Key highlights
- The link between inflation and energy costs is well-established, and it is likely that businesses in Nigeria will continue to grapple with rising energy costs soon.
- Nigeria recorded a higher inflation rate in March 2023 than it did for the previous month of February.
- KPMG had earlier cautioned that the slowdown was more likely a blip and we expected the trend of a generally high and rising trend in inflation to persist for most of 2023.
Professional services firm, KPMG Nigeria, has said that it sees a further rise in energy costs in Nigeria following the increased inflation rate of 22.04% for March 2023, as recently announced by the National Bureau of Statistics (NBS).
The firm noted this in Issue 5 of its KPMG in Nigeria Flash notes released on Sunday, April 16. According to KPMG, rising energy, fuel, transport, and related costs were largely responsible for the surge in core inflation in March 2023. However, the gradual improvement in the availability of cash and boost in electronic transactions together with the CBN tightening stance has not yet eased pressure on food and especially energy, transport, and distribution prices. The KPMG report stated that:
“A strategy to cut production costs and boost supply and control conditions stifling distribution and responsible for high and rising energy and transportation costs might be more effective in controlling consumer inflation.
“We, therefore, reiterate our position of a high and generally rising consumer price index (CPI) in 2023 at least until we begin to see significant and consistent signs of slowing domestic transportation and distribution prices and domestic and international commodity and energy prices as well as a gradual return to normalcy in economic activity following the cash crunch experienced in Q1 2023.”
The fuel subsidy angle
According to KPMG Nigeria, the fuel subsidy removal presents further challenges to authorities on how to reignite the economy and how to navigate its decision to remove fuel subsidy and pass the 2023 finance bill at a time of hyperinflation and when Q1 2023 GDP growth in particular and 2023 GDP growth, in general, is expected to be weak and where its finances are in a deteriorating state with unstable and inadequate foreign exchange, the rising cost of debt and debt service as well as continuing constraints to revenue generation in the country.
More insights from KPMG
The report also notes that the depreciation of the naira against the dollar during the month in question has also put pressure on domestic prices despite a general slowdown in international commodity and energy prices. A part of the report stated:
“The reversal of inflation in March reinforces our view that the determinants of inflation in Nigeria are largely cost-push factors which are out of control of monetary authorities and consequently, further tightening at this point has more of an impact on squeezing economic growth, constraining non-oil export growth, slowing employment creation and consumer demand and worsen poverty, rather than slowing down inflation.”
What you should know
Energy costs are a major component of business expenses and can have a ripple effect throughout the economy. If energy costs continue to rise, businesses may have to adjust their prices, reduce their profit margins, or look for ways to cut costs elsewhere.
However, inflation can have other causes besides rising energy costs. Other factors such as government policies, supply chain disruptions, and changes in consumer behavior can also contribute to inflation.