Based on our market survey, the year-on-year headline inflation is estimated to spike by 0.69% to 12.95% in April. If our projections are accurate, it will be the 8th consecutive monthly increase and the highest level in the last 2 years. Beyond the rising inflation trend, the slope of the curve is becoming steeper, after easing for 3 consecutive months. Our survey also points to a sharp increase in the month-on-month inflation (a more accurate measure of prices) to 1.56% (annualized at 20.38%) from 0.84% (annualized at 10.53%) in March. Policymakers will face tough choices between lowering the MPR to cushion the effect of the COVID-19 induced deterioration on macroeconomic conditions or increasing the MPR to stem rising inflationary pressures and reduce external imbalances.
IMF emergency support fund ($3.4bn) to support external reserves
However, the International Monetary Fund (IMF) has approved a $3.4bn emergency support for Nigeria. This is in a bid to support the Federal Government’s effort in mitigating the severe economic impact of COVID-19 pandemic and the crash in oil prices. The FG also anticipates a $3.5bn support loan from the World Bank and the African Development Bank. This is expected to boost the gross external reserves which have lost approximately $14.33bn in the last 2 years. It will also provide some relief and support for the CBN in ensuring exchange rate stability.
Rising inflation is driven by the combined effect of COVID-19, lockdown measures and planting season
The sharp increase in headline inflation can be largely attributed to both seasonal and structural shocks. The COVID-19 pandemic has triggered both demand and supply shocks. The on-going lockdown, business closure and movement restrictions have disrupted the commodity supply chain, creating shortages. Consumers spending pattern have also shifted towards essentials like food and data. This was compounded by the planting season and currency devaluation. The second quarter of the year is typically the planting season, which is characterized by reduced agric output
Higher logistics costs in spite of a fall in PMS price
Analysts had anticipated a sharp drop in the cost of logistics due to the 14.85% reduction in the retail price of PMS to N123.5 per litre. However, the scarcity of commercial transportation due to the restriction of movements has pushed up transportation costs by over 50%. The spillover effect was a spike in commodity prices. Core inflation is projected to increase by 0.17% to 9.9%.
Supply shortages due to the planting season and COVID-19 containment measures
The current lockdown and movement restrictions coincide with the planting season, which typically commences in the second quarter of the year. The resulting decline in commodity supplies has filtered through to a sharp increase in commodity prices. Food inflation is expected to soar by 0.22% to 15.20% in April.
Exchange rate induced imported inflation
In response to the crash in oil prices, the currency was adjusted to N360/$ and N380/$ at the official and I&E windows respectively. The exchange rate for import duty payment was also increased to N361/$ from N326/$. The immediate impact of this was a jump in the price of imported commodities. Imported inflation is estimated to rise to 16.3% from 16.2% in March.
Peer Comparison – Mixed movement in Inflation – 3 Reds, 3 Greens, 1 Amber
The inflation trend across Sub-Saharan Africa (SSA) was mixed. Three out of the SSA countries under our review recorded increases in March; three also posted declines while one was flat. The increase in Angola’s inflation rate was largely due to the devaluation of the Kwanza and the Covid-19 impact. Most of the SSA countries under our review are tilting more towards an accommodative monetary policy stance. This is to cushion the effect of the COVID-19 pandemic on their respective economies. However, the spike in inflation coupled with the oil price crash and its resulting impact on external buffers have restrained some countries from embracing an accommodative monetary policy stance. Time will tell if ensuring price and exchange rate stability will overshadow the need to support the hampered domestic economy.
Inflationary pressures to heighten but aggregate demand will shrink
Inflationary pressures are expected to persist in the coming months due to the combined effects of the planting season, lockdown measures, border closure and exchange rate adjustments. Meanwhile, there will be a reduction in aggregate demand and a shift in consumption pattern towards essentials as consumers respond to reduced disposable income. This is because recessions are typically accompanied by salary cuts and huge staff layoffs.
N850bn domestic borrowing likely to have a neutral effect on private investments
The Senate has approved the conversion of the N850bn external loan to domestic borrowing. This is due to the negative impact of COVID-19 virus on the global economy and financial markets as well as the crash in oil prices. Typically, increased government borrowing from the domestic economy usually crowds out private investment. This is because the yield on government securities usually increases to attract investors. However, the LDR directives by the CBN could help cushion the crowding-out effect on the private sector as banks are mandated to meet the threshold.