Inflation could fall to 29.5 percent by the end of the year, PwC predicts

•Acquisition of more investments, flexible rules

PwC forecasts a slight decline in inflation by the end of the year to 29.5%. This is expected to offset the effects of reforms, policy actions, external pressures and food prices under the current administration.

According to the National Bureau of Statistics (NBS), headline inflation was 33.95% last month. However, PwC in its report titled: “Nigeria Economic Outlook: Navigating Economic Reforms”, released over the weekend, noted that to ease the current economic stresses, the federal government should prioritize macroeconomic stability by addressing security, social and inflationary pressure points and pressure exchange rate.

The report, which also made three broad considerations for the government, namely structured and targeted policies, policy flexibility and policy mitigation, urged the government to mobilize capital to drive growth through market-oriented policies, intensifying investment promotion; make short- and long-term sector bets, focusing on exports, domestic substitution and job creation.

PwC said the government must exercise fiscal prudence by optimizing spending on capital projects with the highest ROI, rationalizing spending on public services, and improving revenue diversification and tax collection efficiency.

He stressed that there should be policy flexibility, stating that the government should decide when and how to introduce, defer, sequence or stagger various policies based on current economic and social conditions.

PwC said the government should adopt scenario planning before implementing any major economic reform to avoid unwarranted policy changes such as the cybersecurity levy.

According to the consulting firm, FG should ensure that contingency plans are incorporated into all economic policies at the planning stage. The report indicated that there is a need to implement emergency financing programs to support businesses through low-interest loan programs or loan guarantees to ensure that businesses have access to affordable financing despite high market interest rates.

“Create social safety net programs, such as unemployment benefits and workforce development programs, to absorb job losses from exits due to economic pressure points.

“The government may reconsider the planned increase in selected taxes to ease financial challenges and unlock liquidity for some businesses affected by economic pressure points,” he said.

PwC warned that any further tax increase would result in a decline in reinvestment by companies operating in Nigeria and worsen the situation of companies leaving the country.

According to the report, the impact and consequences of the reforms on businesses would include reduced revenue growth.

It stated: “Inflation can reduce incomes by reducing consumers’ purchasing power. This leads to low business sales, which in turn negatively affects business revenues.

“Higher production costs, import costs and raw material costs resulting from inflation and exchange rate pressures are passed on to businesses. The depreciation of the Naira is expected to increase the cost of imported raw materials.

“Overall price increases as a result of the removal of subsidies could increase spending on marketing, logistics, utilities, among others, while high interest rates could lead to higher borrowing costs for businesses, making it more expensive to finance operations and investments.”

PwC noted that the broad economic growth outlook indicates that the country’s gross domestic product (GDP) could expand modestly by 2.9% as a result of sustained policy reforms, although growth prospects may be limited by increased economic pressures.

“Concerns about the sustainability of public finances may remain slightly elevated given debt servicing costs, which mean 89 percent of the fiscal deficit is expected to be financed by new borrowing,” the report said.