Friday, July 17,
2020 11:45 AM / Proshare Research/ Header Image
Inflation has become a bugbear as uncertainty about local supply chains, rising job losses and falling real interest rates discourage capital importation and foreign direct investment (FDI). Data released today by the National Bureau of Statistics (NBS) shows that Nigeria's inflation rate for June 2020 stood at 12.56%, the highest in 26months. The steady rise in the inflation rate has been attributed to the continuous spread of the coronavirus pandemic and variety of statewide lockdowns which disrupted domestic manufacturing (see Chart 1 below).
Chart 1: Nigeria's Inflation Rate (%)
Source: NBS, Proshare Research
Local consumers have had to cope with the roughest end of a hard inflationary stick in H1 2020 as food price increases escalated on the back of lower farm yields, higher transportation costs and a rise in domestic banditry that has affected farming communities and reduced farmgate output. According to NBS data bread, potatoes, yam and other tuber food items have risen noticeably; fruits, oils, meat, fish and vegetables have been major causes of an increase in the domestic food price index while the rise in prices of medical and hospital services, road surface passenger transport, pharmaceutical products, motor vehicles, bicycles, motorcycles, vehicle spare parts and other services in respect of personal transport equipment added to the mix of principal contributors to the inflation rate for non-food items (see Charts 2&3 below).
Chart 2: Nigeria's Food Inflation Rate (%)
Source: NBS, Proshare Research
The country's rising inflation further dampened growth prospects and contributed to a rise in the nation's misery index. Uncertainty as regards jobs (the consequence of COVID-19), worsened pre-existing low domestic disposable income. The rise in the domestic cost of goods and services was to be expected in H1 2020 as the government in a bid to curb the spread of the coronavirus mandated social distancing among users of commercial transportation and prohibited interstate travels for an extended period. Road transporters had to reduce the number of passengers and double the cost of commute per passenger. Disruptions to global supply chains for automobiles and parts have further worsened Nigeria's inflation rate with local prices rising for motor vehicles, bicycles, and vehicle spare parts elbowing prices up to cover replacement cost considerations.
Chart 3: Nigeria's Core Inflation Rate (%)
Source: NBS, Proshare Research
The rise in the cost of hospital and paramedical services was equally predictable. With a continued rise in the cases of COVID-19, the country's medical services and facilities have been stretched thin. The pressure on medical facilities has pushed up the prices of hospital services and pharmaceutical products. News of proposed drugs as a potential cure for the virus has pushed up the prices of pharmaceutical products. Disruption to the global supply chains for pharmaceutical products coupled with Nigeria being a net importer of pharmaceutical products has adversely affected the price of medicines.
Inflation To Grow Into A Bigger Bear
As the world waits for a vaccine for COVID-19, most economies continue to struggle with the spread of the virus and the adverse consequences on their economies. Nigeria is still in the early days of economic disruption with cases of the virus growing steadily as testing numbers per day improve.
The health challenges of COVID-19 and the consequent response of the governments at national and sub-national levels to partial or total lockdowns either targeted at high-risk locations or broad statewide coverage would determine the future course of domestic inflation as a cutback in farming. Local manufacturing and transportation will see a spike in food prices and a worsening of the inflation rate to between +14% and +16% by the end of the year. By applying the economist's rough rule of 70, it means that if the inflationary trend persists, the value of a Naira in consumer's wallets would be worth 50% of today's value in five (5) years or by 2025.
Also, as automobile firms in Germany, the US, and the UK re-open gradually as lockdowns begin to ease, it may be reasonable to expect that automobile and spare parts cost will slowly decline, thereby tempering inflationary pressure as local transportation cost eases. The recovery of the global automobile industry may send an optimistic signal to the domestic transportation market.
It must be noted that the attitude of
Nigerians to the government's policy of social distancing and the wearing of
face covers to curb the spread of COVID-19 will play a critical part in
flattening the virus curve. The lack of full compliance with the government's
directives, however, could worsen the virus caseload numbers and put pressure
on the government to again impose fresh lockdown measures, which would shut
down agricultural production, transportation and other business activities. The
consequence of this would be a further rise in domestic inflation rates in both
Q3 and Q4 2020.
Given deteriorating global economic trends (the global economy is expected to contract by -8.4% according to a recent world bank publication), the rising number of recorded COVID-19 cases locally, and a likely slowing down of domestic Nigerian GDP growth in Q2 and Q3 2020, the country may see a rise in domestic inflation rate till the end of the year.
Flogging Households With An Inflation Stick
An increase in inflation suggests a decline in consumer's disposable income or purchasing power. The consequence is that as inflation rises the value of a Naira in a household biggy bank evaporates. Household savings become worth much less than they were at the time of putting the money in the bank as deposit rates at between 1% and 2% are far behind the recent inflation rate of 12.54%. As things stand savers are paying banks for keeping their money and the government is taxing the average household for being brave enough to hold their cash wealth in Naira. To make things worse for the household, there has been a rise in cost domestic cost of healthcare and transportation thereby reduce living standards. If the trend continues, it may be expected that there would be a fall in future consumer demand, productivity, and manufacturing and service output.
CBN's Policy Headache
The CBN's price stability function
has been thrown into confusion. The need to stimulate the economy to combat the
job losses, manufacturing shutdowns and logistic disruptions caused by COVID-19
has made it difficult for the CBN to tighten the money supply. With the fiscal
authorities looking for money to maintain acceptable levels of domestic
production despite the health challenges, the CBN is patched into an inevitable
policy support response regardless of rising domestic inflation rates.
The economy recorded a growth rate of +1.87% in Q1 2020, lower than the +2.1% in the contemporary period of 2019 and much lower than the +2.55% by the end of the previous year. COVID-19 has disrupted several activities in sectors such as the Oil & Gas sector, the fast-moving consumer goods sector (FMCGs), and the banking sector. Companies are struggling to survive, finding it difficult to access and repay loans (leading to potential non-performing loans (NPLs) problems for the financial sector). The Central Bankâ€™s monetary policy committee (MPC) meeting (July 20 and July 21 2020) may need to confront the headwinds that are billowing. The CBN will need to face the task of designing a monetary policy that maintains price stability as well as promotes economic growth. The CBNâ€™s top agenda at the MPC meeting would be to mitigate the rising inflation rate amid the pandemic without adversely affecting growth, this is like running a hundred-metre dash with feet tied.
Analyst predicts that the CBN would reduce CRR to increase the domestic money supply to the real sector while other policy indicators are left unchanged. The dominant thinking among financial and business analysts is that the CBN will trade economic growth for rising inflation, in other words, the Bank is damned if it does and is damned if it does not.