According to the National Bureau of Statistics (NBS), Nigeria’s headline inflation climbed to 12.20% YoY (0.76% MoM) in February 2020, better than our forecast of 12.29% YoY and Bloomberg consensus forecast of 12.31% YoY.
Pressure on food prices (+5bps to 14.90% YoY) was the main driver of headline inflation as the impact of border closure lingered in the review month. On a month-on-month basis, food prices moderated by 12 bps to 0.87% MoM.
Core inflation accelerated for the 5th consecutive month to 9.43% YoY (January 2020: 9.35% YoY) following the implementation of the new VAT rate of 7.5% (compared to 5.0%previously).
We reiterate our expectation for further uptick in core inflation in Q2 2020. In our view, the expected hike in electricity tariff (proposed to take effect on 01 April, 2020) is a significant upside risk to inflation that is likely to have a comparable impact to the 2016 electricity price adjustment
In addition to the risk of higher electricity tariff, the rapid spread of COVID-19 and crash of crude oil prices have increased the likelihood of naira devaluation and its potential pass-through to inflation. Notably, the spread of COVID-19 has resulted in international supply chain disruptions, reduced inventories, and higher prices of imported items. In our view, inventory shortages could worsen if panic buying becomes more pronounced in coming months
By our estimate, a downward currency adjustment of between 10% to 20% could lead to 60 to 100 bps increase in our average inflation forecast of 13.0% YoY in 2020
In the coming month, we expect headline inflation to rise to 12.27% on sustained impact of border closure, VAT increase, and COVID-19 induced supply disruptions. Recent expansionary measures aimed at improving credit are also likely to stoke inflationary pressures via currency speculation if left unchecked. We also believe that the overhang of lower oil prices on business activity may delay investment decisions and reduce the efficacy of these measures.