CBN wants households, businesses to brace for lower

•Negative real interest rate may exacerbate capital outflows –PwC

By Chinwendu Obienyi

Recent economic forecasts and surveys conducted by the Central Bank of Nigeria (CBN) suggest that both households and businesses in Nigeria should prepare for reduced spending and a challenging expenditure outlook in the coming months.

This is coming after the apex bank released its Inflation Expectations Survey Report for December 2024 which revealed that households are anticipating higher expenditures in the near future.

In the same vein, a PwC report titled; 2025 Budget and Nigerian Economic Outlook: Accelerating Momentum at an Inflection Point, also indicated that declining interest rates in advanced economies are likely to lead a reallocation of funds to more competitive markets offering higher real returns.

This would mean that Nigeria may unlikely attract significant foreign funds this year if inflation continues to rise in these advanced economies.

The National Bureau of Statistics (NBS) had indicated that inflation rate reached a three-decade high of 34.8% in December 2024, severely eroding consumer purchasing power.

Hence, the CBN survey revealed that consumers are planning to reduce their savings and investments in the coming months, suggesting a tightening of household budgets. The survey said, “Businesses and households respondents perceive the current inflation rate to be high. A breakdown of the perception indicated that small businesses (83.9%) had the highest inflation perception while micro businesses (71.4%) recorded the lowest perception.”

Although the survey revealed further that businesses and households respondents expect the level of inflation to gradually ease over the next six months, 66.4% want the apex bank to reduce interest rates as more businesses expect higher expenditure compared to households in the current month.

“Households and businesses anticipate lower spending as their expenditure expectation gradually decrease over the next six months. Households project increases in transportation costs, rent, vehicle expenses, house purchases, and medical expenses,” the report stated.

With businesses projecting further naira depreciation into the first quarter (Q1) of 2025, this could increase import costs and overall expenses. The apex bank had already reported that credit default rates surged in Q4 2024, particularly in corporate lending and unsecured loans, indicating financial stress in the business sector.

To add to the gloomy outlook, the PwC Nigeria report noted that while advanced economies have reduced policy rates as inflation got to target levels, the CBN raised its policy rate five times in 2024 to combat inflation, which reached 34.6% in November 2024. It said that declining interest rates in advanced economies were likely to lead to a reallocation of funds to more competitive markets offering higher real returns.

PwC Nigeria, said, “Nigeria may not benefit significantly from this because its negative real interest rates, resulting from inflation surpassing interest rates, may discourage investors. If inflation rises in advanced economies in 2025, their central banks may increase policy rates, leading to a shift of funds towards these markets offering positive real returns.

This may exacerbate capital outflows from economies like Nigeria, where negative real interest rates diminish the appeal of local assets to international investors”.

Despite the gloomy expenditure outlook, both the CBN survey report and PwC report believe that the country’s GDP could grow by 3.3%, potentially creating new economic opportunities while adding that a projected steady global economic growth in 2025 may result in a moderate increase in remittance flows to the country.

Reacting to the reports, analysts who spoke to Daily Sun, said that while the CBN’s outlook suggests a challenging period ahead for both households and businesses in terms of expenditure, ongoing economic reforms and policy measures may help stabilize the situation as 2025 progresses.

“Both sectors should brace for lower spending in the short term while closely monitoring economic indicators for signs of improvement”, they said.