KPMG Predicts Lower GDP Growth in H2 Despite Fuel Subsidy, FX Reforms

*Says in spite of 225 basis points hike in MPR, inflation still a challenge, may hit 30% by December

*Declares oil theft remains major risk to the revenue performance 

James Emejo in Abuja

Global tax, audit, and business advisory services firm, KPMG, yesterday said  despite the reforms introduced by President Bola Tinubu’s administration particularly the removal of fuel subsidy and foreign exchange liberalization, the Nigerian economy is expected to post a weaker growth in the second half of the year.

The firm said it expected growth to weaken by 2.6 per cent in 2023, lower than both the revised World
Bank’s 2023 forecast of 2.8 per cent for Nigeria and the 3.1 per cent growth rate achieved in 2022.
KPMG disclosed this in its Macroeconomic Review H1 2023 and Outlook for H2 2023 report which was obtained by THISDAY, adding that the combined impact of both subsidy and FX liberalization may further drive headline inflation to about 30 per cent by December.

The report, which was endorsed by Partner and Chief Economist, KPMG in Nigeria, Dr Yemi Kale, added that in addition to the effect of the recent Naira redesign policy, the weak growth for 2023 will be driven by low crude oil output, high inflation which weakens consumer demand, and weak growth of the private sector as several corporate organisations continue to declare huge foreign exchange losses in the first half of 2023.
The report stressed that FX and subsidy reforms are further expected to weaken consumer demand and raise the cost of doing business even for the rest of the year.
KPMG also pointed out that the task of maintaining domestic price stability had become even more challenging for the Central Bank of Nigeria (CBN) in H1 2023 as inflation remained rigidly in double digits with no tendency to ease soon.

It noted that the CBN continued to respond by increasing the Monetary Policy Rate (MPR), adding that between year-end 2022 and Q2 2023, the apex bank hiked the MPR by 225 basis points to douse inflation, bringing the MPR to its the highest level in two decades.
Nevertheless, the firm observed that inflation continued to soar despite hikes in rates as headline inflation climbed steadily from 21.34 per cent in December 2022 to 22.79 per cent by the end of June 2023, “raising questions on whether inflation in Nigeria has become a non-monetary phenomenon or monetary policy has become less effective”.

 It said, “We note that there are major rooms for improvement in monetary policy conduct as an unhealthily wide disparity still exists between the economy’s baseline rate (MPR) and other interest rates in the economy.
“For example, whilst the CBN raised the MPR to 18.75 per cent in H1 2023, other interest rates in the
the economy responded poorly with low elasticity.

At the extreme, the inter-bank call rate declined by more than half from 12 per cent in December 2022 to 6.73 per cent by the end of H1 2023.
“However, we also note that sustainably taming inflation would require not only monetary responses which are generally more apt for addressing demand-pull inflation, but also addressing underlying supply-side problems driving cost-push inflation.
“This may require focusing on ways to boost local production, improve local infrastructure, cut energy and transportation costs, and boost foreign exchange inflow.”
The firm said it anticipated current inflationary pressure in the economy will persist into H2 2023, stressing that headline and food inflation are unlikely to ease soon as the depreciation of the naira continues to reinforce the inflationary impact of fuel subsidy removal via higher input prices and production costs caused by imported inflation.

The report stated, “Specifically, our model suggests that the combined influence of fuel subsidy removal and foreign exchange liberalisation may drive headline inflation to about 30 per cent by December 2023.”
However, it noted that government revenue is expected to increase for the year, especially with the removal of subsidy, exchange rate gains, and the implementation of proposed tax reforms.

The report noted, “The higher inflow from FAAC is also expected to slow down the pace of debt accumulation and reduce fiscal deficits in the short term. However government accountability, transparency, and efficiency in the management of the fiscal gains should be the priority.
“Notwithstanding, oil theft remains a major risk to the revenue performance of the government as growing cases of oil theft imply huge revenue losses to the government.”
To mitigate the risk, the report urged the government to intensify its effort to address oil theft through a multi-dimensional approach that will include the adoption of enhanced security measures, more community engagements and empowerment and the utilisation of advanced surveillance technology.

KPMG also stated that the commencement of operations of the Dangote refinery; implementation of critical reforms by the CBN to address foreign exchange illiquidity

Problems, and government fiscal and trade agenda as well as reforms across MDAs remained crucial factors to look out for in H2 and beyond.