LAGOS – Analysts have warned that the ongoing challenges from high inflation caused by naira depreciation, rising energy costs, and increased logistics expenses and tight financial conditions will constrain economic activities, particularly in the industrial sector in the last quarter of this year.
Besides, they project foreign exchange liquidity conditions to remain tepid in the near term should inflows from the CBN remain weak, which could lower market confidence and increase pressure on the naira.
Cordros Securities Researchers, in their Weekly Economic and Market Report (06-September-2024, noted that private sector activities in Nigeria printed above the 50 points psychological threshold for the first time in 13 months as the composite PMI expanded to 50.2 points in August (July: 49.7 points).
“We highlight that the outturn was driven by improvement across the services and agriculture sectors while the industry sector remains subdued.
“Specifically, the services PMI (50.7 points vs. July: 50.3 points) settled higher on the back of increased business activity, a higher stock of raw materials and increased new business opportunities. At the same time, the agriculture sector PMI (50.5 points vs. July: 49.7 points) inched to an expansionary level after three consecutive months of contraction due to improved crop production and agricultural support services in the period.
“Elsewhere, while the industry sector PMI (49.2 points vs July: 48.3 points) remains below the benchmark, the figure represents the highest level in seven months, signaling a gradual recovery in industrial activities.
“For context, we attribute the improvement in the industry sector to increased activities across the mining, quarrying, electricity, and gas subsectors, while the manufacturing subsector declined”
“We expect that resilient services and potential improvement in agricultural activities following the harvest period will support private sector performance in the near term. However, ongoing challenges from high inflation – caused by naira depreciation, rising energy costs, and increased logistics expenses – and tight financial conditions are expected to constrain economic activities, particularly in the industrial sector”.
Mr. Adewale-Smatt Oyerinde,Director-General, Nigeria Employers’ Consultative Association (NECA), in a chat with Daily Independent, said Nigeria’s frail foreign exchange liquidity conditions may continue to subdue investors’ investment decisions on domestic production
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It is obvious that the dynamics in the external sector politics would play a key role in achieving growth and other targets over the Nigeria’s 2023/25 periods
“We believe that the threat posed by the lingering effect of legacy challenges on fiscal capacity, in terms of budget implementation, remains the leading downside risk”.
An executive director of one of the new generation banks, in a chat with Daily Independent, implored the Central Bank of Nigeria (CBN) to initiate policies that would boost credit facilities to the private sector to drive export-promotion activities in the economy.
He said: “Foreign exchange liquidity conditions may remain tepid in the near term should inflows from the CBN remain weak, which could lower market confidence and increase pressure on the naira”.
Auwal Ibrahim Musa (Rafsanjani), the Executive Director, Civil Society Legislative Advocacy Centre (CISLAC), in a chat with Daily Independent, referred to the rise in energy costs which is reflective of the increases in fuel prices (diesel and kerosene) coupled with the depreciating Naira and rising airfare prices as factors responsible for the rising inflation rate that will constrain economic activities this year.
He argued that the headline inflation outlook remains elevated when the recent flooding which affected many food-producing states amongst other issues in the country are taken into account.
“For the Monetary Policy Committee (MPC), there is little room for another rate tweak at its next meeting after the rate hikes this year in the bid to tame inflationary pressure, following this marginal acceleration.
Besides, analysts at Financial Derivatives Company, who had predicted that inflation would rise to 20.32 per cent in October 2022, said they expect that prices will continue to surge.
“In contrast to the general expectation that harvest would drive down market prices, the food basket experienced a faster rate of price acceleration and that it can be attributed to the significant shortage in the supply of agricultural products as a result of the floods that ravaged major food-producing states.
“Furthermore, the interaction of higher logistic costs and the exchange rate pass-through effect is keeping the price of the non-food basket above reach. Typically, Nigerian headline inflation and food inflation taper from September to November every year, reflecting the core harvests that occur in the period.
