Fitch: Inflation Has Peaked in Nigeria, Will Moderate Below 25% By Year-end

·    Food prices to stay elevated on weak domestic production

·    Fixed investment set to grow by 7.0% in 2024

·    Economy to expand by muted 3%, 3.5% in 2025

Emmanuel Addeh in Abuja

Fitch Solutions has said Nigeria’s rising inflation, which hit 34.19 per cent in June, has already peaked and would moderate to less than 25 per cent by the end of 2024.

In its latest Country Risk report on Nigeria, the global firm, which offers financial information services, market data, analytical tools and risk services, however, said food prices will stay high due to weak domestic production, caused by insecurity in agricultural regions and adverse weather conditions.

These, it said, will continue to strain household finances, worsen poverty, and suppress private consumption in the quarters ahead.

According to Fitch, overall, fixed investment will grow by 7.0 per cent but add just 1.0pp to headline growth in 2024 as it continues to remain muted, despite improving market sentiment.

The global firm also projected that the Nigerian economy will expand by a muted 3.0 per cent in 2024, up slightly from 2.9 per cent in 2023, but will hit 3.5 per cent in 2025. “Inflation has peaked, but weak food production to keep prices elevated,” Fitch predicted.

However, it stated that the current high inflation, tighter monetary policy, and weak foreign direct investment will weigh on domestic demand, although an increase in domestic refining will support net exports.

Fitch stated, “In 2025, we project that real Gross Domestic Product (GDP) will grow by 3.5 per cent as inflation moderates; however, structural constraints will keep growth below potential.

“We forecast that the Nigerian economy will expand by a muted 3.0 per cent in 2024, up slightly from 2.9 per cent in 2023.”

After taking over the reins of power in May last year, President Bola Tinubu announced the “removal” of petrol subsidy and later the liberalisation of the exchange rate. The impact of these reforms have mostly led to inflation in the country surging to a three-decade high.

For these reasons, Fitch said the economic growth will remain subdued in the coming quarters due to weak consumer spending.

It stated, “We project inflation will moderate to just under 25.0 per cent by year-end, but food prices will stay elevated due to weak domestic production, caused by insecurity in agricultural regions and adverse weather conditions.

“This will continue to strain household finances, worsen poverty, and suppress private consumption in the quarters ahead.”

The report added that the workers’ wage increase was unlikely to prevent a decline in consumer spending this year. It forecasted private consumption to fall by 2.5 per cent in 2024—following a decline of 10.3 per cent in 2023—and shave off 1.5 percentage points (pp) from headline economic growth.

It said, “Meanwhile, we believe that fixed investment will provide only limited support to the Nigerian economy. While the reforms enacted by the Tinubu administration are positively influencing market sentiment, concerns about Nigeria’s long-term business environment remain.

“Notwithstanding a 219.7 per cent y-o-y increase in capital inflows in Q1 2024, foreign direct investment remains subdued, pointing to a continued reluctance by foreign companies to invest in tangible assets, particularly outside of the hydrocarbons sector.”

From a domestic perspective, the central bank’s increase of the cash reserve ratio, it said, had reduced liquidity within the banking system, which will hinder business financing in the coming quarters.

Furthermore, despite the start of the Lagos-Calabar Coastal Highway Project, Fitch said the persistent fiscal pressures stemming from high debt servicing costs and weak tax collection will limit the government’s ability to bring capital expenditure closer to that of other Sub-Saharan African countries.

“Overall, we forecast that fixed investment will grow by 7.0 per cent but add just 1.0pp to headline growth in 2024,” it stressed.

On a more positive note, Fitch said it believed that the operational start of the Dangote refinery will boost net exports in 2024.

It said a significant portion of the produced petrol will be sold domestically, with the Independent Petroleum Marketers Association of Nigeria (IPMAN), which controls about 150,000 retail stations across Nigeria, already having committed to purchasing and distributing gasoline from the refinery.

Fitch said, “As such, our oil and gas team forecasts that Nigeria’s trade deficit of refined liquids will narrow from 493,000 barrels per day (bpd) in 2023, to 228,000 bpd in 2024 , pointing to a marked reduction in the country’s dependence on petrol from overseas.

“Meanwhile, a portion of Nigeria’s crude production—which will continue to grow this year will be redirected from the export market to domestic refining, capping export growth.

“All told, we forecast that net exports will add 3.1 per cent to headline economic growth in 2024, and act as the key driver of economic expansion. We project that real GDP growth will accelerate to 3.5 per cent in 2025 as consumer activity picks up.

“Inflation will remain on a downward trend next year, averaging 18 per cent, thanks to statistical base effects and more stability in the foreign exchange market.”

Fitch said greater monetary orthodoxy by the Central Bank of Nigeria (CBN) will lead to stronger capital inflows compared to previous years, limiting pressure on the naira.

This, it said, will gradually improve households’ purchasing power and allow private consumption to start a recovery next year, adding 1.7 per cent to headline economic growth.

In addition, Fitch said that it expected the Dangote refinery to ramp up petrol production next year, further lowering Nigeria’s dependence on imported fuel.

It stated, “Although we believe that the refinery’s target of reaching full capacity of 650,000 bpd next year is overly ambitious, further infrastructure developments should allow for production increases. Consequently, we forecast net exports will contribute positively to overall economic growth, adding 1.1 per cent.”

Besides, it stated that fixed investment was unlikely to reach full potential next year, as structural challenges remain, with Nigeria’s high cash reserve ratio and elevated interest rates limiting corporate credit growth.

Meanwhile, limited progress on fiscal reforms, widespread insecurity and a challenging operating environment, it pointed out, will keep Foreign Direct Investment (FDI) inflows muted.

Fitch stated, “All told, we forecast fixed investment to add 0.6pp to headline real GDP growth in 2025.  

“Risks to our economic growth outlook are tilted to the downside. Should production at the Dangote refinery fall below expectations, growth will come in softer than we currently forecast.

“Similarly, if the refinery exports most of its petrol rather than supplying the domestic market, fuel imports will remain higher than anticipated, negatively impacting Nigeria’s growth outlook.”