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Nigerians Brace for Tougher Times: Electricity Tariff Set to Surge by Over 40%

Nigerians Brace for 40% Surge in Electricity Tariff, Tougher Times Ahead
Energy Subsidies on the Verge of Extinction as Nigeria Prepares for Tariff Hike
President Tinubu’s Administration Faces Acid Test with Impending Electricity Tariff Increase

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Power - Investors King

Nigeria is bracing itself for a challenging period ahead as the electricity tariff is set to increase by more than 40%, potentially putting an end to all energy subsidies in the country.

With a monthly subsidy of approximately N50 billion still present in the electricity sector due to revenue shortfalls, the tariff hike scheduled for July 1st will be another significant test for President Bola Ahmed Tinubu’s administration’s market reform efforts.

The administration has already eliminated subsidies on Premium Motor Spirit (PMS) and implemented a floating exchange rate for the naira, both of which have complicated the price-setting process of the Nigerian Electricity Regulatory Commission’s (NERC) 2022 Multi-Year Tariff Order (MYTO).

Despite signing contracts with NERC to ensure a supply of at least 5,000 megawatts per year, the power sector players have been unable to meet this target.

In 2015, the average tariff for distribution companies (DisCos) and different customer classes was N25 per kilowatt. However, in the 2020 MYTO, the average tariff rose to N60 per kilowatt, and in the 2022 MYTO, it further increased to N64 per kilowatt across customer classes.

Foreign exchange rates and inflation have played a crucial role in determining the tariffs. The exchange rate used in 2015 was N198.97/$, which increased to N383.80/$ in 2020, and N441.78/$ in 2022. Inflation rates used were 8.3% in 2015, 12% in 2020, and 16.97% in 2022.

Currently, the inflation rate stands at 22.41%, with projections indicating it could reach 30% by the end of June due to the floating of the naira and the removal of PMS subsidies.

Besides inflation, other factors such as the metering gap of over seven million, gas prices, losses, and actual generation capacity also contribute to the determination of tariffs.

While NERC’s projected tariff for July 2023 aimed to remove subsidies and increase the previously frozen tariff bands D and E, the prevailing floating of the naira and rising inflation are expected to push the new average tariff to approximately N88 per kilowatt, allowing the sector to recover its costs.

Stakeholders have expressed concerns over the unavoidable tariff increase and its potential impact on households and small businesses. Energy costs alone are expected to rise by over 70%, placing further strain on purchasing power amidst high unemployment and poverty rates, which form significant challenges for the economy.

As of now, the available electricity on the grid stands at 3,057.7 megawatts from 17 power plants. Over the past four months, the average load intake of all DisCos has been around 3,000 megawatts, falling significantly short of the 100% remittance orders they are required to meet.

The unreliability of the grid and subsequent financial losses have raised concerns among stakeholders about the future of the Nigerian Electricity Supply Market. Consumer apathy towards the system and the increasing reliance on alternative energy sources are compounding the sector’s challenges.

Energy expert, Prof Wunmi Iledare, expressed concerns about the restructuring of the forex market and its potential devaluation of the naira. He emphasized the importance of supporting the government’s efforts to decouple the economy from forex instability, even if it means accepting higher electricity tariffs and petroleum product prices.

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Economy

Nigeria’s Growth Forecast Lowered to 3% for 2025, Higher than Most Emerging Markets

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IMF global - Investors King

The International Monetary Fund (IMF) has projected a 3% growth rate for Nigeria in 2025, slightly down from the 3.1% forecasted for 2024.

Despite this slight decline, Nigeria’s projected growth remains higher than that of many emerging markets as detailed in the IMF’s latest World Economic Outlook released on Tuesday.

In comparison, South Africa’s economy is expected to grow by 1.2% in 2025, up from 0.9% this year. Brazil’s growth is projected at 2.4% from 2.1% in 2024, and Mexico’s growth forecast stands at 1.6% for 2025, down from 2.2% in 2024.

However, India is anticipated to see a robust growth of 6.5% in 2025, although this is slightly lower than the 7% forecast for 2024.

The IMF’s projections come as Nigeria undertakes significant monetary reforms. The Central Bank of Nigeria has been working on clearing the foreign exchange backlog, and the federal government recently removed petrol subsidies.

These reforms aim to stabilize the economy, but the country continues to grapple with high inflation and increasing poverty levels, which pose challenges to sustained economic growth.

Sub-Saharan Africa as a whole is expected to see an improvement in growth, with projections of 4.1% in 2025, up from 3.7% in 2024. This regional outlook indicates a modest recovery as economies adjust to global economic conditions.

The IMF report underscores the need for cautious monetary policy. It recommends that central banks in emerging markets avoid easing their monetary stances too early to manage inflation risks and sustain economic growth.

In cases where inflation risks have materialized, central banks are advised to remain open to further tightening of monetary policy.

“Central banks should refrain from easing too early and should be prepared for further tightening if necessary,” the report stated. “Where inflation data encouragingly signal a durable return to price stability, monetary policy easing should proceed gradually to allow for necessary fiscal consolidation.”

The IMF also highlighted the importance of avoiding fiscal slippages, noting that fiscal policies may need to be significantly tighter than previously anticipated in some countries to ensure economic stability.

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Economy

Nigeria’s Inflation Rises to 34.19% in June Amid Rising Costs

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Food Inflation - Investors King

Nigeria’s headline inflation rate surged to 34.19% in June 2024, a significant increase from the 33.95% recorded in May.

This rise highlights the continuing pressures on the nation’s economy as the cost of living continues to climb.

On a year-on-year basis, the June 2024 inflation rate was 11.40 percentage points higher than the 22.79% recorded in June 2023.

This substantial increase shows the persistent challenges faced by consumers and businesses alike in coping with escalating prices.

The month-on-month inflation rate for June 2024 was 2.31%, slightly up from 2.14% in May 2024. This indicates that the pace at which prices are rising continues to accelerate, compounding the economic strain on households and enterprises.

A closer examination of the divisional contributions to the inflation index reveals that food and non-alcoholic beverages were the primary drivers, contributing 17.71% to the year-on-year increase.

Housing, water, electricity, gas, and other fuels followed, adding 5.72% to the inflationary pressures.

Other significant contributors included clothing and footwear (2.62%), transport (2.23%), and furnishings, household equipment, and maintenance (1.72%).

Sectors such as education, health, and miscellaneous goods and services also played notable roles, contributing 1.35%, 1.03%, and 0.57% respectively.

The rural and urban inflation rates also exhibited marked increases. Urban inflation reached 36.55% in June 2024, a rise of 12.23 percentage points from the 24.33% recorded in June 2023.

On a month-on-month basis, urban inflation was 2.46% in June, slightly higher than the 2.35% in May 2024. The twelve-month average for urban inflation stood at 32.08%, up 9.70 percentage points from June 2023’s 22.38%.

Rural inflation was similarly impacted, with a year-on-year rate of 32.09% in June 2024, an increase of 10.71 percentage points from June 2023’s 21.37%.

The month-on-month rural inflation rate rose to 2.17% in June, up from 1.94% in May 2024. The twelve-month average for rural inflation reached 28.15%, compared to 20.76% in June 2023.

The rising inflation rates pose significant challenges for the Central Bank of Nigeria (CBN) as it grapples with balancing monetary policy to rein in inflation while supporting economic growth.

The ongoing pressures from high food prices and energy costs necessitate urgent policy interventions to stabilize the economy and protect the purchasing power of Nigerians.

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Inflation to Climb Again in June, but at a Reduced Pace, Predicts Meristem

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Nigeria's Inflation Rate - Investors King

As Nigeria awaits the release of the National Bureau of Statistics’ report on June 2024 inflation, economic analysts project that while inflation will continue its upward trajectory, the pace of increase will moderate.

This comes after inflation rose to a 28-year high of 33.95% in May, up from 33.69% in April.

Meristem, a leading financial services company, has forecasted that June’s headline inflation will rise to 34.01%, a slight increase from May’s figure.

The firm attributes this persistent inflationary pressure to ongoing structural challenges in agriculture, high transportation costs, and the continuous depreciation of the naira.

Experts have highlighted several factors contributing to the inflationary trend. Insecurity in food-producing regions and high transportation costs have disrupted supply chains, while the depreciation of the naira has increased importation costs.

In May, food inflation grew at a slower pace, reaching 40.66%, but challenges in the agricultural sector, such as the infestation of tomato leaves, have led to higher prices for staples like tomatoes and yams.

Meristem predicts that food inflation will persist in June, driven by these lingering challenges. Increased demand during the Eid-el-Kabir celebration and rising importation costs are also expected to keep food prices elevated.

Core inflation, which excludes volatile items like food and energy, was at 27.04% in May. Meristem projects it to rise to 27.30% in June.

The firm notes that higher transportation costs and the depreciation of the naira will continue to push core inflation up.

However, they also anticipate a month-on-month moderation in the core index due to a relatively stable naira exchange rate during June, compared to a more significant depreciation in May.

Cowry Assets Management Limited has projected an even higher headline inflation figure of 34.25% for June, citing similar concerns.

The firm notes that over the past year, food prices in Nigeria have soared due to supply chain disruptions, currency depreciation, and climate change impacts on agriculture.

This has made basic staples increasingly unaffordable for many Nigerians, stretching household budgets.

As inflation continues to rise, analysts believe the Central Bank of Nigeria (CBN) will likely hike the benchmark lending rate again.

The CBN’s Monetary Policy Committee (MPC) has raised the Monetary Policy Rate (MPR) by 650 basis points this year, bringing it to 26.25% as of May 2024.

At a recent BusinessDay CEO Forum, CBN Governor Dr. Olayemi Cardoso emphasized the MPC’s commitment to tackling inflation, stating that while the country needs growth, controlling inflation is paramount.

“The MPC is not oblivious to the fact that the country does need growth. If these hikes hadn’t been done at the time, the naira would have almost tipped over, so it helped to stabilize the naira. Interest rates are not set by the CBN governor but by the MPC committee composed of independent-minded people. These are people not given to emotion but to data. The MPC clarified that the major issue is taming inflation, and they would do what is necessary to tame it,” Cardoso said.

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