There are indications that the prices of commodities, especially food items, which recorded slow growth in January, according to the nation’s statistics bureau, might resume the journey up in February. Analysts, therefore, hinted that increases in energy cost, high taxation and lingering foreign exchange liquidity challenges will further escalate inflation, impact adversely on citizens’ welfare and aggravate poverty. BAMIDELE FAMOOFO reports.
The hope for a better living standard for ordinary Nigerians may be at risk as developments in the economy in the month of February, according to financial pundits, portend gloom in the days ahead. This is because prices of commodities, especially food, which recorded a marginal decrease in January, according to the inflation figure released by the National Bureau of Statistics last week, might reverse the decreasing trend due to pressures on prices resulting from high energy cost, increased taxation, fluctuating exchange rate among other factors like insecurity.
Muda Yusuf, Economist/Chief Executive Officer, Centre for the Promotion of Private Enterprise, noted that although the economy recorded a marginal decline in headline inflation in January, high inflationary pressures continues to be a major worry to stakeholders in the Nigeria economy. He added that high food prices will impact adversely on citizens’ welfare and aggravate poverty.
The immediate past Director General of the Lagos Chamber of Commerce and Industry cautioned that rising inflation in the months ahead will further weaken the purchasing power of the people and also undermine investors’ confidence.
Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company Limited acknowledged that the prevailing economic developments in the month of February, points to the fact that inflation is likely to reach another inflection point at the end of the month.
“The immediate past Director General of the Lagos Chamber of Commerce and Industry cautioned that rising inflation in the months ahead will further weaken the purchasing power of the people and also undermine investors’ confidence”
“Since January, there have been major developments, which point to the fact that inflation is likely to reach another inflection point in February. Some of these factors are seasonal while some are structural and fundamental to the Nigerian economy. Fuel scarcity, especially the sharp rise in the price of diesel to N410-N420/litre, planting season and currency pressures is all likely to propel another cycle of price increases,” the expert said.
Experts at Cordros Research in their inflation outlook for February said the gap between food demand and supply will increase over the period. Accordingly, the Company forecast a 6bps increase in food inflation to 1.68% m/m, with the high base effect from the prior year cascading to 16.89% y/y.
A major threat to food prices in the country is that the 2021 harvest season was below average. Also, conflicts in the food-producing regions have persisted although we understand that it is stabilising in some areas.
“Thus far, February has been characterised by scarcity of PMS in major cities of the country, given the impact of contaminated PMS imported into the country during the period. That said, we expect the situation to improve over the short term as we understand that seven vessels waiting to discharge PMS have arrived at Lagos ports. Besides, the pressures on global gas prices seem unabating given the tension arising from the Russia-Ukraine conflict. Overall, we expect the core inflation to rise by 1.09% m/m, translating to a 13.74% y/y print,” Cordros noted.
On balance, the Company forecast headline inflation of 15.45% y/y in February 2022.
“Over the medium term, we expect the inflationary pressure to persist, albeit slowly in line with the combined impact of (1) persistent increase in energy prices, (2) expected depreciation of the currency to N440.00/USD at the IEW, (3) additional tax measures in the 2021 Finance Act, and (4) pre-existing structural challenges in the agricultural sector. Consequently, we revise our 2022FY average and year-end inflation base-case projections to 14.75% y/y (previously: 13.64% y/y) and 13.87% y/y (previously: 13.55% y/y), respectively.”
January in retrospect
The Inflation report for the month of January was released Wednesday last week by the NBS. The data shows a marginal decline (0.03%) in official headline inflation to 15.60%. This time around, the statistics are reflective mainly of seasonal factors (harvest and post-Christmas blues). This is because core inflation, which is inflation less seasonalities, actually increased while other sub-indices declined.
Month-on-month inflation down on reduced aggregate spending Monthly inflation fell by 0.34% to 1.47% (19.24% annualized) from 1.82% in December (24.07% annualized). This is partly because of the harvest and lower aggregate demand due to post-Christmas blues.
Food inflation fell 0.24% to 17.13%, supported by the harvest In January, both the annual and monthly food indices declined. The yearly food index fell by 0.24% to 17.13% while the monthly index dipped by 0.57% to 1.62%. This was largely due to the harvest of major staples like tomatoes, pepper and onions. However, the prices of bread and cereals, potatoes, yam and other tuber, soft drinks, oils and fats and fruits increased due to currency pressures and the imposition of taxes on nonalcoholic and carbonated drinks.
After the moderation witnessed in the previous month, the core inflation rose by 13bps to 1.25% m/m in January. Experts attribute the increase to the troika impact of (1) tax increase in line with the 2021 Finance Act, (2) higher energy prices, and (3) lingering FX liquidity challenges. Sifting through the breakdown provided, we highlight that pressure was most significant in the Miscellaneous good & services (+5bps to 1.27% m/m), Restaurant & hotels (+4bps to 1.21% m/m), Communication (+3bps to 0.88% m/m), Transport (+2bps to 1.26% m/m), and Education (+2bps to 1.21% m/m) sub-baskets. On a year-on-year basis, core inflation settled at 13.87% – the highest level since April 2017 (14.75% y/y).
“Since January, there have been major developments, which point to the fact that inflation is likely to reach another inflection point in February. Some of these factors are seasonal while some are structural and fundamental to the Nigerian economy”
Sub-Saharan Africa
Trend Inflation trend across Sub-Saharan Africa was mixed in January. Of the six countries under our review that have reported their January inflation numbers, three recorded increases while the other three posted declines. This mixed trend was driven by movement in food and non-food prices.
Irrespective of the inflation direction, most Central Banks in Africa maintained status quo at their last meeting to strike a balance between output growth and price stability. The South African Reserve Bank increased interest rates by 25 bps to 4% at its January meeting. This is the second consecutive rate hike due to heightened inflation risks.
The way out
Yusuf said to curb the current inflationary pressure, the government needs to fix a myriad of factors, top of which is addressing the security concerns causing disruption to agricultural activities.
Reform the foreign exchange market to stabilize the exchange rate, reduce volatility and stimulate forex inflows, addressing forex liquidity issues through appropriate policy measures and the challenge of high transportation and logistics cost are some other pressing issues which he said must be taken care of to ease inflation.
“Government must reduce fiscal deficit monetization to minimize incidence of high-powered money in the economy, manage climate change consequences to reduce flooding and desertification, ensure the restoration of normalcy and good order at the nation’s ports to reduce transaction costs, reduce import duty on intermediate products and raw materials for industries to reduce production costs, especially in the light of the sharp depreciation in the exchange rate, address concerns around high energy cost and create an investment friendly tax environment,” the CEO of CPPE added.
Winning strategy for investors
While experts at Cordros Research expect the inflation rate to moderate in 2022 financial year in line with the favourable base effect from the prior year, their revised estimate shows that the headline inflation would print 13.71% y/y by year-end, which remains stubbornly high compared to the CBN’s target band of 6.0% and 9.0%.
Meanwhile, they advocate that investors rotate their equities portfolio from growth to value stocks as they are poised to perform well in an inflationary environment. “Interestingly, we believe there are value stocks in the market that do not only have the potential for capital appreciation but also trade at attractive dividend yields that can compete favourably with fixed income yields over the medium term.”
In the fixed income market, they expect yields to increase slightly over the short to- medium term, underpinned by a plethora of factors, including (1) thin liquidity conditions, (2) MPC switching to a hawkish monetary policy stance, (3) increased demand for risk-adjusted returns due to the elevated political risk brought by pre-election activities, and (4) persistent inflationary pressure, and (5) possible increased reliance on the domestic market to finance the 2022FY fiscal deficit.
“Accordingly, our short-term strategy for investors favours holding cash and reducing exposure to variable income assets, instead preferring assets such as fixed placements,” Cordros disclosed.
