HomeBusinessNigeria's Inflation at Risk from Monetary Tightening Without Supply-Side Solutions – KPMG

Nigeria’s Inflation at Risk from Monetary Tightening Without Supply-Side Solutions – KPMG

  • KPMG analysis on Nigeria economy: inflation is at risk from monetary tightening without adequate supply-side solutions.
  • The global economic landscape, characterized by a slowing economy and divergent economic growth rates, poses significant challenges to monetary policy and inflation control.
  • The IMF expects global inflation to drop to 5.2% in 2024, indicating a need for balanced monetary and supply-side policies to prevent negative impacts on economic growth and employment.
  • For Nigeria, implementing supply-side solutions alongside monetary tightening is crucial to mitigate the risk of inflation and ensure sustainable economic growth.

Nigeria’s economic landscape in 2023 and the outlook for 2024 have been significantly influenced by a combination of pro-market reforms, global economic headwinds, and the country’s monetary policy stance. The pro-market reforms, particularly the removal of fuel subsidies and the unification of the exchange rate, have had a profound impact on the Nigerian economy. These reforms led to a sharp depreciation of the naira, which in turn increased inflationary pressures. The Central Bank of Nigeria responded by adopting a more restrictive interest rate environment to curb inflation, which further weighed on economic growth.

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KPMG analysis on Nigeria economy
KPMG analysis on Nigeria economy

The document read: 

  • “We recognise that price stability is a necessary condition for economic growth. We equally recognise that raising interest rates is a natural response to inflationary pressures in monetary policy playbooks. 
  • “However, we emphasise that monetary tightening is more apt for addressing demand-pull inflation. Thus, inflation may yield little in response to the monetary tightening efforts, unless the supply-side bottlenecks fanning cost-push inflation are also addressed. 
  • “Eliminating these bottlenecks will require concerted efforts from both fiscal and monetary authorities. We are confident that such efforts will better deliver the intended price stability without trading-off economic growth.”

The global economic environment in 2023 was characterized by elevated inflation and other challenges that affected global growth. These headwinds included sustained interest rate hikes, weaker trade, and geopolitical tensions, which eroded investor confidence and triggered supply chain disruptions. Despite these challenges, the global economy managed to avoid a recession, with growth settling at an estimated 2.6% in 2023. This resilience was attributed to Central Banks in developed economies ending their monetary tightening streak aimed at reining in inflation to their 2% target.

In the Sub-Saharan Africa (SSA) region, including Nigeria, economies faced multiple layers of challenges in 2023, including sluggish growth, elevated inflation levels, debt sustainability problems, steep currency depreciation, and political tensions. These challenges were more local than global, with the macroeconomic performance of the region mirroring the impacts of economic reforms, power challenges, and matured oil fields in the region’s top economies.

Looking ahead to 2024, KPMG anticipates that growth in Nigeria will strengthen to 3.0% driven by the rebound of business activities in the non-oil sector and improved oil production and prices in the global market. The Central Bank is expected to maintain its hawkish posture and raise the Monetary Policy Rate (MPR) further in 2024 to tame inflation, which is anticipated to hover around an annual average of 22% by the end of the year. Additionally, the exchange rate is expected to depreciate further in 2024 and settle significantly above current rates in both the official and parallel markets.

The global economic outlook for 2024 suggests moderate growth, lower inflation, and interest rate cuts after an initial pause to observe the inflation-dampening impact of previous rate hikes. This outlook is based on the expectation of easing financial conditions in advanced economies, sustained domestic monetary tightening, improved revenue mobilization, greater fiscal discipline, and debt restructuring in the SSA region.

Nigeria’s economic outlook for 2024 is influenced by a combination of domestic reforms, global economic headwinds, and the country’s monetary policy stance. The anticipated strengthening of growth, the maintenance of a hawkish monetary policy to control inflation, and the expected depreciation of the exchange rate are key factors shaping the economic landscape. The global economic environment, characterized by moderate growth and lower inflation, also provides a favorable backdrop for Nigeria’s economic performance in 2024.

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