LCCI expects double-digit inflation, reduction in capital projects in 2015

Owing to economic realities within the outgoing year, the Lagos Chamber of Commerce and Industry (LCCI) has forecast double-digit inflation regime and reduction in capital projects in the coming year.
In a statement released on Sunday to BusinessDay, the chamber said the unfolding oil price scenario and the consequent exchange rate depreciation have made it plausible to predict higher inflation conditions in 2015, stressing that there could be pressures on production and operating costs across sectors in the coming year.
The chamber said the combined austerity measures of the government and tighter monetary policy will likely put additional pressure on consumer prices, thus making the possibility of having a double-digit inflation rate regime possible in the first half of 2015.
“A natural outcome of depreciating exchange rate in an import dependent economy is inflation. Cost push inflation will begin to manifest in next few weeks of 2015. This will be driven by high cost of production and high cost of imported finished goods,” LCCI said.
The chamber also projected that businesses driven by government patronage are likely to experience a decline in 2015 given the poor government revenue outlook, adding that capital projects of governments will reduce drastically, a situation that may result in the suspension of some capital projects and a slowdown on government contract awards.
LCCI further said that the declining public revenue has heightened the risk of default in payment for jobs executed for government agencies in the short term. It, therefore, advises contractors to be cautious while engaging with government at all levels of government.
“With the current developments, many ongoing contracts, especially the medium to large ones, will attract cost variations. Clearly, the exchange rate depreciation will alter many cost parameters. This is a new challenge that many contractors and suppliers as well as their clients will have to confront. This will happen in public and private sectors,” the premier chamber said.
LCCI also projected that the official dollar to naira rate of $/N168 and parallel market rate at $/N190 as well as an unprecedented premium of above 15 percent, pose a major risk of round tripping from the official market to the parallel market or interbank market, saying that it will likely create profound pressure on the official foreign exchange window [RDAS] and trigger round tripping activities in the foreign exchange market.
“The tight monetary policy may continue into the 2015 and this would keep interest rate high in the economy. At its last Monetary Policy Committee meeting, the CBN decided to review upwards the Monetary Policy Rate (MPR) and the Cash Reserve Ratio (CRR) on private sector deposit from 12 percent to 13 percent; and from 15 percent to 20 percent, respectively,” the statement by the chamber further said.
The chamber, however, said the good news is that expected fuel imports cost will drop.
“This should reduce the pressure of fuel subsidy payment on government. It is also expected that cost of diesel imports would reduce, depending on the degree of impact of the exchange rate on the imports. It should be possible at this time for the government to exit from the business of importation and sale of petroleum products. This will save the country the huge cost of inefficiency and corruption inherent in the process. With the current level of global oil price, it will be difficult to justify budget provisioning for fuel subsidy,” LCCI stressed, adding that the exchange rate depreciation also offers an advantage to non-oil exporters and provides some advantages to industries with high local value addition.