KPMG Nigeria has said that the removal of fuel subsidy in Nigeria could lead to a significant rise in the country’s inflation rate, potentially reaching 30% in June 2023.
A recent report by KPMG highlights that the removal, whether implemented entirely or partially, would cause a temporary inflationary surge. Currently, Nigeria’s inflation rate stands at 22.22%, as reported by the National Bureau of Statistics (NBS).
A part of the KPMG report stated: “The World Bank projects that a one-off adjustment will lead to higher inflation in 2023 and 2024 and lower thereafter. Our internal macro model also supports the World Bank’s findings with a forecast of an increase of about 6% over the June 2023 inflation rate bringing it to about 30%.
“In mid-2024, however, all other things remain constant, and as year-on-year base effects kick in, the pace of inflation will drop significantly though overall prices of goods and services will remain elevated. However, as inflation is already high and will increase further, more Nigerians will be pushed into poverty unless compensating measures to cushion them at least partially from the price shock are put in place.”
However, the report highlighted some factors that will determine how long the said inflation spike will last. They are:
•The extent to which some of the inflationary impacts of increases in PMS fuel prices have already been incorporated is because the effective market price is already above the official regulated price in many parts of the country.
•The impact of increased PMS fuel prices on transport and food prices is expected to be limited, as evidenced by previous instances of significant PMS price hikes.
•The CBN’s capacity to manage inflationary pressures through effective monetary policy. In this regard, on 21st March 2023, the CBN raised the monetary policy rate, which measures interest rate, from 17.5% to 18%. However, the CBN is struggling to contain runaway inflation and there are legitimate questions regarding the efficacy of interest rate hikes to contain inflation given the significant supply-side and geopolitical drivers, ranging from China’s erratic recovery from COVID-19 to the multifaceted impact of the Russia-Ukraine war.
The report also highlights the fact that as fuel subsidy has been removed and Nigerians are being asked to make sacrifices, the government must also be seen to be cutting wasteful expenditure and reducing the rising costs of running government including the courage and political will needed to fully implement the Oronsaye report which is estimated to save the government N1.3 trillion.
