Nigeria’s Running Inflation to Temper Consumption Economy
Rising headline inflation has been noted as a downside to growing the consumption economy as Nigerians begin to re-draw their preference scale amidst local economy headwinds.
With the removal of fuel subsidies, market economists told MarketForces Africa that a large number of household finances will come under pressure.
They noted that the naira has been losing its purchasing power and companies are borrowing at higher rates despite the steep unemployment rate, say unemployment will peak, as businesses begin to rationalise headcounts.
“Thanks to the survival instincts of average Nigerians, the pressure could, however, become unbearable without palliative measures to cushion the immediate effects of high fuel price”, LSintelligence Associates said in a brief.
The headline inflation rate in Nigeria rose to 22.22 percent in April 2023, moved by an increase in food prices, the highest rate hike in 17 years. The accelerated headline inflation also absorbed pressures from the naira crisis, eventually weakening first-quarter gross domestic product growth.
Analysts noted that pressure on the consumption side dragged growth in the first quarter, and analysts have projected that the removal of fuel subsidies will drive inflation upward in multiple-folds in 2023.
The pump price of petroleum motor spirit or petrol has jumped more than 250% amidst the federal government’s decision to liberalise the downstream oil sector.
In the first quarter of the year, Nigeria’s economic growth slowed down to 2.31% year-on-year in real terms, indicating a 1.21% point lower than 3.52% recorded in the previous quarter.
The major driver of economic growth in Q1 2023 was the services sector, contributing a total of 57.29% to GDP. The agriculture sector’s contribution to GDP declined in Q1 2023 by 10%.
It also records a negative quarter-on-quarter growth of 28.83%. Industries’ contribution to GDP increased by 22% quarter on quarter as Construction. Amidst uncertainties fuelled by rising energy costs, the manufacturing sectors grow by 2.78% and 1.63% respectively.
Nigeria’s major earnings sources support the growth as the report indicated that the oil sector contribution to GDP increased by 30% quarter on quarter as the oil production increased in Q1 2023 to 1.51mbpd from 1.34mbpd in Q4 2022.
Headline inflation maintained an uptrend in the last 12 months despite sustained increases in monetary policy rates. Food prices surge is forcing households to cut down consumption. Analysts said the trend would reset economic productivity and drag growth lower.
This expectation could be reversed if the Nigerian government implements measures to reduce economic pressure that has shifted the misery index upward.
The removal of subsidies will reduce fuel consumption drastically as transport and logistics begin to raise prices. The increase in prices will filter into the food market despite the low-income earnings condition of the majority of Nigerians.
According to the government report, more than 133 Nigerians are vulnerable despite large social intervention spending over the last eight years under former president, Muhammadu Buhari.
A large number of people will struggle to meet their daily needs in the next few months as the market begins to dictate petrol pump prices, analysts told MarketForces.
“A slowdown in consumption economy will drag down growth in 2023 if there are no palliative measures to immediately reduce the negative effect that subsidy will have on foods and other household basic needs”, LSintelligence Associates stated in the note.
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