Nigeria's Double-Whammy: Inflation and Unemployment - PFI Capital


Monday, June 22, 2020/ 1:00 PM / PFI Capital / Header Image Credit: Nevada Appeal


Based on the Philips curve, there is usually a stable and negative relationship between inflation and unemployment. This is because an increase in the rate of inflation up to a point is a sign of increase in aggregate demand. Because aggregate demand has increased, firms employ more workers and that reduces the rate of unemployment. This relationship however does not exist all the time as inflation up to certain level, will increase the rate of unemployment and this is particularly true when the inflation rate is cost-push.

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Quarterly data on inflation and unemployment provides some explanations into the relationship between Nigeria's inflation and unemployment rates since 2012.


Between Q1'12 and Q1'20, we note that the quarterly inflation rate was the lowest from Q1'13 to Q4'15. This period was also when quarterly unemployment rates were the lowest. Particularly, average inflation rate was 7.8% in Q1 2014 and unemployment rate was 7.83% during the same period.


In Q4'14, Nigeria had 101.77 million citizens in the working age population of which 72.93 million were either fully employed, underemployed or unemployed, translating into a labour force participation rate of 71.7%. The number of citizens that are fully employed were 55.21 million, 4.67 million were job seekers, while 13.05 million citizens were in time related underemployment category. The National employment rate during the period was therefore 93.6% with full time employment rate being 75.7% as the national unemployment rate stood at 6.4%. In full year 2014, inflation averaged 8% which is the lowest between 2012 and 2019. In Q1'14, average inflation rate was 7.8%, while it was 8% in Q2, 8.4% and 8% in Q3 and Q4 respectively.


From Q4'15, unemployment rate hit double digit of 10.44% while inflation rate was 9.4%. With the wake of slump in oil prices, inflation rate also hit double digit (11.3% in Q1 2016) with the last double-digit inflation rate occurring in Q4'12 (12%). It was from this point that the double whammy started as Nigeria began recording increase in inflation rate brought about by the increase in the cost of purchasing raw materials which stemmed from low foreign reserve, making the CBN limit individual and business dollar spending. As such, rate of naira to the dollar increased to as high as N400/$ in the parallel market. With increase in cost of production and the country recording negative growth rate (-1.58% in FY'16), unemployment also increased as companies began laying off workers to enable them stay afloat. Inflation rate jumped from 11.3% in Q1'16 to 18.5% in Q4'16 while the unemployment rate grew to 14.23% in Q4'16 from 12.09% in Q1'16.

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Sources: NBS, CBN, PFI Capital Research


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Note: We forecast unemployment rate to be 24.35% in Q4'18, 25.62% in Q1'19, 26.97% in Q2'19, 28.39% in Q3'19, 29.88% in Q4'19 and 31.45% in Q1'20.


The unemployment rate continued its increase and reached 20.42% in Q4'17. It was also during Q4'17 that the inflation rate began increasing slowly. Inflation rate grew slowly to 15.7% in Q4'17 from 16% recorded in Q3'17. Throughout 2018, inflation rate averaged 12.1%. The average inflation rate moves from 14.3% in Q1'18 to 11.30% in Q4'18. Q2'17 was the period Nigeria exited recession, and the slow increase in inflation continued throughout 2018 as shown above, as the country continued to expand moderately. Attributed to this was the government spending its way out of recession which helped in cushioning the demand shock caused by the recession.


We note that between January and August 2019, inflation averaged 11.25%. In fact, it was on a slow rise between May and August 2019 as inflation rate slowed to 11.02% in August from 11.40% in May. However, inflation up ticked by 20bps in September and by 37bps in October as a sign of the effect of border closure in August. The May 2020 inflation rate is the 9th consecutive rise in inflation rate since it hit 11.02% in August 2019. It is worthy to note that the inflation rate of 11.02% in August 2019 was the lowest since January 2016 (9.6% in Jan'16 and 11.4% in Feb'16).


Our model suggests that Nigeria's unemployment rate has grown to 31.45% as at Q1'20 compared to the level (23.13%) it was in Q3'18. Based on the data, our simple regression analysis reveals that whenever headline inflation increases by 0.82% per quarter, rate of unemployment grows by 1% per quarter and this relationship is statistically significant. Our correlation coefficient also shows a moderate positive relationship between inflation and unemployment in Nigeria.


Hence, we note that while some countries are experiencing deflation and unemployment brought about by the global health crisis, Nigeria has been battling with Stagflation since Q1'16. Unemployment and inflation rate have been on the rise albeit slow growth, and this is in our view, not expected to go change direction with the current global health crisis. A major factor attributed to this is the disruptions in supply of goods that their demand is relatively inelastic. This is passed on to the consumers in form of high prices. As prices increase, there is a decline in competitiveness and export demand becomes lower. As such, unemployment in the external sector rises. We also do not rule out firms reducing certain investments as a result of rise inflation rate, which tends to lower the level of employment.


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