/$ and N771/$ from an average of N463/$ in May before the policy announcement,” the report read.
Citing data by the National Bureau of Statistics (NBS) which showed that food inflation surged by 25 per cent in June, PwC noted that the hike is primarily driven by insecurity concerns and climate change effects in the country’s food-producing regions.
It also observed that transportation costs increased by 25 per cent in June compared to the same period in 2022, as a result of higher energy prices in the global market.
PwC predicts that with the removal of fuel subsidies, transportation costs are likely to rise further, given the substantial jump in fuel prices, especially after the pump price of the product jumped by more than 300 per cent to sell for N619 per litre from N198 per litre.
With currency depreciation and structural factors contributing to the rising costs of basic items such as clothing, footwear, furnishing, and housing utilities,PwC said consumers are expected to be squeezed by the unpleasant impacts leading to a slow down in demand. It added that the rise in energy, food, transportation, and import costs may dampen consumer spending on non-discretionary items.
The accounting consulting firm warns that the trend is much likely to worsen in August, pressured by heightened demand for foreign currencies like the US dollar, British Pound Sterling, and Euro.
The firm also projected that business revenues may decline in the short-term, mainly due to direct impact input costs and reduction in disposable incomes.
According to PwC, in the short run, investors will likely adopt a wait-and-see approach, which may be a result of the absence of further reforms to strengthen business and economic fundamentals.
Despite the gloomy economic outlook for August, the report raised optimism that economic reforms such as the FX market liberalisation could gradually attract foreign investments and boost capital inflows in the long term. It also foresee possible increase in crude production due to likely improved security architecture in the oil-producing regions
PwC noted further that though floating the naira may have a negative impact, it could provide incentives to corporates to explore local sourcing or backward integration in the medium term.
Overall, the report projects further regulatory reforms, reduced consumer demand in the medium term, and a slow but improved outlook for government spending, taxation, and credit control in Nigeria for August.
The report identifies various drivers behind these expectations, including the proposed new ministerial cabinet to drive economic direction and fiscal policy management, the implementation of new tax reforms to drive revenue generation, rising consumer goods prices, and uneven wage adjustments across sectors.
