Nigeria: Special Report – Inflationary Trend Erratic Over External, Internal Shocks

Inflation has been erratic in the last five years driven by some external and internal factors, including the precipitous fall in crude oil prices in 2016 that saw the country slip into recession coupled with major fiscal moves by the government like the shut-down in land borders in 2019.

Vanguard checks revealed that though the inflation numbers have been quite responsive to some of the drivers, but it has largely been on the rise (double digit) since May 2019 when the Muhammadu Buhari’s led government took over leadership in the country.

The inflation, which began a gradual up-trend prior to the general election in 2015, rose to 9.0 percent at the end of May, 2015, indicating a month-on-month, M/M, increase of 3.4 percentage points over 8.7 percent recorded in April and year-on-year, Y/Y, increase of 12.5 percent point from 8.0 percent in May 2014.

It maintained a steady upbeat to close the year at 9.55 percent. By December 2016, the figure had moved up to 18.55 percent, following the recession that hit the country that year as a result of fall in the prices of crude oil and consequent depletion in the external reserve as well as failure of the Central Bank of Nigeria, CBN, to allow a market determined exchange rate for the naira.

However, in 2017, the inflation figure began a downward trend, closing at 15.37 percent at the end of the year as oil prices rebounded and the country slipped out of recession. It maintained the trend in 2018 to close the year at 11.44 percent.

The figure resumed an up-tick in 2019 when the nation held a general election and as at December 2019, it had risen again to 11.98 percent. Additionally, the closure of land borders by the federal government in August 2019 to curtail the smuggling of staple food commodities like rice, cooking (vegetable) oil, poultry, tomato, flour and pasta also added to push inflation higher within the year. For 2020, it has trended up continually for all the four months in the year, closing the first quarter (Q1’20) at 12.26 percent before rising again to 12.34 percent in April due to a combination of the coronavirus-induced lock-down instituted by the Federal Government coupled with the negative pass through impact of naira depreciation on both the core and food basket, which stoke upward pressure on consumer prices during the month.

Financial analysts and economists are projecting further rise in the number in May and over 2020 due to the effect of the on-going COVID-19 crisis on food prices.

For analysts at Cordros Capital, aside naira weaknesses, which bled to both the core and food basket, the impact of supply chain disruption, occasioned by the COVID-19 outbreak, is now becoming a lot more evident on Nigeria’s consumer prices, especially the food basket. They said: “While we do not downplay the second-order impact of naira depreciation on the core basket, we believe higher energy and transport prices also added another layer of pressure to April inflation, since they both account for about 45 percent of the core basket. For May, while the troika impact of planting season and lean season in the North and South, continued naira down-slide, and rising incidence of COVID-19 cases should have ordinarily pressured headline CPI in May, we believe that a favourable high base from the corresponding period of last year will place a ceiling of CPI up-trend. Against that backdrop, we now look for m/m headline CPI of 1.11 per cent, cascading to flat y/y inflation at 12.34 per cent.”

Also, analysts at United Capital, said: “In May, we expect the pressure on the headline inflation rate to persist. The fundamental drivers will remain food prices as interstate travel restriction and land border closure, coupled with the fact that Nigeria is currently in the planting season remain part of the narrative. Dissecting the core inflation, the pressure point remains increase in prices of health care products and services as well as transportation.

“In addition to that, the scarcity of FX and high rate at the parallel market, coupled with the global supply chain disruption will keep prices of household appliances and imported items high. On the other hand, decrease in PMS prices and restriction of movement in the month of May will reduce the impact on core index. Bearing all the above points in mind, we expect m/m inflation to tick up to 1.1 per cent from 1.0 per cent. In extension, we expect y/y inflation to increase from 12.34 per cent to 12.38 per cent.”

Source: Vanguard

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