| Nigeria Economy |    1911 VIEWS  |
| Nigeria Economy | |
| 1911 VIEWS | |
 |
Monday,
October 12, 2020 / 10:14 AM / By FDC / Header Image Credit: FDC Limited
Our monthly market survey shows that there was a
further build-up in inflationary pressures in September in both the food and
non-food basket. This points to an increase in headline inflation towards a
range of 13.56%-13.63% in September and further reaffirms analyst consensus that
inflation will continue its upward trajectory in Q4'20. Our findings show that
supply chain disruptions (logistics) and output constraints (flooding and
security challenges) combined with money market saturation are likely to exert
upward inflationary pressures. This will be further compounded by the
electricity tariff hike, currency weakness and forex scarcity. Although, the
electricity tariff increase was suspended for two weeks, its impact on domestic
commodity prices was benign.
All
other inflation sub-indices are expected to move in the same direction with the
headline inflation.
Higher food inflation could be a ticking time bomb
Food
inflation increased for the 6th consecutive month to 16.0% in August and is
projected to rise again to 16.54% in September in spite of the harvest. This is
largely due to supply shortages triggered by flooding and rising insecurity in
the food belt. The domestic supply shortfalls coincide with the CBN's forex ban
on finished food and fertilizer imports. This raises concerns about the
possibility of a food crisis in Nigeria. The rise in food prices amidst
currency adjustments, hike in PMS price etc. has also resulted in a discourse
about the idea of food security in Nigeria. Lack of food availability and
accessibility, higher unemployment and rising poverty levels could increase
social unrest in the country.
Addressing
the challenges surrounding the four components of food security (access,
affordability, utilization and stability) in Nigeria would involve a deliberate
effort by policymakers to set aside contingency funds and engage key
stakeholders. This would aid food consumption and reduce the national poverty
level.
Alignment of policy goals is crucial for economic recovery
The
unprecedented COVID shock further accentuates divergent views among economists
and policy makers in revitalizing the economy. While some are of the Keynesian
school of thought, others are in support of the Milton Friedman school.
However, in times of economic uncertainty, alignment of policy goals and
coordinated execution helps to reduce investor anxiety. Forex rationing,
negative real rates of interest and countercyclical spending are used to
increase output and moderate price inflation.
We are
also of the opinion that while stimulating the economy is paramount, increasing
government spending without tackling the underlying structural defects could
stoke inflationary pressures without a significant positive impact on GDP
growth and employment. It is also important that the Central bank's autonomy is
not compromised to prevent falling into an inflationary trap.
Concluding Thoughts
Inflationary
pressures will most likely intensify in the coming months. Q3 GDP is also
scheduled to be released on November 23rd (same day as the MPC meeting). If the
numbers come in worse than expected, the outcome meeting will be a tough call.
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