Analysts at FocusEconomics have said that the fuel subsidy removal fallout and the devaluation of the naira will fan inflationary flames through the second half of 2023.
They stated this in their Consensus Forecast report for September 2023.
According to the analysts, inflation (24.08%) has exceeded market expectations, surging to nearly a two-decade high of 24.1% in July, driven by the removal of the fuel subsidy in May and the significant depreciation of the naira’s value. So, these factors are expected to sustain inflationary pressures throughout the second half of 2023.
They stated that inflation is projected to surpass the upper limit of the Central Bank’s target 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.
