August 2023: Inflation to soar, FX market turmoil to continue — PwC

In its recent report titled “Nigeria Economic Outlook for August 2023,” published on Friday, renowned multinational accounting firm PricewaterhouseCoopers (PwC) predicts that the full adoption of market-oriented policies, including the removal of fuel subsidies and the implementation of a managed floating exchange rate system, will likely result in a further rise in inflation and heightened volatility in the foreign exchange (FX) market.

According to PwC, the removal of fuel subsidies and the free-floating of the Nigerian currency, the naira, is expected to mount additional pressure on inflation. The prices of essential commodities such as food, transportation, clothing, footwear, education, furnishing, and housing equipment have already surged significantly due to inflationary pressures. PwC warns that these prices are likely to increase even more in light of the new policies’ impact.

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The report points to data showing that food inflation rose by 25 percent in June, primarily 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, mainly due to higher energy prices.”

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 percent to sell 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.

In light of these market-oriented policies and their impact on the nation, the accounting consulting firm 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.

The report identifies various drivers behind these expectations, including the proposed new ministerial cabinet, the implementation of new tax reforms, rising consumer goods prices, and uneven wage adjustments across sectors.

Furthermore, PwC believes that the adoption of a managed floating exchange rate system will likely cause volatility and could lead to an increase in crude oil production. While novel economic reforms like FX market liberalisation might attract foreign investments and boost capital inflows in the long run, PwC warns that expecting a huge inflow of foreign direct investment in the short term would be misplaced, as investors may adopt a cautious “wait and see” approach.

The rise in inflation is also likely to reduce real yields, or returns on investments. Manufacturers are expected to 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 for August indicates that the introduction and full adoption of market-oriented policies could worsen inflation and FX market volatility. While some long-term benefits are expected, short-term challenges are anticipated to impact consumer spending, investment, and overall economic growth in the country.