Fitch says Nigeria’s Inflation Dampening Economic Growth, Eroding Purchasing Power

01 Jul Fitch says Nigeria’s Inflation Dampening Economic Growth, Eroding Purchasing Power

A Fitch Ratings Agency has noted in a report released yesterday  that Nigeria’s rising inflation was dampening the country’s economic growth and eroding consumer purchasing power.

It said persistently high inflation remains a key macroeconomic weakness, contributing to Nigeria’s relatively modest growth rates and weighing on external liquidity by discouraging financial account inflows.

It projected  Nigeria’s growth at 3.1 per cent in 2022 with high oil prices expected to lift oil receipts, which together with a post-pandemic recovery in activity should support the non-oil sector growth.

“Still, high inflation this year will dampen growth by eroding consumer and business purchasing power. The oil sector’s inability to raise production will provide a further obstacle to higher growth,” it added.

It noted that the decision by the Central Bank of Nigeria (CBN) to raise the main policy interest rate sharply in May does not signal a fundamental shift in the country’s unorthodox monetary policy, which it noted will continue to impede efforts to rein in inflation.

“We believe Nigeria’s complex policy approach will be maintained at least until the next presidential election in February 2023. A significant strengthening of macroeconomic performance appears unlikely in the near term, despite the supportive effects of higher global oil prices for the economy.
“The Russia-Ukraine war’s impact on global prices, notably for food and energy, has seen inflation accelerate in 2022. Consumer prices rose 17.7 per cent yoy in May, up from last year’s low of 15.4 per cent in November,” it said.

Fitch stressed that it now forecasts Nigeria’s inflation to average 17 per cent in 2022, unchanged from the 2021 average. “In March 2022, we had predicted inflation this year would average 14.6 per cent,” it added.

The report stated that the authorities had planned to phase out fuel subsidies in 2022, but they are now unlikely to be removed before 2023. This, it pointed out helps to contain 2022 inflation, but noted that the cost of the subsidy – borne by the Nigerian National Petroleum Corporation (NNPC) – has reduced NNPC transfers to government.

“ As a result, we forecast the general government deficit to narrow only moderately to 3.4 per cent of Gross Domestic Product (GDP) this year, from 4.2 per cent in 2021,” it posited.