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

In its latest report titled “Nigeria Financial Outlook for August 2023,” printed on Friday, famend multinational accounting agency PricewaterhouseCoopers (PwC) predicts that the total adoption of market-oriented insurance policies, together with the removing of gas subsidies and the implementation of a managed floating alternate charge system, will possible lead to an extra rise in inflation and heightened volatility within the overseas alternate (FX) market.

In response to PwC, the removing of gas subsidies and the free-floating of the Nigerian foreign money, the naira, is anticipated to mount extra stress on inflation. The costs of important commodities equivalent to meals, transportation, clothes, footwear, training, furnishing, and housing tools have already surged considerably on account of inflationary pressures. PwC warns that these costs are more likely to improve much more in mild of the brand new insurance policies’ influence.

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The report factors to knowledge exhibiting that meals inflation rose by 25 p.c in June, primarily pushed by “insecurity issues and local weather change results within the nation’s food-producing areas. Transportation prices additionally elevated by 25 p.c in June in comparison with the identical interval final yr, primarily on account of larger vitality costs.”

PwC predicts that with the removing of gas subsidies, transportation prices are more likely to rise additional, given the substantial soar in gas costs, particularly after the pump worth of the product jumped by greater than 300 p.c to promote for N619 per litre from N198 per litre.

Foreign money depreciation and structural elements have additionally contributed to the rising prices of primary objects equivalent to clothes, footwear, furnishing, and housing utilities.

PwC expects this development to worsen in August, notably on account of heightened demand for foreign exchange just like the US greenback, British Pound Sterling, and Euro.

In mild of those market-oriented insurance policies and their influence on the nation, the accounting consulting agency foresees additional regulatory reforms, diminished shopper demand within the medium time period, and a gradual however improved outlook for presidency spending, taxation, and credit score management in Nigeria for August.

The report identifies varied drivers behind these expectations, together with the proposed new ministerial cupboard, the implementation of recent tax reforms, rising shopper items costs, and uneven wage changes throughout sectors.

Moreover, PwC believes that the adoption of a managed floating alternate charge system will possible trigger volatility and will result in a rise in crude oil manufacturing. Whereas novel financial reforms like FX market liberalisation may appeal to overseas investments and enhance capital inflows in the long term, PwC warns that anticipating an enormous influx of overseas direct funding within the quick time period can be misplaced, as traders could undertake a cautious “wait and see” method.

The rise in inflation can be more likely to cut back actual yields, or returns on investments. Producers are anticipated to face larger manufacturing prices because of the detrimental influence of excessive FX charges on their companies. Moreover, customers could expertise a dampening impact on non-discretionary spending as vitality, meals, transportation, and import prices rise.

PwC’s financial outlook for Nigeria for August signifies that the introduction and full adoption of market-oriented insurance policies might worsen inflation and FX market volatility. Whereas some long-term advantages are anticipated, short-term challenges are anticipated to influence shopper spending, funding, and general financial progress within the nation.