Review of Electricity Tariff and Petrol Subsidy Removal would Shape Nigeria's Inflation in 2021

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Tuesday, May 18, 2021 / 12:07 PM / Ottoabasi Abasiekong for WebTV / Header Image Credit: WebTV


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A likely review of the electricity tariff in June, and the possible removal of subsidy payments for petroleum products supply would mount pressure on inflation in Nigeria.  Mr. Ebo Ayodeji the Head of Retail Investments, Chapel Hill Denham, disclosed this in a recent discussion on "Rising Inflation: Implications For the Nigerian Financial Market".

 

With the latest figure of inflation released yesterday which showed that core inflation stood at 18.12% while food inflation as of April 2021 was 22.75%, the analyst argued that the two key scenarios would shape the direction of inflation in the year.

 

He noted that issues like structural bottlenecks, insecurity, and the effects of the border closure led to a spike in inflation in 2020 and Q1 2021. Acknowledging the position of economist Dr. Doyin Salami (Chairman, Presidential Economy Advisory Committee) that "17% is the threshold by which inflation directly reduces output in the economy", he said it was clear that in a high inflation regime the price of inputs reduces outputs.

 

This according to him leads to low purchasing power parity for citizens and affects socio-economic activities in the country.

 

Speaking on the implications for the financial and capital market he said that investors would be forced to seek investment opportunities that could give higher returns because of the erosion of their purchasing power by inflation.

 

He noted that the interest in investments has risen as investors weigh their risk appetite for instruments like Treasury Bills, hoping they could find better returns elsewhere.

 

For the equities market, he pointed out that the interest of investors would be around getting larger dividends from their shares. He alluded to the fact that there was the need for intentional alignment between fiscal and monetary policies to create an enabling environment for domestic and foreign direct investments in the country.

 

Expressing his opinion on the Central Bank of Nigeria (CBN) Monetary Policy Committee (MPC) meeting scheduled for next week, Ayodeji believed the approach would be to consider the difficulties of "Cost-Push" domestic inflation.

 

He added that the MPC would possibly take action to head off inflationary pressures if there was an increase in the money supply in the economy, which needed to be checked to avoid a surge in the domestic headline inflation rate which settled at 18.12% in April 2021.


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