In August 2024, Nigeria experienced a notable surge in purchase cost inflation, marking a five-month high driven largely by the continued depreciation of the naira.
This development has compounded the economic challenges facing businesses across the country, further straining an already precarious operating environment.
According to the latest Stanbic IBTC Bank Nigeria PMI report, the primary culprits behind this inflationary spike are the rising costs of materials and transportation, both of which have been significantly impacted by the weakening naira. The report, compiled by S&P Global from a survey of purchasing managers in the private sector, paints a grim picture of the current business landscape in Nigeria.
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“Input costs rose rapidly again midway through the third quarter. The rate of purchase cost inflation hit a five-month high amid increases in prices for materials and transportation, with cost pressures exacerbated by currency weakness.
“Staff costs were also up as firms increased pay in response to higher living costs. Higher input costs were often passed on to customers, and output prices subsequently increased at the sharpest pace in five months,” the report noted.
This sharp rise in costs has forced companies to pass on these increased expenses to consumers, leading to the fastest rise in output prices in five months.
The struggle is not just with materials and transportation. Businesses are also grappling with rising staff costs, as firms have had to increase wages in response to the higher living costs borne by their employees. This combination of escalating input costs and elevated wages has left businesses with little choice but to raise their prices, thereby fueling inflation further.
“The rate of output price inflation also quickened to a five-month high in August as just under half of all respondents signalled a rise in charges,” said Muyiwa Oni, Head of Equity Research West Africa at Stanbic IBTC Bank. “The increase in output prices reflected the pass-through of higher costs to customers.”
Despite the uptick in the headline Purchasing Managers’ Index (PMI) from 49.2 in July to 49.9 in August, the figure still remains below the critical 50.0 mark, indicating that business conditions continue to deteriorate, albeit at a slower pace. This stagnation reflects the ongoing struggles businesses face in managing rising costs amid weak demand.
“The stagnation in overall operating conditions was in line with the trend in business activity; Nigerian companies posted a fractional reduction in business activity during August, as was the case in July,” Oni elaborated.
He further pointed out that while some companies increased their output due to renewed sales expansion, others continued to suffer from weak demand exacerbated by severe cost pressures.
Material and transportation costs, in particular, have been significant drivers of this inflation. The report highlights substantial price increases for essential materials such as animal feed and paper, along with higher logistics and transportation costs. These challenges have been further intensified by the persistent depreciation of the naira against the U.S. dollar, making imports more expensive and compounding the inflationary pressures faced by businesses.
In response to these escalating costs, companies have begun to cut back on purchasing activities, resulting in a reduction of stockpiles for the first time in 17 months. This decline in inventories noted as one of the sharpest on record outside the pandemic period, underscores the severe strain on businesses trying to navigate through these turbulent economic waters.
The naira’s depreciation, which saw the currency drop by 1.76% against the dollar on the official NAFEM market in August, only adds to the economic woes. Although this decline is milder than the 6.43% drop recorded in July, it still reflects a market under pressure, with the naira consistently losing value against the dollar. This trend highlights the broader economic challenges, including potential demand-supply imbalances in the foreign exchange market.
As businesses continue to battle these rising costs, the outlook remains cautious. The report notes that firms remain tentatively optimistic about future output, though sentiment is at one of its lowest points since the survey began. The ongoing economic difficulties, particularly the persistent weakness of the naira, continue to pose significant risks to Nigeria’s economic stability and growth prospects.