| Nigeria Economy |    1555 VIEWS  |
| Nigeria Economy | |
| 1555 VIEWS | |
 | |
| PROSHARE | |
| PROSHARE | |
Tuesday, March 10,
2020 / 08:53 AM / by FDC Ltd / Header Image Credit: Ventures Africa
We are projecting a 0.17% increase in the Year-on-year
inflation to 12.30% for February. This will be the 6th consecutive monthly
increase and a 22-month high. While inflation has maintained an upward
trajectory, the rate of increase in the index has declined, indicating that the
base year effect is waning.
In addition, the CBN's unorthodox policies have seen
interest rates declined sharply by an average of 10%. This has led to a
significant drop in interest income and a squeeze in consumers purchasing power.
The income elasticity of demand suggests that a squeeze in income will lead to
a reduction in the quantity of goods that would be demanded.
In the past years, food inflation has been the major
culprit of rising inflation in Nigeria and is expected to jump to 14.98% from
14.85% in January. The impact of the partial closure of the land borders is
taking a toll on food prices and creating shortages. All the other inflation
sub-indices are expected to move in tandem with the headline inflation. Month-on-month
inflation (a better reflection of market realities) is projected to increase to
0.88% (11.09% annualized) from 0.87% (10.92% annualized) while core inflation
is likely to rise by 0.05% to 9.40%.
The other inflation stoking factors include higher logistics
costs, VAT hike and lower interest rates. The average lending rate fell sharply
by approximately 500bps to 15%, increasing money supply. Broad money supply was
up 4.99% to N28.42trn in November 2019.
FBN PMI at a 6-month low
The Purchasing Managers index, which measures the
health of the manufacturing sector, fell for the second straight month to 51.7
points in February from 53.6 points in January. More importantly is that all
the five sub-indices declined with the output level declining the most and the
suppliers delivery times in the positive region. The reduction in the output
level can be largely attributed to lower supply of raw materials due to
insecurity in the North.
OMO restrictions boost
system wide liquidity
The fallout of the restriction of OMO purchases to
banks and foreign investors was an increase in system wide liquidity as matured
OMO bills for individuals and local corporates were not ploughed back into the
money market. Currency in circulation spiked by 10.91% to N2.44trn in November
2019.
Peer Comparison - Mixed
movement in Inflation - 5 Reds, 1 Green, 1 Amber
Most SSA countries are likely to witness falling
inflation due to a sharp drop in the price of petroleum and lower energy costs.
Transport and energy costs have been one of the major drivers of inflation in
Sub-Saharan Africa in the past.
Central Banks in advanced economies are leaning more
towards an accommodative monetary policy to cushion the effect of the Covid-19
virus on aggregate demand. The US Fed cut benchmark interest rates by 50bps to
1.0-1.25%p.a. - the highest cut since the 2008 financial crisis. This will most
likely reduce the debt service burden of African countries. There is an
expectation that the Fed may cut another 50 basis points at the next meeting on
March 17/18.
Concluding Thoughts
The upward inflation trajectory and the continuous
depletion of the external reserves will be major considerations at the MPC
meeting on March 23/24. This increases the chance of a more tightened monetary
policy stance.
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