economy
Financial experts fear electricity tariff hike may push up inflation
Financial analysts have warned that the recently increased electricity tariff may drive up inflation in the country and inflict more misery on the poor.
Nigeria’s inflation rate climbed to 33.2% in March 2024, marking a 1.5%-point increase from February 2024, although the rise was slower compared to the previous month’s 1.80% increase.
The uptick in March was primarily attributed to higher costs in food and beverages, alongside increased energy and housing expenses.
In April, the Federal Government, acting through the Nigerian Electricity Regulatory Commission (NERC), approved a hike in electricity rates for consumers categorized under Band A, as announced by NERC’s Vice Chairman, Musliu Oseni, in a press statement.
Oseni revealed that the tariff adjustment would see customers paying N225 per kilowatt hour, a significant increase from the previous rate of N68.
Reacting to the tariff hike, the Organised Private Sector in Nigeria warned that the more than 200% hike in electricity tariffs by the Federal Government could lead to increases in inflation in the coming months and shut down over 65% of businesses in the country.
The analysts, who expressed concern over the potential consequences of recent price increases and electricity tariff adjustments on goods and services in an exclusive interview with Nairametrics, highlighted the interconnectedness of inflation with the broader economy and the possibility of a spiral inflation scenario if unchecked.
The analysts stressed the ripple effects of these price increases on businesses and households and advocate for proactive measures to stabilize prices and promote sustainable growth.
They also raised concerns over possible strain on companies’ financial health, with anticipated increases in operating costs and product prices which will erode consumer purchasing power.
Escalating inflation
Nairametrics reported that Nigeria’s inflation rate increased to 33.2% for the month of March 2024, according to the latest data from the National Bureau of Statistics (NBS).
This represents 1.5% points increase from the 31.7% recorded in February 2024. The increase in the inflation rate in March was slower compared to the 1.80% rise recorded in February 2024.
Inflation in March was driven by an increase in food and beverages coupled with energy and housing costs.
On a year-on-year basis, the headline inflation rate increased by 11.16% from 22.04% in March 2023. Additionally, the headline inflation rate for March 2024 was 3.02%, a decrease of 0.10% from February 2024, when it was 3.12%.
In March 2024, the food inflation rate reached 40.01% year-on-year, marking an increase of 15.56 percentage points from 24.45% in March 2023.
What financial analysts are saying
The Group Managing Director of Crane Securities Limited, Mr. Mike Eze, in an exclusive chat with Nairametrics, provided insight into the potential consequences of the recent adjustment in electricity tariffs.
He observed that small and medium-sized enterprises (SMEs) and multinational corporations spanning various sectors of the economy could face pressure to raise product prices to offset production costs.
Expressing concern over the current economic trends, he emphasized the interconnectedness of inflation with goods, services, and the broader economy.
Eze noted that the increase in pay TV rates by MultiChoice, owners of DStv and GOtv, across board highlighted the current inflationary pressures in the country.
He pointed out that the recent increase in electricity tariffs, particularly for Band A customers, is poised to affect manufacturers of goods and services, potentially exacerbating the inflationary pressures.
- “There is a genuine risk of entering into a spiral inflation scenario,” he cautioned, “with a cascading effect on prices across sectors.”
Eze warned that if left unchecked, this could potentially lead to hyperinflation, further burdening consumers and businesses alike.
Attributing the electricity tariff adjustment to the rising inflationary trends, he highlighted its ripple effects on businesses and household budgets.
He noted that financial institutions are responding by adjusting their rates, while the Central Bank of Nigeria (CBN) is also increasing interest rates in response to these economic indicators.
- “It is the rising inflation that prompted the hike in electricity tariff. This will affect the businesses and household wallets, as even financial institutions are increasing their rates, with the CBN also raising the interest rate,” Eze said.
The GMD stressed the importance of proactive measures to address the underlying cost structures and mitigate the adverse effects on the economy.
He urged stakeholders to collaborate in finding solutions to stabilize prices and ensure sustainable economic growth.
David Adonri, Managing Director of Highcap Securities Limited, also in an exclusive interview, noted that the prices of goods and services might further rise with the escalating costs associated with electricity and its implications for production expenses.
He emphasized that the rise in electricity prices is poised to elevate production costs, subsequently contributing to an anticipated uptick in inflation rates.
Adonri noted, however, that there exists a potential mitigating factor in the form of a stable electricity supply. Should consistent power availability facilitate an increase in production output, he suggested, there could potentially lower overall impact on costs.
Mr Patrick Ajudua, President of the New Dimension Shareholders Association, expressed concern over the escalating inflation rates, which he emphasized have placed significant strain on the financial health of many companies, resulting in a decline in their bottom line.
He highlighted the additional pressure stemming from the recent revision of electricity tariffs, foreseeing an inevitable increase in operating and product costs.
Ajudua pointed out that in response to these challenges, manufacturing companies are compelled to offset some of these costs by transferring them to consumers.
- “This strategy, while serving to mitigate the impact on their operations, is expected to lead to a rise in product prices.
- Consequently, this upward price adjustment is likely to erode the purchasing power of consumers, further exacerbating the decline in gross earnings for companies,” he said.
Victor Chiazor, Head of Research at FSL Securities Limited, in an exclusive chat with Nairametrics, said that the increase in inflation figures shows that prices have continued to rise faster than in previous seasons and this directly weakens the purchasing power of the consumer.
He noted that inflation continues to be triggered by a combination of high food prices, higher exchange rates, and rising energy and transportation costs.
- “Recently we have seen some level of appreciation and stability in exchange rate, tighter monetary policies as well as the announcement of a drop in diesel prices all of which we expect to kick in the near term to ease inflation.
- The increase in electricity tariff would have triggered a further rise in inflation but we estimate the impact to be less visible given that the tariff increase was solely for consumers on band A,” he said.
Olatunde Amolegbe, Managing Director of Arthur Steven Asset Management Limited and former President of the Chartered Institute of Stockbrokers (CIS said:
- “We have to realize that there is a resistance level at which consumers stop to buy or seek alternatives. It’s not all businesses that will be able to continually pass inflated cost components to consumers.
Tajudeen Olayinka, an Investment Banker and Stockbroker, said that the greatest challenge to rising inflation is the depreciating value of the Naira that caused the currency to drop below its fair value a few months back, thus causing pain and anguish in the economy.
- “Now that excessive speculation around the currency is gradually being reduced somehow, it is very likely that Naira will stabilize around its fair value in the immediate to near term, given the avalanche of monetary policy options that can be deployed by CBN to this effect.
- The implication of this is a drop-off effect on a possible inflationary threat from the new electricity tariff since the tariff is meant to increase power availability and improve total-factor productivity. The deciding factor is the stability in the exchange rate of Naira,” he said.
What you should know
The Organised Private Sector in Nigeria, comprising the Manufacturers Association of Nigeria (MAN), Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), National Employers Consultative Association (NECA), Nigerian Association of Small Scale Industrialists (NASSI) and National Association of Small and Medium Enterprises (NASME) had stated that over 65% of businesses in Nigeria might shut down due to the over 200% hike in electricity tariff by the Federal Government.
The group disclosed this in a statement addressed to President Bola Tinubu on the need to suspend the tariff hike to save businesses, jobs, and the economy in general.
According to the statement, the N225/KWh electricity tariff makes Nigeria the third country with the highest energy cost in the world just below industrial powers – the United States and Germany.
What the group said
- The group said, “Clearly, with the new tariff of N225/kwh, Nigeria now ranks third after Germany and the United Kingdom on the list of countries with high electricity costs. What is most worrisome with the Nigerian case is the fact that the electricity to be supplied is not adequate.
- “Also, the increase is coming on the heels of macroeconomic instability, infrastructure deficits, as well as other supply-side constraints limiting the performance of the productive sector. Truth be told, over 65 percent of private businesses, especially manufacturing concerns and SMIs, may be forced to close down due to the high electricity tariff.”
