As expected, PwC, the professional tax and advisory firm, has raised fresh concerns about the uncertainties buffeting Nigeria’s economy with negative consequences for investor confidence. Sky-high inflation and volatility in the forex market have continued defying the raft of measures adopted by the CBN to achieve stability and attract investors.
“Despite the hawkish stance by the CBN to maintain stability, Nigeria’s outlook is still quite uncertain as investors remain cautious of a complex and ambiguous macroeconomic environment,” PwC said in its latest Nigeria Capital market report on August 6.
The FX volatility has introduced significant risks and uncertainties into the business environment. The official exchange rate depreciated by 67.8 per cent from N461.1/$ in May 2023 to N1,433.8/$ in May 2024. It sank to N1,598.9/$ last week.
Business leaders note that uncertainty surrounding the naira’s value has made long-term investment decisions more complex and contributed to a significant level of hesitancy to commit substantial resources in an environment where currency depreciation could erode returns.
Some quoted companies have had shareholders’ funds eroded by FX losses in the past year. A handful of multinationals have closed shop and fled.
Rising inflation has hit businesses hard. Small companies face higher costs of raw materials, rent, logistics, and wages that impact profits, making it harder to stay afloat. The situation is worsened by weakened consumer spending power. The average Nigerian now spends about 60 per cent of their income on food.
Inflation increased from 22.41 per cent in May 2023 to 33.95 per cent in May 2024. The drivers include food, utilities, and transportation. Food inflation climbed to 40.6 per cent with utility inflation at 29.6 per cent, and transport inflation at 25.6 per cent per the NBS.
The CBN has tried to address the challenge by rolling out inflationary targeting measures to rein in the highest rate in 30 years. It raised the benchmark interest by 800 basis points to 26.75 per cent within a year. It has intervened in the FX market forcing banks to liquidate dollar holdings, sold FX directly to BDCs, and cleared all FX backlogs by March 2024. The CBN has revived the dollar retail auctions as demand for forex surged during the summer holidays.
The impact of these measures remains muted. While the government insists the situation will improve, most Nigerians do not share such optimism. Interventions to address the cost-of-living crisis, such as distributing food items as palliative have been a sham. The cash transfer scheme has been masked in secrecy.
The Taiwo Oyedele committee’s tax and fiscal policy reforms have not been implemented, and the government itself has not demonstrated prudence in public spending.
The problem with Nigeria’s economy is structural. The overdependence on oil exports, weak manufacturing sector, huge infrastructure deficit, low investment in agriculture and other non-oil sectors, random policy shifts, bad politics, and corruption have combined to make the country vulnerable to internal and external shocks. With insecurity now added to the mix, the outlook remains grim.
Depending largely on oil exports for forex is bad economics as earnings remain unpredictable due to fluctuating prices and oil theft.
Nigeria cannot spend over $10 billion annually on food imports while the budget for agriculture remains a paltry N362.9 billion or 1.26 per cent in the 2024 budget.
To revamp the naira, massive and sustained diversification of exports must be explored, with opportunities in agriculture, mining, manufacturing, and digital technologies.
There should be an aggressive import substitution drive to promote local production with incentives for local industries, improving infrastructure and the overall business environment. The power sector crisis and the logistics nightmare caused by bad roads and a barely functional rail system must be addressed permanently.
Promises have little value. The Tinubu administration should take stock and act.
