PwC has cautioned that additional tax hikes could lead to reduced reinvestment by Nigerian firms and further corporate departures. This warning is outlined in its June 2024 report titled ‘Nigeria Economic Outlook: Navigating Economic Reforms,’ which predicts a decline in inflation to 29.5% by the second half of 2024, down from the 33.95% recorded in May 2024.
According to the report, the government might revisit its proposed tax hikes to address financial difficulties and enhance liquidity for businesses affected by economic pressures. However, any additional tax increases could worsen the decline in reinvestment and potentially lead to corporate departures from the industry. It added in the Report that PwC that the impacts and implications of the reforms on businesses would include reduced revenue growth.
The report highlights that inflation can erode revenue by diminishing consumers’ purchasing power, resulting in reduced sales for businesses and negative impacts on overall revenue. Additionally, businesses face higher production, import, and raw material costs due to inflation and exchange rate pressures, which are then transferred to them, even as is added that the depreciation of the Naira is also anticipated to raise the cost of imported raw materials.
PWC warned that the overall increase in prices resulting from the removal of subsidies could raise costs in areas such as marketing, logistics, and utilities. Additionally, elevated interest rates may lead to greater borrowing expenses for businesses, making operational funding and investments more costly.
It stated: “The general rise in prices due to the removal of subsidy may increase expenses such as marketing, logistics, utilities etc.,” while “high interest rates may lead to higher borrowing costs for businesses, making it more expensive to fund operations and investments.”
According to the report, the economic outlook for the second half of 2024 projects a marginal decline in inflation to 29.5 per cent by year end, balancing the effects of reforms, policy actions, external pressures and food prices; particularly in the second half of the year.
It also stated that the broad economic growth outlook was indicating that the country’s Gross Domestic Product (GDP) may grow marginally by 2.9 per cent on the back of sustained policy reforms although growth prospects may be limited by elevated economic pressures.
“Fiscal sustainability concerns may remain slightly elevated, given debt servicing costs, that is, 89 per cent of the budgeted fiscal deficit is to be financed by new borrowings,” the report said.
The report also contained three broad considerations for the government, which are structured and focused policy, policy flexibility and mitigation of policy’s impact.
It urged the government to prioritise macro stability by addressing security, social and pressure points of inflation and exchange rate pressures and mobilise capital to drive growth through market focused policies and intensification of investment promotion.
Besides, it advised the taking of short and long-term sectoral bets focused on exports, domestic substitution and job creation.
“Government must drive fiscal prudence by optimising spending on capital projects with the highest Return on Investment (ROI), rationalise public service spending and improve revenue diversification and collection efficiency,” it added.
Under policy flexibility, the report said that the government should decide when and how to introduce, defer, sequence, or stagger different policies based on current economic and social conditions.
It further advised the authorities to adopt scenario planning before any major economic reform is implemented to avoid unwarranted policy reversals and embed contingency plans within any economic policies during the planning phase.
The report recommended that the government introduce intervention funding initiatives, including low-interest loan programs and credit guarantees, to facilitate affordable financing for businesses despite high market interest rates. Additionally, it urged the government to establish social safety net programs, such as unemployment benefits and workforce development initiatives, to mitigate job losses resulting from economic pressures. The report emphasized that businesses should carefully assess their strategic priorities, operating models, and cost structures while maintaining a clear-eyed strategy.
PwC emphasized in the report that businesses should reassess their strategies and clearly identify essential elements for future success, irrespective of economic conditions. Furthermore, it advised businesses to invest in robust systems that empower them to thrive in any economic environment, and advisedly added that businesses should radically transform their cost structure and reimagine their operating models. In the same vein, it advised businesses thus: “Revisit your entire cost structure to establish short, mid, and long term actions to fundamentally adjust for the future. Re-imagine how you organise and collaborate by using technology accelerators and strengthening resilience.”
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