PMI Report: Productivity Dropped in June as Fuel Subsidy Removal Heightened Inflationary Pressures

Dike Onwuamaeze

The productivity of the Nigerian economy dropped in June following the removal of fuel subsidy on May 29 this year by President Bola Ahmed Tinubu, which stirred sharp accelerations in   price inflation and worsened the fortunes of wholesale and retail traders.  

These are contained in the Stanbic IBTC Bank Nigeria’s Purchasing Managers’ Index (PMI) for the month of June 2023, which stated that business confidence dipped during the month.

The headline figure derived from the survey is the PMI and readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

But although the headline PMI remained above the 50.0, the report showed that productivity of the private sector declined slightly to 53.2 in June from 54.0 that was recorded in May.

According to the PMI, “the pace of expansion was marked, but softened for the second successive month to the weakest in the current growth sequence.

“Some panelists linked the slowdown to issues related to the ending of the fuel subsidy. Three of the four monitored sectors recorded increases in output, the exception being wholesale and retail.”

The report also stated that, “the rate of overall input cost inflation hit a 10-month high in June, largely reflective of a marked acceleration in the pace at which purchase prices increased.”

It added that close to half of all respondents reported a rise in overall input costs during the month.  

It said: “Nigerian companies signaled a sharp acceleration in the rate of purchase cost inflation in June, with prices up by the largest degree in six months.

“The announcement of the removal of the fuel subsidy and subsequent increase in prices was the main factor leading to higher purchase costs, according to respondents. Manufacturing posted the sharpest rise in prices.”

According to the PMI’s report, “the steep increase in purchase costs caused by the removal of the fuel subsidy led to a rapid acceleration in the pace of output price inflation as companies passed on higher costs to their customers. After easing to a 37-month low in May, the pace of increase rebounded to the sharpest in the year-to-date. More than 48 per cent of panelists noted a rise in selling prices, against just 1.0 per cent that lowered charges.”

Commenting on the PMI’s report, the Head of Equity Research West Africa at Stanbic IBTC Bank, Mr. Muyiwa Oni, said that the removal of the fuel subsidy in Nigeria caused a sharp strengthening of price pressures in June.

Oni said: “While overall business conditions remained on a positive trajectory, firms faced a much stronger inflationary environment at the end of the second quarter of the year, linked to the removal of the fuel subsidy.

“Purchase prices increased at the fastest pace since last August (2022), while the rate of selling price inflation accelerated sharply to the steepest in the year-to-date as firms passed higher costs on to their customers.

“Issues around the ending of the fuel subsidy also acted to limit the pace of output growth, according to respondents, although activity was still up markedly in the latest survey period,” adding that “wholesale and retail bucked the wider trend and posted a drop in activity.”

He added that rates of expansion in output and new orders lessened, but remained marked nonetheless while business confidence dipped to a near record low.

According to him, “intensifying inflationary pressures encouraged companies to expand inventories to try and get ahead of further price increases. Meanwhile, employment was up modestly for the second month running.”   

In addition, “some companies reported having brought forward purchasing and expanded inventories ahead of predicted increases in costs of materials in the months ahead. This, allied with increasing workloads, meant that stocks of purchases were accumulated to the largest degree in eight months.”

New export orders

The PMI’s report also showed that new export orders declined in June, thereby ending a three-month sequence of expansion. It attributed this to the general weakness in demand across international markets had been behind the moderation in new business from abroad.

It also stated emphatically that “business confidence fell in June and was the second-lowest since the survey began in January 2014, only fractionally above the record low posted last November. Those respondents that were optimistic towards the year-ahead outlook expect investment and marketing activities to support growth. “

The PMI reported that backlogs of work increased for the first time in three months during June, which it linked to the rising new orders and difficulties in securing the materials necessary to complete projects. It added that the rate of accumulation was only marginal.

Quantity of purchases

“In order to be able to meet customer requirements, Nigerian companies increased their purchasing activity in June. There were also some reports that inputs had been secured ahead of predicted price rises. Input buying has now expanded in each of the past three months. The latest increase was marked, but the softest in the current growth sequence

“June data pointed to a sharp and accelerated expansion in stocks of purchases, with the rate of growth the fastest since October last year. Higher output requirements and a desire to secure inputs ahead of expected price rises were behind inventory building,” the report said.