According to a recent report by PricewaterhouseCoopers (PwC) titled “Nigeria Economic Outlook for August 2023,” the full implementation of market-oriented policies in Nigeria, including the removal of fuel subsidies and the adoption of a managed floating exchange rate system, is predicted to result in a further increase in inflation and heightened volatility in the foreign exchange (FX) market.
The removal of fuel subsidies and the free-floating of the Nigerian currency, the naira, is expected to put additional pressure on inflation. Essential commodities like food, transportation, clothing, footwear, education, furnishing, and housing equipment have already experienced significant price surges due to inflationary pressures, and PwC warns that these prices are likely to rise further due to the impact of the new policies.
The report highlights that food inflation rose by 25 percent in June, mainly driven by insecurity concerns and climate change effects in the country’s food-producing regions. Transportation costs also increased by 25 percent in June compared to the same period last year, primarily due to higher energy prices.
With the removal of fuel subsidies, transportation costs are expected to rise further, as fuel prices have experienced a substantial jump, selling for N619 per litre from N198 per litre.
Currency depreciation and structural factors have also contributed to the rising costs of basic items such as clothing, footwear, furnishing, and housing utilities. PwC expects this trend to worsen in August, particularly due to heightened demand for foreign currencies like the US dollar, British Pound Sterling, and Euro.
The report foresees 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.
PwC believes that the adoption of a managed floating exchange rate system could lead to volatility and potentially increase crude oil production. While long-term economic reforms like FX market liberalization might attract foreign investments and boost capital inflows, PwC cautions against expecting a significant inflow of foreign direct investment in the short term, as investors may adopt a cautious “wait and see” approach.
The rise in inflation is also expected to reduce real yields on investments, and manufacturers may face higher production costs due to the negative impact of high FX rates on their businesses. Additionally, consumers may experience a dampening effect on non-discretionary spending as energy, food, transportation, and import costs rise.
PwC’s economic outlook for Nigeria in August indicates that while the introduction and full adoption of market-oriented policies may have some long-term benefits, short-term challenges are expected to impact consumer spending, investment, and overall economic growth in the country.
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