By Chinwendu Obienyi
Several years ago when Nigeria displayed resilience against inflation menace as other countries across the globe, waged war on rising prices, Africa’s largest economy experienced periods of cooling inflation.
This was a welcome development for the Central Bank of Nigeria (CBN) and gave vent to its decision to keep interest rates unchanged in an effort to stimulate economic growth.
However, the big story today is that Nigeria’s annual inflation is back on the rise – accelerating for the fourth straight month to 17.71 per cent in May. This figure was the steepest inflation rate since last June, fueled by rising food prices, soaring diesel prices, and ongoing dollar shortages.
On top of this, surging global commodity prices and pre-election spending have the potential to fuel the inflation fire – especially after the International Monetary Fund (IMF) projected prices to rise between 18 and 22 per cent in 2022.
Today also the war in Ukraine has propelled global oil prices to levels not seen since 2014.
As at the time of this writing, Brent crude was sold for $112.32/pb. This development has sent shockwaves across the world and prompted Central Banks to adopt an aggressive approach toward raising interest rates.
Hence, while other oil-producing countries are enjoying the gift of soaring commodities, Nigeria has failed to cash in thanks to sub-optimal oil production, heavy reliance on gasoline imports, and fuel subsidies meaning that the current commodities boom is not translating to higher export earnings for Nigeria but to higher costs and inflationary risks.
Inflation figures
According to the National Bureau of Statistics (NBS) report, headline inflation, on a month-on-month basis, increased from 1.76 per cent recorded in April to 1.78 per cent in May 2022. Food inflation recorded an increase of 113 basis points (bps) when compared with the previous month.
Thus, on a year-on-year (y/y) basis, imported food price inflation increased by 9bps to 17.75% y/y from 17.66 per cent y/y recorded in the previous month. Core inflation increased by 72bps to 14.90 per cent y/y from 14.18 per cent y/y recorded in the previous month.
According to analysts at Coronation Research, the figure in core inflation was due to price pressure being felt across gas, liquid fuel, garment, solid fuel and passenger transport by road. Furthermore, the housing water, electricity, gas and other fuel segment increased by 13.85 per cent y/y and 1.39 per cent month-on-month (m/m) while the transport segment recorded an increase of 15.39 per cent y/y and 1.56 per cent m/m.
“These increases can be partly attributed to the price hikes in diesel, kerosene, and aviation fuel”, they noted. While the Central Bank of Nigeria (CBN) projects economic growth at 3.2 per cent this year, the International Monetary Fund (IMF) sees the country’s growth expanding by 3.4 per cent. But with the figures reported by the NBS, Nigeria’s economic outlook remains threatened by disruptive power outages, foreign exchange shortages, capital outflows and untamed inflation with huge pre-election spending stoking more fire.
Experts react
The CBN during its last Monetary Policy Committee (MPC) meeting in May, raised the interest rate to 13.5 per cent from 11.5 per cent – the first time in two years. Justifying the raise, the CBN Governor, Godwin Emefiele, said the MPC is suspicious there might be an aggressive accretion of inflation.
He said, “After carefully reviewing developments in the two months, and outlook of growth in the domestic and global economy as well as downsides of each policy. It is clear and compelling that tackling inflation is more urgent in sequence of policy objectives. MPC urged the CBN to double its effort at supporting the priority growth-enhancing sectors of the economy.
It urged the Federal Government to do more to provide a safe and secure environment for economic activities to stimulate growth.”
Reacting via an emailed note to Daily Sun, Senior Research Analyst at FXTM, Lukman Otunuga, noted that with the CBN triggering a tightening cycle, there is expected to more hikes to limit capital outflows as there are strong rumors that the apex bank might raise interest rates by 50bps at its next MPC meeting.
“With the CBN now focused on fighting inflation and interest rates rising rapidly across the globe, more hikes could be on the table to limit capital outflows. Theoretically, the rate hikes could limit inflation risks at a time when external and domestic factors are threatening Nigeria’s economy.
The ongoing geopolitical risks, extreme weather, and supply-chain disruptions could feed the inflation monster, while pre-election spending ahead of the general elections is likely to exacerbate the negative situation. But the burning question remains whether Nigeria is in a position to handle higher interest rates? He said.
For her part, Chief Economist at Coronation Merchant Bank, Chinwe Egwim, said the apex bank in-house estimates suggest that inflation is expected to remain considerably high, partly due to expected increase in spending on the back of the upcoming 2023 general elections.
“At its last meeting, which was held in May, the MPC raised the policy rate by 150bps to 13 per cent. The committee expects the recent policy rate hike to help moderate inflationary pressure and exchange rate depreciation, reduce the speed of capital flow reversals, provide an incentive for foreign capital inflows, and sustain remittances. So we would wait to see what the committee would do at its next meeting in July”, Egwim said.