The Spectre of High Inflation Haunts Nigeria


Wednesday, January 06, 2016 8.14AM / FDC


CPI to nudge further to 9.5%


FDC is projecting a headline inflation of 9.5% for December 2015, marginally higher than the 9.4% recorded in November. This will rank Nigeria as the country with the 12th highest inflation rate in Africa. The 0.1% increase estimated in the consumer price index is consistent with the moderate uptick recorded between November and December in both 2013 and 2014. It will be the highest level since February 2013.


Inflation rate increased 9 times out of the 12 months in 2015. Is this rising inflationary trend transient or structural? Though the inflation rate may not be totally transient, a consistent but transient trend becomes self-fulfilling over time. 


The major factors contributing towards the rising price level in 2015 are cost-push in nature. These factors include exchange rate pressure, intermittent fuel scarcity, policy uncertainty and trade restrictions.  In December, the naira depreciated significantly in the parallel market to an all-time low of N280/$, further compounding shortages of imported products. Increased demand due to seasonal festivities resulted in higher food prices.


Furthermore, the fuel scarcity that spilled over from November led to a spike in transport fares. The full effect of the cost-push factors has been muted by the decrease in money supply growth (annualized) of -5% and a reduction in the price of diesel to N107. 



Inflation outlook for 2016


With government spending expected to increase in January/February, money supply will also expand. Consumption pattern in January would most likely be driven by market anticipation. Inflation expectations in Q1 will be a function of:

1. Disbursement by the FGN and states for the 2016 budget outlay

2. The fiscal bail out for the states

3. Expectation of social intervention of feeding and school programmes

4. Impact of the increase in electricity tariffs by an average of N12kwH

5. Fuel subsidy removal


These factors may result in a marginal but significant increase in inflation in Q1, with year end inflation rate inching towards a level of 11-12%. The good news is that the price inflation range of 20% (11-9.5) will be lower than the GDP growth range of 40% (4-2.8). In other words, output growth will be higher than consumer price increases. As the CPI is much slower than the rate of growth in GDP, inflation will bottom out and decline in the long term.


Urban prices decelerated in December


The FDC Lagos urban inflation index increased marginally to 12.36% in December, up 0.06% from 12.36% in November. 


The year-on-year (YoY) food index increased to 16.12% from 15.09%, while the YoY non-food index decreased to 10.45%, from 10.89% in November. The increase in urban inflation was driven by the rise in food prices due to preparations for the Christmas celebration as well as logistic challenges due to fuel scarcity.

Inflationary pressures across Sub-Saharan Africa (SSA)


There is a rising inflationary trend across SSA. Angola, the second largest African oil producer, had a significant increase from 12.40% in October to 13.29% in November. This increase was fuelled by a reduction in the country’s foreign exchange earnings and the depreciating kwanza. Kenya also witnessed a steep rise in its inflation rate in December to 8.01% from 7.32% in November; driven by the increase in the prices of food and non-alcoholic beverages, alcoholic beverages as well as the increase in excise duties on cigarettes.


Furthermore, South Africa also witnessed an uptick in consumer prices from 4.7% in October to 4.85% in November. This rise was driven by higher costs of household items. Uganda and Zambia both had increases in inflation rate for December. Uganda’s inflation rate rose from 9.1% in November to 9.3% in December, driven mainly by an increase in core inflation and energy prices. Zambia’s inflation rate jumped from 19.5% in November to 21.1% in December, driven mainly by a weaker currency and higher electricity cost.


The respective monetary policy committees of these countries have responded to the rising inflationary trend mainly by increasing their interest rates or maintaining status quo. Countries that maintained their interest rates include Kenya and Uganda. Angola raised its interest rates from 10.5% p.a to 11% p.a in December, South Africa raised its rates to 6.25% p.a in December, and Zambia raised its rates by 300 bps to 15.5% p.a in November.



Upcoming MPC meeting


The next MPC meeting is in two weeks, at a time when there are mixed signals on the direction of monetary policy in Nigeria. The CBN is expected to announce a new forex policy which will give it the flexibility to bring the external and domestic economic variables into equilibrium. This may include the announcement of a new exchange rate band, with a floor of N185 and a ceiling of N220 during Q1 2016. 



Likely Market Response

Interest Rates 


Money market rates are already at an all time low. We expect to see a creeping up of rates as the level of government borrowing increases. 


External Reserves 

Nigeria’s external reserves are below $29bn. The anticipated adjustment in the exchange rate band is expected to slowdown the rate of depletion, as the demand pressure eases. However with oil prices still soft at $37pb, the likelihood of an accretion is slim. 



Stock Market 

While the increasing inflationary trends will have investors worry about their returns, the major drivers of stock market activities will be macroeconomic uncertainties and likely further increases in US  interest rates. Furthermore, expected Q4 earnings is will be another determinant of stock market performance. The bearish trend in the stock market is expected to continue in the near term.

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