Fuel subsidy removal and naira devaluation will fan inflationary flames through h2/2023 – FocusEconomics

In their September 2023 Consensus Forecast report, analysts from FocusEconomics have highlighted that the elimination of fuel subsidies and the devaluation of the naira are poised to intensify inflationary trends during the latter half of 2023.

The analysts elaborated that inflation, which currently stands at 24.08%, has exceeded initial market anticipations, soaring to a nearly twenty-year peak of 24.1% in July. This steep rise has been primarily attributed to the cessation of fuel subsidies in May and the substantial devaluation of the naira. Consequently, these factors are anticipated to maintain upward pressure on inflation throughout the latter portion of 2023.

The report further indicates that inflation is projected to remain above the upper threshold of the Central Bank’s targeted range of 6.0–9.0% until at least the fourth quarter of 2024.

Factors to watch: Oil output and flexible FX

The analysts also revised their GDP growth projections for this year downward due to the weakening of the naira, which has reached record lows, thereby fueling inflation and dampening domestic demand.

Nonetheless, a shift towards more market-friendly policies is anticipated to provide support for investment.

Several factors, including the commitment to a flexible foreign exchange (FX) regime, and oil output levels, are key indicators to monitor.

FocusEconomics foresees a GDP expansion of 2.8% in 2023, representing a decrease of 0.1 percentage points compared to figures from just a month ago. Looking ahead to 2024, they anticipate a further growth of 3.2%.

FocusEconomics panellists project an average consumer price increase of 23.6% in 2023, marking a 0.7 percentage point increase from estimates made a month earlier.

For 2024, the average increase is forecasted at 20.7%.

Monetary policy

Note that during its meeting held on July 24–25, the Central Bank implemented a 25 basis point rate hike, which was smaller than what was expected. This brought the key rate to 18.75%.

The decision was prompted by heightened price pressures and concerns about increased inflation due to the elimination of the fuel subsidy and the liberalization of the FX regime.

The consensus among experts points to an additional rate hike during the forthcoming meeting scheduled for September 25–26.

FocusEconomics panellists predict that the monetary policy rate will conclude in 2023 at 19.80% and 2024 at 18.00%. As of August 18, the naira was trading at N769 to a dollar, exhibiting a 0.7% month-on-month appreciation as it began stabilizing after its recent sharp decline attributed to dollar shortages and the removal of FX controls.

FocusEconomics project that looking forward, to an appreciation of the naira from its present levels is anticipated by the end of 2023. This is attributed to expectations of a more conventional monetary policy and an improved investor sentiment.

FocusEconomics analysts envisage the naira concluding 2023 at N734 to a dollar and ending 2024 at N755 to a dollar.