Nigeria Economy | |
Nigeria Economy | |
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Thursday, December 12, 2019 10:33AM / by FDC/ Header Image Credit: FDC
Based on our survey, headline
inflation for November is projected to increase to 11.88% from 11.61% in
October. In the last six months, headline inflation has increased for three
months. If our projections are accurate, it will be the fourth month of rising
inflation.
In recent times, there have been more
factors stoking inflationary pressure, despite the recent growth in output
recorded in Q3 (2.28%). Factors such as the border closure, lower interest
rates and increased liquidity have impacted negatively on the consumer price
index. The border closure has led to a spike in the prices of commodities such
as rice, chicken, and turkey while lower interest rates are a disincentive to
save. The average yield on T/bills is now 4.24% below headline inflation,
resulting in negative real rate of return. Hence people are likely to spend
rather than save. This has increased the demand for goods. The level of
liquidity has also increased as reflected in the 3.95% increase in the credit
to private sector. Although, the CBN have achieved the dual objectives of lower
interest rates and higher loan extension to the private sector, heightened
inflationary pressures and the steady depletion of the external reserves could
trigger a change in policy in the near term.
Month-on-Month Inflation Expected to stay flat at 1.06%
The month-on-month inflation (a more
relevant measure of prices) is projected to remain flat at 1.06% (13.49% annualized)
in November. Commodity prices moved in different directions in November, while
tomatoes and pepper declined, garri and rice recorded price increases.
Determinants of Inflation
Money Supply
Money supply is a key determinant of
the general price level. In October, M2 grew at an annualized rate of 2.07% to
N27.63trn. We anticipate a further increase in broad money supply in November
as banks increase lending to credit worthy customers in a bid to meet up with
the CBN's 65% LDR directives. In November, OMO maturities surpassed total OMO
sales (N849.31billion), resulting in a net inflow of N1.05trillion.
Interest Rates
While the anchor rate (MPR) has been
left unchanged at 13.5%p.a since March 2019, the CBN's unorthodox policies have
seen lending rates declined by an average of 400 basis points in the last four
months. Lower interest rates incentivize consumers and corporates to borrow
more, thus increasing the amount of money in circulation. This is evidenced by
the spike in credit to the private sector to N25.80trn in October from
N24.82trn in August. Currency in circulation increased to N2.06trn in October
from N2.02trn in August.
Exchange rate
The exchange rate was relatively
stable across all market segments in November. At the parallel market, the
naira traded between N359/$-N360/$. Exchange rate stability is expected to have
a positive impact on core inflation which is expected to decline marginally to
8.86% from 8.88% in October.
Peer Comparison - inflationary pressures across Sub-Saharan Africa
Regional inflationary trends have been
increasing in the past months. Three of the six SSA countries under our review
have released their inflation figures for November, all posting increases.
Rising food prices was a common factor responsible for the uptick in inflation.
With the unfavourable weather condition across the African region, flood and
storms have affected farm produce in countries such as Kenya and Uganda,
leading to reduced food supply and higher prices.
With the exception of Kenya and
Uganda, all the SSA countries under our review kept their benchmark interest
rates unchanged at their respective MPC meetings.
Outlook: Festive demand to heighten inflationary pressures
We expect commodity prices to increase
in the next few weeks due to increased seasonal demand. The increase in price
could be further exacerbated by the impact of border closure. In addition, the
minimum wage payment especially in Lagos will boost consumer disposable income
and increase aggregate demand. Hence, headline inflation will most likely
increase in December.
Related
News on Inflation
Related News on Border Closure
1.
Consumers May Frontload
Festive Purchases On Border Concerns -
2.
Nigeria's
Foreign Minister Onyema, Lists Four Conditions For Reopening Borders
3.
FG To Extend Border Closure Till January 31,2020
4.
We Don't Have a Rice Problem - Understanding Sovereign
Comparative Advantages - Tosin
Adeott, Nov 04, 2019
5.
Lagos-Ogun Partnership for Economic Development - Thoughts
on What Is Possible - Olufemi
Awoyemi, Nov 03, 2019
6.
FG To Extend Border Closure Till January 31,2020 - Customs, Nov 04, 2019
7.
The Economics of the Rice Conversation - Between A Rock
and a Hard Place - Oct
31, 2019
8.
The Effects of Nigeria's Closed Borders on Informal Trade
with Benin - Brookings - Oct
30, 2019
9.
Thoughts on Nigeria's Rice Bubble - Fasua - Oct 25, 2019
10.
Border Closure Takes Its Toll on The Price Of Rice - FDC, Oct 22, 2019
11.
Inflation Succumbs to Border Closure and Money Supply
Growth - Spikes to 11.24% -
FDC, Oct 16, 2019
12.
Border Closure Hitting the Price of Rice - CSL Research, Oct 04, 2019
13.
Border Closures May Only Offer Temporary Subsidy Reprieve - CardinalStone Research, October 11, 2019
14.
Effects of Closing the SEME Border - Coronation Research, Oct 15, 2019
15.
Border Closures Begin to Take Toll on Prices - CardinalStone Research, Oct 15, 2019