Worsening Inflation Rate Tempers Growth Optimism

Worsening Inflation Rate Tempers Growth Optimism

Nigeria’s worsening headline inflation rate has been noted as a key downside to growing the consumer economy as citizens begin to re-draw their scale of preferences amidst weak purchasing power, unemployment, and painful impacts of economic reform policies.

In its June 2023 edition of the Nigeria Development Update, the World Bank projected an inflation rate of 25% for 2023 because of the removal of petrol subsidies.

However, the Washington-based multilateral lender noted that despite expectations of a significant increase in headline inflation in 2023, the rate will likely fall by the first quarter of 2024.

With the removal of fuel subsidies, some analysts, and economists told MarketForces Africa that a large number of household finances will come under pressure. Inflation is projected to spike, according to Broadstreet consensus as monetary authority interest rate hikes failed to stabilise the price level.

The naira has been losing its purchasing power and companies are borrowing at higher rates despite the steep unemployment rate, a development that analysts projected could worsen joblessness as corporates rationalise their workforce to reduce pressures on economic activities.

“Unemployment rate will peak because businesses that want to survive the current trend must rationalise headcounts to reduce the size of their payrolls – or borrow at a steep price to sustain its previous activity levels.

“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.

At the moment, Nigeria has a negative feeling about the country. There is fear about President Bola Tinubu’s pro-market policy direction, and eventual implementation plan due to the impacts of worsening macroeconomic indicators that affect household finances, standards, and costs of living conditions.

“Expect a further slowdown in gross domestic product growth in the second quarter, and perhaps in the third and fourth on account of possible policy somersault, weak spending by individuals and government, and market-related pressures on corporates performances”, LSintelligence said in an email.

The headline inflation rate in Nigeria rose to 22.41 percent in May 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. Naira has also wobbled while the government remains silent about palliative measures to cushion the effects of a decision to float the local currency.

World Bank said price increases resulting from the subsidy removal will have a one-time impact on prices, primarily affecting petrol purchases for transportation, power generation, and certain services.

However, it will start to have a disinflationary effect – meaning that it will alleviate inflationary pressures despite higher petrol prices – because it will reduce reliance on financing from the CBN, curbing the growth of the money supply.

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 risk-filled expectation, according to analysts sampled by MarketForces Africa Research, could be reversed if the Nigerian government implements measures to reduce economic pressure that has shifted the misery index upward.

The removal of subsidies has reduced fuel consumption drastically as transport and logistics operators begin to raise prices. The increase in prices has also filtered 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. #Worsening Inflation Rate Tempers Growth Optimism Nigerian Treasury Bills Yield Rises to 7%