Global Report for Quarter 2 – 2023
The second Quarter of 2023 finally ends with political and economic transitions that have evoked uncertainties, disruptions, and quick adaptations of the Nigerian economy and all stakeholders. The high level of uncertainty created by the power transition on May 29th, 2023, which was followed by the removal of fuel subsidies, unification of exchange rate, and other critical political and economic actions taken by the new administration, has had a torrent effect on the economy and the livelihood of Nigerians characterized by economic uncertainties, rising inflation, economic hardship, weakening of the Naira against the dollar, and a struggling manufacturing sector. Being Africa’s largest economy, the economic disruptions have had an extended impact on neighbouring countries and West Africa at large.
In Q2 2023, however, the global economy grew slower than initially predicted, which may have been caused by different factors, including the conflict in Ukraine and Russia. In light of this, the International Monetary Fund (IMF) has lowered its global economic growth prediction for 2023 from 4.4% to 3.6%. Food prices have increased due to the war, straining household budgets in many nations. Inflation is a significant concern for policymakers worldwide, considering the global inflation rate in Q2 2023 was 6.9%, up from 5.7% in Q1 2023. The main drivers of inflation are rising energy prices, supply chain disruptions, and increased demand. Regarding growth, the United .States. economy is growing at a healthy pace, with a real gross domestic product (GDP) increased at an annual rate of 2.4% in the second quarter of 2023, compared to the first quarter, where GDP increased by 2%, and China’s economy is recovering from the COVID-19 pandemic. Global crude prices averaged $76.78 a barrel in the second quarter of 2023, compared with $110 a year earlier.
Nigeria’s economy grew slower in Q2, as the war in Ukraine and rising inflation weighed on growth. The Nigerian National Bureau of Statistics (NBS) reported that the country’s GDP grew by 2.31% in Q2 2023, down from 3.7% in Q1 2023. The inflation rate in June 2023 was 22.79%, and the average for Q2 2023 was 17.7%. Nigeria’s main drivers of inflation are rising food prices, fuel prices, and transportation costs. Amidst all the recent changes and uncertainties, the stock exchange market recorded its highest gain two years after Tinubu’s inauguration speech in May. In addition, also, oil production appears to be stabilizing as May and June production numbers signalled improvement (1.18bpd/1.24bpd, respectively).
This report will analyze the global and Nigerian economies in Q2 2023. It will discuss the main drivers of growth and inflation, the impact of the war in Ukraine and rising inflation on households and businesses, and the policy responses to these challenges.
Nigeria: Quarter 2 2023
Different disruptions in politics, security, and government policies stirred up the economic atmosphere of the second quarter of 2023. The newly elected President, H.E. Bola Ahmed Tinubu, was inaugurated in May 2023, and he immediately announced the removal of fuel subsidies. The unification of exchange rates followed the removal of fuel subsidies, the suspension of the CBN governor, and the unification of exchange rates which created cost-push inflation through an increase in the cost of production across the nation.
Inflation continued to rise and reached all-time highs in Q2. In April, inflation was at 22.22%, the highest since January, when inflation was at 21.82%. It then increased to 22.41% in May and 22.79% in June, the highest since September 2005. The fiscal policies implemented by the government and their effects also pushed food inflation for June 2023 to 25.25% compared to 24.25 for March 2023. Nigeria’s new President, Bola Tinubu, removed fuel subsidies and loosened the restrictions on foreign exchange trading. This led to a plunge in the Naira and a significant rise in transport and import costs, another factor contributing to current inflation. There is pressure on the government to implement measures to reduce inflation, such as raising interest rates or reducing spending. Additionally, businesses are dealing with increasing expenses, which can result in job losses and slower economic growth.
Another significant element causing inflation in Nigeria is the conflict in Ukraine. Due to the war’s disruption of trade and energy flows, food and gasoline costs have increased. The Central Bank of Nigeria (CBN) has increased interest rates, lifting the benchmark to 18.5%, to cool the economy. The GDP growth of 2.31% was less than the expected 3%, and the oil industry continues to be the country’s most significant catalyst of expansion.
The unification of exchange rates activates Naira’s value to be determined by market forces through the import and export(I&E) window. Banks who held dollar assets saw an increase in profit on foreign exchange transactions as the value of their assets in foreign currencies gained value due to the percentage difference in the eliminated CBN official rate and the I & E window. The exchange rate averaged $1/N785 for the parallel market rate and $1/N463 for the official CBN rate before the unification of the exchange rate in June 2023 However, major consumer goods companies (FMCGs) have experienced substantial net foreign exchange losses due to this exchange rate unification. These losses have had a significant negative impact on their overall financial performance, leading to notable pre-tax losses for these prominent companies causing a rise in the cost of production and prices of goods. On the brighter side, the new exchange regime liberalizes the system by attracting more foreign direct investment(FDIs). It reduces volatility and speculations, thereby encouraging long-term planning and investment, which would ultimately translate to sustainable economic growth and improved living standards for Nigerians, among other long-term benefits. However, the policy also translates into an increase in the value of foreign debts due to the weakening strength of the dollar in the foreign exchange market.
Looking Ahead
In light of the current and potential challenges created by the spike in fuel prices, food inflation and the naira weakening against the dollar it is important to explore viable solutions that can help mitigate the impact of rising inflation and safeguard the future of our economy. Among the potential solutions is the exploration of alternatives for fuel, particularly in the context of increasing fuel prices. Implementing a well-structured subsidy program could help cushion the impact of abrupt price increases and provide a safety net for citizens.
Addressing the issues facing the economy, especially the implications of the fiscal policies of removal of fuel subsidy and unification of exchange rate that sets the economy towards a contractionary approach, We expect continuous inflationary pressures from the reduction in the value of Naira in the foreign exchange market through the I&E window as more goods will be imported to increase supply to the Nigerian market. Inflation for Q3 is projected at 23.01%-24.5%, and the exchange rate is projected to average $1/N820.
Amidst the rising inflation creating economic hardship and high uncertainties, we expect the government to introduce several policies and some economic interventions to cushion the effect of economic hardship and rising inflations on citizens and businesses. Also, we expect considerable foreign investment inflow into the country in Q3 and a relative improvement in national output driven by the bolstering of economic activities, increased government spending, and (projected) stability in the oil sector.
From the international view, global growth is projected to slow significantly amid high inflation, tight monetary policy, and more restrictive credit conditions. The possibility of more widespread bank turmoil and tighter monetary policy could result in even weaker global growth and lead to financial dislocations in the most vulnerable emerging market and developing economies (EMDEs). Comprehensive policy action is needed to foster macroeconomic and financial stability in the world at large.
