PricewaterhouseCoopers (PwC) Nigeria has released its bi-monthly economic outlook for October 2023, shedding light on the country’s economic trajectory and the challenges it faces in the coming years. The report, which considers the impact of global economic trends on Nigeria’s foreign exchange, presents a nuanced picture of the nation’s financial outlook.
According to the report, PwC projects a 2.8% growth rate for Nigeria in 2023, with an expected increase of 3% in 2024. While the growth forecast is promising, it is underpinned by a series of economic dynamics and challenges that require careful navigation.
Inflation and Cost of Living: PwC’s report indicates that inflation is likely to surge in the short to medium term. This is attributed to increased petroleum prices and a devalued naira, which will impact food, transportation, and non-food prices. As the cost of consumer goods rises, consumers are expected to face higher prices, potentially leading to a decrease in demand.
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Petroleum Prices and FX Implications: The rise in international oil prices is expected to drive up the cost of petroleum products. This, in turn, will impact food, transport, and core inflation rates. Consumers may feel the pressure of these higher prices, potentially resulting in reduced demand. Furthermore, the lack of wage adjustments proportionate to inflation may exacerbate the situation.
Policy and Leadership Changes: The report highlights several significant developments, including the installation of a new ministerial cabinet to drive economic direction and fiscal policy management. Additionally, the implementation of the Finance Act 2023, which introduces key reforms for expanding the tax base, is set to have an impact.
Foreign Exchange Uncertainty: The lack of clear guidance on foreign exchange (FX) policy and unsettled FX obligations backlog are expected to continue affecting investor sentiment. The reintroduction of Bureau de Change (BDCs) is seen as a potential solution to address the devaluation of the naira in the short to medium term. The appointment of a new Central Bank of Nigeria (CBN) governor and management team is anticipated to shape monetary policy direction.
Economic Growth and Investment: Continued inflationary pressures and a rise in the cost of living may lead to marginal real economic growth in the medium term. PwC’s projections foresee a 2.8% growth rate for Nigeria in 2023, increasing to 3% in 2024.
Investment and FX Concerns: Capital reallocation from Nigeria’s economy is seen as a potential obstacle to foreign investment flows. Investors may adopt a cautious “wait and see” approach due to the lack of clarity in FX policy, which may lead to a scarcity of goods and inputs for manufacturing and trade, further driving up prices.
Government Spending and Consumer Demand: Government spending is expected to increase, but it will continue to be constrained by debt servicing obligations and a substantial fiscal deficit. A rise in energy, food, transportation, and import costs is likely to dampen consumer spending on non-discretionary items.
Production and Net Exports: High FX rates are expected to drive up the cost of goods and services, negatively impacting firm performance. Businesses may face challenges due to increased interest rates and devaluation losses. In the short term, the reintroduction of BDCs (bureau de change) and the adoption of the FX Price Verification System are aimed at improving FX accessibility and accountability. PwC projects a 1.6% decline in industrial production in 2023, with a growth of 6.7% in 2024.
Global Economic Trends: PwC’s report also underscores the impact of global economic trends on Nigeria’s outlook, including concerns about the cost of funding, capital reallocation, trade balance, remittances, and declining confidence due to fiscal deficits and debt servicing ratios.
Global GDP growth is expected to slow down with economic projections falling short of historical growth. IMF projects that GDP growth in the United States, the EU and the UK is expected to decline to 1.8%, 0.9% and 0.4% respectively in 2023.
“A weak global economic growth may negatively affect remittance flows into the economy. The decline in remittance flows may reduce FX flows to the economy. Though remittances to Nigeria accounted for 38% of the total flows to the region, it increased by only 3.3% to $20.1 billion,” the firm said.
As Nigeria navigates these economic challenges and opportunities, the path to sustained growth remains a complex endeavor. It will require astute policy management and strategic decision-making to mitigate the potential pitfalls and leverage the opportunities that lie ahead.