| Nigeria Economy |    2158 VIEWS  |
| Nigeria Economy | |
| 2158 VIEWS | |
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| PROSHARE | |
Friday,
December 18, 2020 / 09.29 AM / By FDC Ltd / Header Image Credit: Sahara Reporters
The Federal Government has ordered an immediate
re-opening of four of its critical land borders. The borders were closed in
August 2019 to minimize smuggling of rice, ammunitions, and narcotics among
others. This move has inhibited regional trade, which contributes approx.
13.88% to GDP and account for 16.9% of total employment. Informal trade has a
significant share in Africa's regional trade, accounting for approx. 30%-40%.
The region has a GDP size of $2.6trn, with Nigeria accounting for about 21.9%.
With talks on the ECO currency and the AfCFTA commencing in January 2021, the
re-opening of the land borders will boost regional trade and integration.
The border re-opening is happening at a time when the
country's inflation rate is at its highest level in almost three years. In line
with our forecast (14.8%), headline inflation rose by 0.66% to 14.89% in
November, making it the 15th month in a row that inflation will be increasing.
The month-on-month inflation, when annualized is now above the 20% threshold
(20.99%).
A number of analysts have attributed the continued
spike in inflation to the prolonged closure of the land borders. While this
seems true, attributing pricing pressures to only border closure could be
misleading. More than anything else, forex scarcity, restrictions on food
import and rationing have exerted pressures on the food basket, pushing food
inflation to a 34-month high of 18.3%. Its impact was further compounded by
capacity constraints among local farmers, boost in market liquidity, higher
logistics costs and electricity tariff hike. Even though annual core inflation
(inflation less seasonalities) declined (11.05%), the sharp increase in the
monthly core sub-index (1.96%)is an indication that the impact of the increases
in electricity tariff and PMS price is beginning to manifest. More so, the
decline in the annual core index is unlikely to be sustained in the coming
months.
The border re-opening is expected to ease supply
constraints and reduce the country's food demand gap. This may be an antidote
to rising inflation. However, inflation is likely to remain in double digits
until the lingering insecurity challenges, monetary and forex pressures are
addressed.
Inflation consistently
above the CBN's target
In the last 5-years, headline inflation has
consistently remained above the CBN's target (6-9%) in spite of its inflation
targeting monetary policy framework. The framework allows the Central Bank to
set an inflation target and adjust monetary policies to achieve the target. For
the framework to be effective, an accommodative monetary stance is usually
adopted when inflation is above the set target. Hence, with the steep rise in
inflation, which is likely to continue in the coming month, the CBN could be
forced to reverse its monetary policy stance in line with its monetary
framework. The CBN has also noted that inflation rate above 12% is growth
retarding. With inflation fast approaching the 15% threshold, growth prospects
remain low.
Inflation breakdown
Core inflation down to 11.05%despite increase in cost-push factors
Core inflation (inflation less seasonalities) declined
by 0.09% to 11.05% in November. However, on a monthly basis it increased by
0.71%to 1.96%, reflecting the increases in PMS price and electricity tariff.
The highest increases were recorded in prices of passenger transport by air and
road (due to a pickup in travel demand as the festive season approaches),
pharmaceutical products, medical and artisan services like vehicle repairs and
hair dressing salon costs.
Food inflation at a 34-month high due
to supply constraints
The food sub-index remained the major driver of
inflation. It crossed the 18% threshold to 18.3% due to capacity constraints
among local farmers, border closure, forex restrictions and rationing. The
continued attack on farmers has depleted food reserves and increased the
chances of Nigeria falling into a food crisis in the coming months. An increase
in the price of major staples and higher living costs could deepen poverty
levels. The World Bank estimates that 6.6 million Nigerians would slip into
poverty in 2020.
Rural and Urban
The rural and urban sub-indices increased to 14.33%
and 15.47% respectively. Urban inflation rose at a faster pace and this could
be partly due to higher costs of living and food prices.
State-by-State Analysis
The states with the highest inflation are
predominantly in the North - Kogi (19.81%), Bauchi (19.67%) and Zamfara
(17.3%). While the states that recorded the lowest inflation rates were Abia
(13.26%), Delta (13.2%) and Kwara (12.24%).
SSA Regional Trend
Of the seven SSA countries tracked, inflation
increased in four while it eased in three. The rise in inflation was primarily
due to higher food prices. Monetary policy rates were also left unchanged in
all the countries. However, it is noteworthy that countries that have higher
interest rates than their inflation tend to have stable currency.
Outlook
We expect inflationary pressures to persist in the
coming months. The re-opening of the land borders will slow the pace of
increase in food inflation. However, Nigeria's inflation will remain in double
digits until the lingering insecurity challenges, monetary and forex pressures
are addressed.
Credits
* This post was first published on FDC Economic Bulletin on
Thursday, December 17, 2020.
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