| Nigeria Economy |    1545 VIEWS  |
| Nigeria Economy | |
| 1545 VIEWS | |
 |
Tuesday, August 20, 2019 Â /09:24AM / By FDC / Header Image Credit: NBS
The National
Bureau of Statistics (NBS) released July inflation numbers on Friday. As was
widely anticipated, it declined by 0.14% to 11.08%. Nigeria is now the country
with the 8th highest inflation in the African continent. In the region, average
inflation in 2019 is projected to be 8.4%. Nigerias inflation has consistently
been above the regional average in the past few years. The National Bureau of
Statistics (NBS) released July inflation numbers on Friday. As was widely
anticipated, it declined by 0.14% to 11.08%. Nigeria is now the country with
the 8th highest inflation in the African continent. In the region, average
inflation in 2019 is projected to be 8.4%. Nigeria’s inflation has consistently
been above the regional average in the past few years.
It is worth
mentioning that food inflation dropped to 13.39% from 13.56% in June. In the
last year, the food basket has been mostly responsible for the direction of
inflation. This is because it accounts for more than 50% of the weight in the
general basket. The food index declined by approximately 0.60% in the last two months
due to a number of factors including a favourable harvest.
However,
other inflation stoking factors that have been benign are likely to become
potent in August and September. These factors include, the minimum wage
implementation and the adjustment in the exchange rate for computing custom
duty which moved to N326/$ from N305/$. Assuming that 60% of all goods imported
attract a duty, the shift from N305/$ to N326/$ will have a pass through effect
of approximately N25.7bn. The apex bank is also contemplating adding dairy
products to the list of items restricted from forex. Annual dairy imports is
estimated at $1.2bn. In recent times, the President directed the CBN to
prohibit forex access for all food imports. This could push up commodity prices
and stoke inflation. In Q1'19, food imports was estimated at $1.1bn, 10.7% of
total imports. Imported food inflation in Q2 was 15.72%, 2.04% higher than
domestic food inflation.
Data
Breakdown
Month-on-month
inflation slides to 1.01% in July
The
month-on-month index, a more accurate measure of price movement slowed to 1.01%
(12.77% annualized) in July from 1.07% (13.69% annualized) in June. This was
supported by lower food prices as well as a decline in diesel costs. The
average price of diesel fell by 6% to N222/ltr in July. This reduced
distribution and logistics costs by approximately 5%.
Food
inflation dipped by 0.17% to 13.39%
The annual
and monthly food indices eased by 0.17% and 0.10%, to 13.39% and 1.26% respectively
in July. This was primarily as a result of a favourable harvest. During our
survey in July, we noticed that the prices of major food items such as
tomatoes, onions and beans declined. According to the NBS, the price of food
items such as bread and cereals increased. However, the global cereal price
index declined by 2.7% to 168.6 points in July. These commodities have high
import content and are exchange rate sensitive. Thus the adjustment in the
exchange rate for computing custom duty to N326/$ from N305/$ most likely
pushed up their prices. Imported food inflation rose to 16.39% in July from
15.75% in the preceding month.
The president
has directed the CBN to prohibit forex for food imports in order to promote
self-sufficiency in food production and preserve the forex reserves (which lost
$700mn in the last month). Although the move would encourage backward
integration and support agric sector growth, it could push up food prices in
the coming months as Nigeria is highly food import dependent.
Core
inflation down to 8.80%
The
year-on-year core index declined to 8.80% in July from 8.84% in June. However,
the core inflation curve is flattening out, implying that core inflation is
gradually reaching an inflection point. On a monthly basis, it was down 0.08%
to 0.77%. This sub-index has benefitted from a relatively stable exchange rate.
The naira traded within the tight band of N360-N361/$ at the parallel market.
At the IE window, the currency traded within the band of N360-N362/$. The
figure shows that the naira is more expensive at the IE window than the
parallel window. This has widened the average spread between IE rate and
parallel market rate to 0.30% from -0.15% in June. Most transactions are done
at the IE window. By implication, we could see a shift to the parallel market,
thus, increasing demand pressures. The exchange rate at the parallel market
could depreciate to N370/ $ in the near term.
The items
that recorded the highest price increases were: medical and hospital services,
cleaning, repair and hire of clothing, footwear and household appliances. Core
inflation is 2.34% below the 364-day primary market T/bills rate of 11.14%.
This is indicative of a positive rate of return on investment.
Urban &
rural indices sustain downward trajectory
The
year-on-year urban and rural inflation rates slowed to 11.43% and 10.64% in
July from 11.61% and 10.87% respectively in June. On a monthly basis, both
indices dropped by 0.03% and 0.09% to 1.07% and 0.96% respectively.
State by
State Analysis - Kwara, the best performing state
Kwara state
had the lowest inflation rate (7.93%), followed by Delta (8.76%) and Cross
River (8.87%). Delta state being the only major oil producer in the low
inflation category does not confirm any distinct correlation between high oil
revenue and low inflation in Nigeria. The states with the highest inflation
rates are in the North West Kebbi (15.41%), kano (13.47%) and Zamfara
(13.13%).
What Next?
Headline
inflation in Nigeria has declined in the last two months but is not likely to
be sustained as money supply saturation takes it toll and cost push factors add
pressure to the price basket. The key issue remains whether the MPC and the CBN
are swayed to become more accommodative like most Central banks in the advanced
economies.
In
contemporary economic thinking which is strongly supported by empirical
studies, policy makers are placing greater emphasis on anticipated inflation as
against historical data. At Jackson Hole Wyoming this week, Jerome Powell, the
Fed Chairman is going to share some of his views and those of big thinkers as
to what markets should expect as against what the Twitter in Chief is
contemplating.
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