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‘Import pass-through costs may worsen Nigeria’s inflation outlook’

by Idonosan Debe
November 9, 2022
in Business
2 min read
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Drugs, Petrol, Used Automobiles, Dominate Nigeria’s Imports, NBS Says
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FBNQuest has expressed concerns about Nigeria’s inflationary trend, noting that the present currency depreciation may further aggravate the country’s inflation outlook, especially as local prices begin to reflect import pass-through costs.

Indeed, local producers have continued to complain about poor access to foreign exchange for the purchase of critical raw materials for production. With the announcement by the Central Bank of Nigeria (CBN) to redesign the Naira, the local currency has taken a further hit, raising concerns for businesses dependent on importation.

Higher inflation and exchange rate volatility are weakly associated with higher pass-through of exchange rates into import prices.

According to FBNQuest, a conservative projection of the headline inflation rate at c.22.5% year-on-year by end-2022 is in view, before slowing to c. 18.6% by end-2023. However, market realities reflect a faster rise in inflation rate.

Head of Equity Research team of FBNQuest, Tunde Abidoye, while speaking at a media parley in Lagos, noted the prospects for Nigeria’s macroeconomy and highlighted the outlook for public debt, the exchange rate and inflation.

Tunde stated that “businesses and investors now face difficult conditions including mounting pressures on inflation and exchange rate, constrained disposable income as well growing pressure from the external sector.

“Given the challenges on both the global and domestic fronts, it is essential for businesses and investors to have informed views on important macroeconomic variables in order to minimize business risks and to develop a long-term strategy to take advantage of opportunities as they arise.”

Also, FBNQuest has advised private mid-cap companies to carefully explore the capital financing options available in the local financial markets to grow their businesses.

FBNQuest is the investment banking and asset management business of FBN Holdings Plc. The managing director, FBNQuest Funds, Ijeoma Agboti, said, equity and quasi-equity capital are important sources of financing for mid-cap companies seeking investment for their current operations and expansion initiatives.

Stressing that equity capital can be helpful to businesses because business owners can sell shares to investors to finance expansion and growth, without immediate obligation, she added that, quasi-equity encompasses various loan and convertible loan options for which repayment is linked to future cash flows, but often provide more flexible payment terms than traditional loans.

The current economic headwinds facing mid-cap businesses, she pointed out, places a demand on business leaders to carefully plan their capital needs with a view to optimise and defensive positioning.

Agboti said, while the outlook for the business environment remains uncertain over the next six months, strong opportunities remain to bolster capital structures and to pursue strategic business prospects.

“A difficult economic environment provides a good opportunity to re-strategize and position for recovery. In the process, investors should decipher attractive opportunities presented by quality issuers,” she pointed out.

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Tags: Foreign exchangeImportationInflationInflation in NigeriaNigeria
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