- Finance Act, 2023 Fiscal Policy Measure may worsen living standard – Kuranga
- Food inflation to rise higher the short term – Rewane
Nigeria’s consumer price index rose to 22.22 percent in April according to data released from the National Bureau of Statistics last week. The figure showed that inflation in Africa’s most populous nation recorded its highest increase in 18 years. A check on the inflation basket, according to NBS, showed that food remains a major driver of inflation as the average price of food commodities increased by about 25 percent in April. Meanwhile, there are no indications, at least in the immediate, that average Nigerians will be able to put a good meal on their tables as economic experts have pointed out that food prices will continue to rise in the short term. To worsen the case at hand, government policies like the Finance Act and the 2023 Fiscal Policy Measure, recently enacted into law, are expected to exacerbate the living condition of Nigerians, at least in the short term. BAMIDELE FAMOOFO writes.
The living standard of Nigerians may suffer a further setback as it is imminent for more people to sink deeper into the poverty threshold with the ever-rising cost of living triggered by unabated inflation.
Figures released by the National Bureau of Statistics, showed that Nigeria, Africa’s largest economy and most populous nation, recorded the highest inflation in the last 18 years with headline figures standing at 22.22 percent in April, rising 0.18 percent above 22.04 percent recorded in March.
Analysing the trend, Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company Limited, noted that it is the fourth consecutive monthly increase and the highest inflation rate in 18 years.
“The last time inflation spiraled to this level was in 2005 (24.3%). At that time the monetary policy rate (MPR) was 13%p.a. and Nigeria had just completed its debt forgiveness and rescheduling,” he explained.
Rewane explained that the sustained uptick in the general price level was mainly due to a surge in the food basket to 24.61 percent from 24.45 percent in March.
He said: “This is not surprising as the second quarter is typically the peak of the planting season. Some of the commodities that witnessed the highest spikes are tomatoes, yam and other tubers, the price of a basket of tomatoes jumped by 100% to N70, 000 from N35, 000.”
The FDC boss cited the price of diesel and the temporary appreciation of the Naira in the forex market as the two major uncertainties that have been impacting inflation expectations and psychology in the past few months. According to the FDC, in April, the price of diesel declined by 35 percent to N640/litre while the exchange rate appreciated by 1.33 percent to N740/$ in the parallel market.
“Accordingly, we forecast the core inflation to settle at 1.55 percent m/m, with the favourable base effects from the prior year cascading to 19.75 percent y/y. Tying all together, we now look for a 1.89 percent m/m headline inflation rate, cascading to a y/y print of 22.35 percent in May”
Given the rising inflation level, Rewane and the economic Think-Tank team at the FDC, suggested that lending rate of banks will increase by 25 basis points as the MPC meets next week for the last time in the Buhari’s administration.
In line with most other Central Banks, the Monetary Policy Rate or base lending rate of the banking industry is expected to rise so as to curtail inflation.
Abdulazeez Kuranga, Financial Market Analyst at Cordros Securities Limited, is of the opinion that headline inflation will continue its upward trend in the short term.
In addition, he said it is the belief of his Company that the 2023 Fiscal Policy Measures and 2022 Finance Act introduce fresh risks to the core inflation over the short term.
“Accordingly, we forecast the core inflation to settle at 1.55 percent m/m, with the favourable base effects from the prior year cascading to 19.75 percent y/y. Tying all together, we now look for a 1.89 percent m/m headline inflation rate, cascading to a y/y print of 22.35 percent in May,” Kuranga disclosed.
Cordros attributed the price increases in April to the festive-induced demand and higher transport costs in the review period. Accordingly, the breakdown provided showed that food prices rose further by 16bps to 24.61 percent y/y while the core inflation (+28bps to 20.14% y/y) remained at its highest level since May 2004 (23.43% y/y). The outturn is 21bps and 12bps higher than Cordros’ estimate (22.01% y/y) and Bloomberg’s median consensus estimate (22.10% y/y), respectively. On a month-on-month basis, consumer prices rose by 5bps to 1.91% (March: 1.86% m/m) – the highest point since May 2016 (2.75% m/m).
Data breakdown
In April 2023, the headline inflation rate rose to 22.22 percent relative to March 2023 headline inflation rate which was 22.04 percent. Looking at the movement, the April 2023 inflation rate showed an increase of 0.18 percent points when compared to March 2023 headline inflation rate.
Similarly, on a year-on-year basis, the headline inflation rate was 5.40 percent points higher com-pared to the rate recorded in April 2022, which was 16.82 percent. This shows that the headline inflation rate on a year-on-year basis increased in April 2023 when compared to the same month in the preceding year (i.e., April 2022). Month-on-month inflation rose by 0.05 percent to 1.91 percent (25.5% annualized) in April from 1.86 percent (24.69% annualized) in March. This largely reflects the combined effects of supply shortfalls and a boost in aggregate demand.
Likewise, on a month-on-month basis, the All-Items Index in April 2023 was 1.91 percent, which was 0.05 percent points higher than the rate recorded in March 2023 (1.86%). This means that in April 2023, on average, the general price level was 0.05 percent higher relative to March 2023.
The percentage change in the average CPI for the twelve months ending April 2023 over the average of the CPI for the previous twelve months was 20.82 percent, showing a 4.37 percent increase compared to the 16.45 percent recorded in April 2022.
Food inflation up again due to the planting season
The Nigerian food basket has consistently increased since the beginning of the year. While the uptick in the first three months of the year have been largely attributed to the disruptive impact of the Naira cash crunch, the increase this time is largely due to the planting season effect. Q2 is typically the peak of the planting season and the resulting impact is a reduction in food supply and ultimately higher prices.
The annual food index rose by 0.16% to 24.61% in April from 24.45% in March while the monthly food index was up 0.06% to 2.13%. The commodities that recorded the highest price increases were oil and fat, bread and cereals, fish, potatoes, yam and other tubers, fruits, meat, vegetable, and spirits.
According to Famine Early Warning Systems Network, the month of May marks the start of the planting season in the northern parts of the country, running concurrently with the off-season harvest of April to June. However, the planting season started in April in the southern region and continues into May. Given the preceding, we expect the food demand-supply gap to remain wide, supporting high food prices. Against that backdrop, we look for a 2.15% m/m increase in food inflation, translating to a year-on-year print of 24.78%.
“While pressures are currently subsiding in the core basket amidst lingering currency pressures, we believe the 2023 Fiscal Policy Measures and 2022 Finance Act introduce fresh risks to the core inflation over the short term. Accordingly, we forecast the core inflation to settle at 1.55% m/m, with the favourable base effects from the prior year cascading to 19.75% y/y,” it said.
Core inflation
Core inflation (inflation less seasonalities) rose by 0.28 percent to 20.14 percent in April, the second consecutive monthly increase. This was despite the relatively stable exchange rate and moderating logistics costs (lower diesel prices). Diesel, which accounts for over 30 percent of firms’ logistics costs, declined by 35 percent to N640/litre in April while the exchange rate appreciated by 1.33 percent to N740/$ in the same period. The highest increases were recorded in the prices of gas, passenger transport by air, liquid fuel, vehicle spare parts, fuels, and lubricants for personal transport equipment, medical services, and passenger transport by road.
Rural and urban inflation
On an annual basis, rural inflation increased by 0.05 percent to 21.14 percent whilst urban inflation rose sharply by 0.32 percent to 23.39 percent in April. On a monthly basis, both indices climbed to 1.72 percent and 2.00 percent in April from 1.78 percent and 2.05 percent in March respectively. The urban-rural inflation gap rose to 2.25 percent in April from 1.98 percent in March. This suggests the lingering impact of storage and logistics challenges.
Inflation by states
In April 2023, all items inflation rate on a year-on-year basis was highest in Bayelsa (26.14%), Kogi (25.57%), Rivers (24.95%), while Borno (19.06%), Taraba (19.64%) and Sokoto (19.90%) recorded the slowest rise in headline inflation on a year-on-year basis. On a month-on-month basis, however, April 2023 recorded the highest increases in Cross River (3.05%), Bayelsa (2.92%), Rivers (2.62%), while Katsina (0.52%), Jigawa (0.74%) and Osun (0.96%) recorded the slowest rise on month-on-month inflation.
Food inflation on a year-on-year basis was highest in Kogi (29.50%), Kwara (29.48%), and Bayelsa (29.38%), while Sokoto (19.55%), Taraba (20.20%) and Jigawa (20.68%) recorded the slowest rise in food inflation on a year-on-year basis. On a month-on-month basis, however, April 2023 food inflation was highest in Cross River (4.65%), Bayelsa (3.61%), and Ekiti (3.49%), while Jigawa (0.14%), Katsina (0.44%) and Osun (0.62%) recorded the slowest rise in food inflation on a month-on-month basis.
CBN likely to retain rates during this week’s MPC meeting
The Monetary Policy Committee of the Central Bank of Nigeria is expected to hold its third meeting of the year on May 23 and 24.
As in the past meetings this year, the Committee remains faced with either maintaining its hiking cycle or keeping policy parameters unchanged.
Financial experts expect the Committee to remain resolute on the path of smaller rate hikes, after taking the global and domestic events since its last policy meeting into account, more so that the CBN governor already hinted at such a path at the last policy meeting held in March.
On the global scene, systemic central banks are signalling a peak in their interest rate hiking cycles although they are leaving the door open for more tightening if conditions warrant. In the domestic economy, headline inflation maintained its upward trajectory, currency pressures remain intact and there are signs the real GDP growth eased in Q1-23 primarily due to the CBN’s naira redesign drive.
Overall, experts expect the Committee to increase the MPR by 50bps and retain other policy parameters.
Local economy expected to remain on growth path
Q1-23 was characterized by a significant cash crunch induced by the CBN’s naira redesign drive amid increased production costs. This is reflective of the impact of the policy on the informal sector, which according to the NBS constitutes 41.4% of GDP as of 2015 – World Bank estimate: 48.2% (as of 2018).
Consequently, the non-oil sector’s growth is likely to have slowed significantly in Q1-23 with the agriculture, trade, real estate and arts and entertainment sub sectors expected to have borne the brunt.
“April 2023 recorded the highest increases in Cross River (3.05%), Bayelsa (2.92%), Rivers (2.62%), while Katsina (0.52%), Jigawa (0.74%) and Osun (0.96%) recorded the slowest rise on month-on-month inflation”
Meanwhile, crude oil production (including condensates) averaged 1.52 mb/d in Q1-23 (Q4-22: 1.35mb/d), suggesting that the oil sector likely grew by 2.01% y/y in Q1-23, albeit not enough to lift the overall growth prospect in the review period.
On a balance of factors, experts forecast the domestic economy likely grew by 1.89% y/y in Q1-23, lower than the 3.52% y/y and 3.11% y/y growth recorded in Q4-22 and Q1-22, respectively.
“Based on the preceding, and barring any major shocks to the economy, we forecast real GDP to grow by 2.77% y/y in 2023E (2022FY: 3.10% y/y). Overall, we expect the Committee to remain cautiously optimistic that domestic growth will stay on a growth path, albeit at a subdued pace. Hence, the Committee is likely to highlight the need to strengthen output expansion and forestall the reversal of gains recorded so far by slowing down on the pace of rate hikes and maintaining the ongoing monetary and fiscal interventions in critical growth-enhancing sectors,” analyst at Cordros Securities Limited said.
Inflationary pressures likely to remain sticky in the near term
Consumer prices maintained their uptrend, rising by 18bps to 22.22% y/y in April (March: 22.04% y/y). Analysts attribute the price increases to the festive-induced demand and the pass-through impact of higher transport costs in the review period. Accordingly, the breakdown provided showed that food prices rose further by 16bps to 24.61% y/y while the core inflation (+28bps to 20.14% y/y) remained at its highest level since May 2004 (23.43% y/y).
Consequently, analysts at Cordros Capital expect the MPC to remain concerned about the persistent inflationary pressures, likely attributing it to supply shocks and the one-off elevated demand witnessed in the review month. Overall, the Committee is likely to express further concerns on upward risks to inflationary pressures in the near term, including the prospect of subsidy removal.
“Nonetheless, we expect members to urge the fiscal authority to sustain its real sector interventions and take decisive steps in tackling the contributory legacy factors limiting food production and distribution in the country,” the experts noted.
