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FX Reforms Will Escalate Nigeria’s Inflationary Burden –Analysts

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FX Reforms Will Escalate Nigeria’s Inflationary Burden –Analysts
Godwin Emefiele, CBN Governor

FX Reforms Will Escalate Nigeria’s Inflationary Burden –Analysts

Foreign exchange (FX) pressure reforms will intensify core inflationary pressure in Nigeria, investment analysts at Vetiva Capital concluded in a report following recent moderation in Nigeria consumer price index.

After meeting with the the Federal Government, the International Monetary Fund, raised concerns over steep inflation and unemployment condition as well as subsidy return.

With the currency inflation in relation to the United States dollar, the local currency, Naira has lost steam as store of value with weak purchasing power amidst stagflation condition in the country. Compare with 6 years ago, households are paying more for less despite the pro-people stance of the All Progressives Alliance mantra.

“Things have not being the same. Naira is weak, there is joblessness, and inflation is rising even foreign investors are not finding Nigeria attractive”, sources told MarketForces Africa.

In June, headline inflation could ease further, as base effects come to play, said Vetiva Capital analysts in a projection while noting that blockage of foods supply to the South is a downward risk for inflation rate expectation.

Also, analysts said they note possible headwinds from the adoption of Nigerian autonomous foreign exchange (NAFEX) rate as the official exchange rate and the consequent impact in the parallel market.

“We pen down a higher print of 1.12% year on year for the month of June, from 1.01% in May, 2021 which translate to a headline inflation expectation of 17.92% year on year for the ongoing month”, Vetiva said.

Having adjusted expectation for the outer months, analysts said they now anticipate an average inflation reading of 17.34% year on year for 2021, from 13.25% in 2020.

“While food inflation has moderated, onions producer and marketers association of Nigeria mulling over stripping southern region of access to onions.

“Though this shock is not broad based, the resurgence of a food blockade across other key food items could have dire consequences for food inflation, especially if such threat re-emerge close to the harvest season.”, analysts explained.

Meanwhile, the investment firm expects prompt intervention to subdue this risk, noting that high base effects could influence further decline in food inflation to 21.79% year on year in June.

“Going forward, we note headwinds from the proposed addition of wheat and sugar to the restriction list and tailwinds from the reopening of the borders.  Thus, we expect an average food inflation of 21.11% year on year in 2021 from 16.11% in 2020”, Vetiva Capital stated.

Vetiva Capital analysts added that with new foreign exchange pressures on the scene, core prices could remain elevated in the near term as Naira slips below N500 for a dollar in the parallel market.

“Thus, we envisage a sustained rise in core inflation to 13.36% year on year in June, This translates to an average core inflation outcome of 13.05% for 2021 from 10.29% in 2020”  

Recalled that the nation’s headline inflation moderated for the second time in a row to 17.93% year on year in May, as against 18.85% projected by analysts.

“While this seems contrary to anecdotal evidence, we believe the high base effect was the primary driver of the moderation in the headline figure, as the reopening of economy, restoration of supply chains and reopening of the land borders eased pressure on the headline figure”, Vetiva Capital said.

It was however noted that on a month-on-month basis, headline inflation rose at a faster pace by 1.01% compare with 0.97% reading in April, 2021. 

Overall, food prices rise but at a slower pace compare with what market had witnessed in the previous 19 months uptrend before consumers price index tempered.  

Although food inflation eased to 22.28% year on year -outperforming Vetiva’s 22.78% by 50 basis points – from 22.72%  in April 20221, insecurity in food-producing regions continues to take its toll on food prices.

 Food inflation for May 2021 printed at 1.05% month on month as it rose at a faster pace when compare with  0.99% month on month jump in April, 2021.

NBS report shows that the major driver of food inflation remains the food and non-alcoholic beverage segment, which is mostly affected by insecurity, adverse weather conditions, and higher pump prices.

Amid the reduction in food inflation, imported food inflation sustained its upward momentum to 16.97% year on year in May from 16.91% April, reflecting the pass through effects of a weaker Naira and foreign exchange (FX) restrictions on food imports.

Structural Headwind squeeze core prices

While noted that structural headwind squeezed core prices, analysts think non-edible items are still reeling from pandemic-induced disruptions and structural factors –pump price adjustments and dual currency adjustments.

Naira devaluation has made more Nigerians becoming poorer while level of joblessness which stands at sky-high level of 33.3% peppered the citizen finances further.

This is evident in May’s core inflation outcome of 13.15% year on year against Vetiva’s projection of 12.78%. While health and transport inflation lead the pack, analysts said they witnessed a moderation in both health (-5bps) and (-2bps) inflation for the first time since the pandemic struck.

“We also attribute this to base effects, given the absence of severe waves of virus, reduction of petroleum motor spirit prices in April, 2020 and relatively flat PMS price this year.

FX Reforms Will Escalate Nigeria’s Inflationary Burden –Analysts