FX demand: Expect pressure on exchange rate, surge in inflation — CPPE

…Tasks FG on tax incentives for low-income employees, SMEs

By Ibiyemi Mathew and Blessing Emmanuel

The Centre for the Promotion of Private Enterprise (CPPE) has predicted that Nigeria’s exchange rate may come under pressure in the short term as forex demand backlog exerts pressure on the official forex window.

Recall that the Central Bank of Nigeria (CBN) recently authorised commercial banks to freely trade foreign exchange at any rate.

The authorisation means that banks now have the power to sell forex at a market-determined rate.

In its half year economic review,  the CPPE CEO, Mr Muda Yusuf said inflationary pressures may intensify in the near term, the exchange rate may come under pressure in the short term as forex demand backlog exerts pressure on the official forex window.

Dr. Yusuf took a peep into the last two quarters to analyse the past, present and possible future of the country’s GDP before the year finally runs out. He pointed out that in the first quarter of the year (January -March) 2023, Nigeria’s GDP already sloped down to 2.31 per cent, from 3.5 per cent which it was in the fourth/last quarter of 2022.

This was due to the fact that different sectors had a hit. Particularly the Agriculture, Oil, Textile, Transportation and Insurance Sector as a result of the Naira Redesign policy introduced by the former President Mohammadu Buhari towards the end of his administration.

“Key sectors that contracted included agriculture which contracted by 0.9  per cent, the first time in about a decade. The livestock subsector was the worst hit as it contracted by a staggering 30.6 per cent. Other sectors that contracted include oil refining which contracted by 35.8 per cent; textiles, 3.7 per cent; rail transportation, 49 per cent; and Insurance, 8 per cent.

Sectors that posted positive growth numbers include manufacturing which grew by a marginal 1.6 per cent; food and beverage, 3.9 per cent; chemical and pharmaceutical, 6.2 per cent;  vehicle assembly, 5.4 per cent; road transport, 8 per cent; ICT, 11 per cent; financial institutions, 25 per cent; and real estate, 1.7 per cent,” the statement reads in part.

He however noted that the pressure is expected to ease before the end of the year.

Yusuf also praised President Bola Tinubu for charting a new and positive course for the economy which portends bright prospects for recovery and growth.

“Already there are clear indications of elevated investors confidence, improvement in the government fiscal space, higher prospects of exchange rate stability in the near term, and positive expectations of better economic governance,” He said.

Muda Yusuf, however, called for an urgent need to address the social outcomes of the recent reforms, especially the inflationary pressure induced by the fuel subsidy removal.

“Urgent measures need to be put in place to mitigate the soaring cost of living and the escalating operating and production costs, especially for  of businesses.

“This would pave way for an equilibrium exchange rate which would be more tolerable and sustainable.

“The Tinubu administration needs to promptly deploy measures to mitigate the current headwinds inflicted by the current reforms.

The interventions should be a mix of direct interventions, tax incentives for low-income employees and small businesses, reduction in import duty on some critical intermediate products for key sectors of the economy, import duty concessions for the transportation, health, power and energy sectors.

“The improved fiscal space created by the reforms should make these mitigating measures feasible and they have to be implemented  urgently in order to give the current reforms a human face,” He said.

He also called for the CBN to put in place a sustainable intervention framework to moderate the volatility in the forex market.

“With a better fiscal space, the outlook for lower fiscal deficit, moderation in the growth of public debt, reduction in debt service burden, and an improvement in the macroeconomic stability are very positive.  All of these would impact on economic growth prospects in the second half of the year,” Yusuf stressed.