Subsidy Removal, Rising Inflation Weaken Nigerians’ Purchasing Power

Purchasing power of Nigerians dropped in June 2023, as the effects of the  fuel subsidy removal and rising inflation  continue to gather momentum, LEADERSHIP learnt.

Inflation Rate for the month of May, 2023 was 22.41 per cent, which was an 18-month high while the federal government, had, in May, 2023 removed subsidy on petrol, allowing PMS to rise by about 250 per cent.

The subsidy removal from petrol had increased transportation fare and other logistics, coupled with high inflation, hence, increasing expenses at a time income had remained unchanged. This shrinks the disposable income of people to buy their choiced goods and assets, hence, they had to let go of some expenses.

Invariably, it crippled the spending power of individuals and companies, which reflected in the Purchasing Manager Index (PMI) of the month of June, 2023.

Stanbic IBTC Purchasing Manager Index (PMI) report has shown a sharp strengthening of price pressures in June 2023, noting that, in turn, rates of expansion in output and new orders softened, but remained marked nonetheless as business confidence dipped to a near record low.

The report added that, “intensifying inflationary pressures encouraged companies to expand inventories to try and get ahead of further price increases. Meanwhile, employment was up modestly for the second month running.”

The headline PMI remained above the 50.0 no-change mark in June. Although dipped slightly to 53.2 from 54.0 in May, the reading signalled a solid monthly improvement in the health of the private sector.

The headline figure derived from the survey is the Purchasing Managers’ Index. Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show a deterioration.

Reacting to this development, director/CEO of Centre for the Promotion of Private Enterprise, (CPPE), Dr. Muda Yusuf said: “these are some of the temporary challenges that the economy is facing because the subsidy removal has led to increase in cost of transportation.”

According to Yusuf, high cost of transportation affects so many sectors, particularly the distributive sector and the supply chain.

“It has implication on disposable income as many low-income people spend bigger percentage of their income on transportation as there is little left for purchasing of other things.

“These are issues but they are transitional issues as things settle down, I am sure that the situation will become better because the reforms put in place by President Bola Tinubu administration invariably will boost the economy growth and investment; and will compensate some of the losses acquired during the period.”

The Stanbic IBTC report had earlier pointed out that, while overall business conditions remained on a positive trajectory, firms faced a much stronger inflationary environment at the end of the second quarter of the year, linked to the removal of the fuel subsidy.

Purchase prices, it stressed, increased at the fastest pace since last August, while the rate of selling price inflation accelerated sharply to the steepest in the year-to-date as firms passed higher costs on to their customers.

“Issues around the ending of the fuel subsidy also acted to limit the pace of output growth, according to respondents, although activity was still up markedly in the latest survey period. Output has now risen in each of the past three months amid higher customer numbers and growth of new orders. Wholesale and retail bucked the wider trend and posted a drop in activity.

“New business was also up for the third successive month. The rate of expansion was marked, albeit the softest in the current sequence of growth. Higher new orders encouraged firms to expand employment for the second month running, although the pace of job creation was again only modest,” it pointed out.

Despite increasing staffing levels, it stated that, firms recorded a build-up of backlogs of work, due to an expansion in new business and some difficulties securing inputs, even as some companies reported having brought forward purchasing and expanded inventories ahead of predicted increases in costs of materials in the months ahead.

This, allied with increasing workloads, meant that stocks of purchases were accumulated to the largest degree in eight months, it noted.

Business confidence, it stressed, dropped to the second-lowest on record in June and was only fractionally above last November’s figure. Companies remained optimistic that output will increase over the coming year, however, linked to investment, business expansion plans and proposed marketing drives, says the report.