Nigeria’s economic turmoil is poised to worsen as a new report by the Financial Derivatives Company (FDC) has shown inflation is likely to cross the 12% threshold, a trend which may lead to a recession, causing unavoidable damage to the economy.
The ongoing energy and forex shortages are compounding the woes of businesses, forcing them to cut production levels, and in some cases reduce staff strength.
“We are projecting a significant increase of 0.7% in the March inflation number to 12.1%. This will be the third consecutive monthly increase this year. The month of March was unique as the fuel scarcity intensified and higher transport costs filtered through to commodity prices such as beans, tomatoes and pepper.
“While our initial time series analysis projected an increase of 0.4%, the severity and longevity of the prevailing fuel scarcity has distorted price levels,” the FDC report stated.
Gregory Kronsten, Head of research at FBN Quest, tells BusinessDay that “in general, inflation is bad for the population and most people say it is worse for the low income segment of the population. But the important thing is what the authorities [MPC and CBN] can do about it. Because the increase in inflation is due to a lot of things both bodies cannot control.
“The first is foreign exchange, followed by food production trends, and lastly security, which are all out of the control of the MPC or CBN. The recent inflation figures have been higher than the target range. If there is a shortage in foreign currency, it will lead to a shortage of goods which also fuels inflation.”
A retail study by FDC also showed that “prices of many consumer goods have remained stubbornly high and in some cases, increased inspite of consumer resistance. The factors that are contributing to the spike in inflation include seasonality, cost push factors, money supply and forex shortage. These factors, while transient in nature, are becoming more permanent. As these factors grow increasingly embedded, they are making consumers panic. Anticipated inflation is more important because of the pass through effect of increased demand and expectations of higher prices on current prices.”
Nigeria’s inflation rose by 11.4 percent in February, which is the highest reading since December 2012, as a falling naira keeps pushing import prices up, mainly food. Unemployment rate has also been pushed into double digits at 10.4 percent in the fourth quarter of 2015.
While negative indices continue to rise, economic growth dropped to 2.8 percent in 2015, the slowest since 1999 and has been projected by the International Monetary Fund (IMF) to experience further decline to 2.3 percent in 2016.
Continuous jumps in the inflation rate, according to Tope Oshikoya, CEO of Nextnomics, will make it more difficult for the Central Bank of Nigeria (CBN) to focus on the challenging exchange rate situation the country finds itself in.
“It puts the Central Bank in a difficult position in the sense that if we look within the monetary policy dilemma, you will expect that if inflation does not scale up erratically, then the monetary policy can decide to hold on, on the interest rates and therefore they will concentrate more on exchange and capital rates.
“But if inflation continues to go up, it becomes difficult for them to do what the market is expecting, which is to devalue the naira,” says Oshikoya.
However, Oshikoya thinks the projected jump is not as severe as what was recorded in February, when inflation jumped from 9.6 percent to 11.4 percent, indicating an 18.75 percent increment.
The dichotomy between urban and rural prices may persist, given the impact of rising transport costs and exchange rate pressures on urban prices. The price of diesel, a major determinant of food transportation costs, has increased to N130 per litre.
FDC’s report also noted that “inflation is likely to remain high in April; as exchange rate uncertainty continues, consumer prices are expected to remain high. In addition, with fuel scarcity expected to persist till next month, in spite of the NNPC’s April 7 deadline, transportation costs will continue to be elevated. Therefore, we expect inflation to remain in the region above 11%.
“The FDC Lagos urban inflation index increased by 0.32%, from 10.68% to 11.00%. This was driven by the significant increase of 0.32% in the food basket and a 0.31% jump in the non-food basket. The year-on-year (YoY) food index increased to 12.56% from 12.23%, while the YoY non-food index increased to 10.21%, from 9.90% in February. We expect the ongoing planting season to affect food supply in coming months.”
Lolade Akinmurele & Caleb Ojewale
