- Higher Transport Production Costs Dampen Consumer Spending Leading To Increasing Inflation
There are worrying days ahead as global financial advisory service firm, Klynveld Peat Marwick Goerdeler (KPMG) has predicted that Nigeria’s headline inflation rate has been tipped to hit 30% by December 2023,
The damning report was contained in KPMG’s macroeconomic Review For The First Half Of 2023 And Outlook For The Year’s Second Half (H2).
The report noted that recent reforms in the petroleum industry (like the fuel subsidy removal) and unification of the foreign exchange market will be responsible for the projected spike in prices of goods and services.
The report reads; “The liberalisation of the foreign exchange market complicated the ability of the CBN to maintain internal price stability as the free fall of the Naira since the departure from the fixed exchange rate regime resulted in higher imported inflation from input costs.
The depreciation also switched local and foreign demands to Nigeria’s local products, further mounting pressures on inflation. The removal of fuel subsidy also raised transport costs and production costs via higher energy costs as the average price of petrol in June 2023 exceeded its average price in the same period in 2022 by about 210%.
Higher transport and production costs dampen consumer spending and strain the operating costs of producers, leading to higher inflation.
“We anticipate that the current inflationary pressure in the economy will persist into H2 2023… Specifically, our model suggests that the combined influence of fuel subsidy removal and foreign exchange liberalisation may drive headline inflation to about 30% by December 2023.”
On how to control inflation, the report explained that the current MPR hike being adopted by the apex bank in the last 18 months has proven ineffective in stalling the increasing inflationary trend. However, it advised that addressing issues such as energy and transportation costs, supply chain problems, and boosting local production will be more effective than increasing interest rates.
The report also projected that Nigeria’s economy will grow by 2.6% in 2023- a considerable reduction from the World Bank’s projection of 2.8% in 2023 and that the recent reforms from President Tinubu such as fuel subsidy removal and unification of the FX market will lower GDP growth in the country.
The report reads, “We expect the Nigerian economy to grow by 2.6% in 2023, lower than the revised World Bank’s 2023 forecast of 2.8% for Nigeria and the 3.1% growth rate achieved in 2022.”
Also, the report explained that recent macroeconomic malaise during the first half of the year such as the failed naira redesign policy, weak growth because of low crude oil output, high inflation, and the fuel subsidy removal and devaluation of the naira will have negative ripple effects in the second half of the year.
