Business activities fall to lowest in 2yrs on naira scarcity

Business conditions in Africa’s biggest economy dipped for the first time in over two years (June 2020) owing to the lingering scarcity of the naira, according to the latest Purchasing Managers’ Index (PMI).

The monthly PMI by Stanbic IBTC Bank showed that the headline PMI declined to 44.7 in February 2023 from 53.5 in the previous month. Readings above 50.0 signal an improvement in business conditions, while readings below 50.0 show deterioration.

“This indicates the first contraction in private sector business conditions in over two years. The steep decline is attributed to the cash shortage challenges experienced across the country during the month,” Muyiwa Oni, head of equity research West Africa at Stanbic IBTC Bank said.

He said the decline consequently resulted in contraction in both outputs and consumer orders, which made firms scale back on purchasing and hiring activities.

“Furthermore, persistent fuel shortages from the beginning of the year saw petrol pump prices increase, which both increased production cost for firms and led to supplier delivery delays,” he added.

The index also revealed that the deterioration in business conditions ended a 31-month sequence of expansion and the fall in output ended a seven month sequence of growth.

“The reductions were the most pronounced in the survey’s history, apart from during the opening wave of the COVID-19 pandemic,” it said.

It said that the most severe impacts of cash shortages were seen with regards to output and new orders, which both fell substantially as customers were often unable to secure the funds to commit to spending. “With new orders and output falling, companies reduced their input buying and staffing levels accordingly.”

Africa’s most populous nation is being roiled by internal crises. Households and businesses are being whipsawed by a chronic shortage of cash occasioned by the naira redesign policy of the Central Bank of Nigeria (CBN).

The scarcity also increased the cost of living of cash-strapped Nigerians last month after the inflation rate slowed down in December for the first time in 11 months.

According to the National Bureau of statistics, the country’s inflation rate rose by 0.47 percent points to 21.82 percent in January from 21.34 percent in December.

A recent report by the Financial Derivatives Company predicts that the inflation rate could further increase in February as a result of the unintended consequences of the naira swap programme, election spending, and high energy costs.

“However, we expect the CBN to intensify efforts towards aligning with the federal government to securitize its ways and means advances that should curb money supply growth and rein in inflation in the near term,” it said.

The cash shortages have slowed down economic activities in the country. Manufacturers Association of Nigeria (MAN) said they are already seeing a drastic reduction of more than 25 percent in sales of locally manufactured products.

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“What should ordinarily be a welcome monetary policy to improve the CBN management of naira currency has become enmeshed in tardy implementation and needless disruption of businesses and everyday life of the people,” Segun Ajayi-Kadir, director-general of MAN said.

Analysts have said that the cash scarcity could affect the country’s Gross Domestic Product (GDP) rate for the first quarter of this year. According to the NBS, it expanded to 3.52 percent in Q4 of last year from 2.25 percent in the previous quarter.

“The lingering cash shortages will likely continue to dampen economic activities and could depress economic growth in the Q1,” Oni of Stanbic IBTC Bank said.

The plummeting of productivity has implications for GDP and a domino effect on other economic indices, the Nigerian Economic Summit Group said in a recent report.

“This can mean fewer job opportunities, increasing poverty incidence, thus adversely impacting the collective economic health of the population,” it said.

The report added that as employment opportunities reduce; consumer spending will also decrease, resulting in an economic slowdown. “This may consequently lead to decreased government revenue, primarily from non-oil sources.”