According to the latest Purchasing Managers’ Index (PMI) report from Stanbic IBTC Bank, business activity in Nigeria experienced contraction in October, marking the first decline in seven months. The headline PMI dropped to 49.1 from 51.1 in the previous month. This indicates a deterioration in business conditions. Factors contributing to the contraction include a sharp rise in overall input prices, driven by currency weakness and the lingering impacts of the removal of the fuel subsidy. The inflationary environment, coupled with higher fuel costs, also depressed consumer demand, impacting new business expansion.
Key Points:
- Reasons for Contraction: The PMI report highlights that a sharp rise in overall input prices, driven by currency weakness and the removal of the fuel subsidy, played a central role in the contraction of business activity. Inflationary pressures were most pronounced in wholesale and retail, as well as manufacturing.
- Impact of Fuel Subsidy Removal: Since the announcement of the removal of the petrol subsidy in May, the price of petrol has tripled, and the value of the naira has weakened. These factors, combined with the implementation of a 7.5 percent value-added tax on diesel imports (later suspended in September), contributed to higher fuel costs, which in turn impacted business activity.
- Inflationary Environment: Nigeria’s inflation rate reached an 18-year high of 26.72 percent in September, up from 25.80 percent in the previous month. This high inflation environment depressed consumer demand, resulting in a pause in new business expansion.
- Policy Recommendations: The Presidential Fiscal Policy and Tax Reforms Committee presented recommendations to address critical economic issues, including exchange rate management, fuel subsidy removal, inflation moderation, and economic growth. These recommendations include tax breaks for low-income earners, transport subsidies, and fiscal policy reviews on various items.
- Economic Outlook: Business leaders hope that positive changes will occur in the economy following the implementation of proposed tax reforms. The challenging economic environment, characterized by high inflation and cost pressures, underscores the need for effective policy measures to support economic recovery and growth.
Conclusion: The contraction in business activity in Nigeria, as indicated by the PMI report, highlights the challenges faced by the economy. Factors such as currency weakness, fuel cost increases, and high inflation have contributed to this decline. The policy recommendations put forth by the Presidential Fiscal Policy and Tax Reforms Committee reflect an effort to address these economic issues. Effective implementation of these measures will be crucial for restoring confidence, stimulating economic activity, and fostering sustainable growth in Nigeria.
