Rising food and energy costs combined with currency depreciation has pushed Nigeria’s inflation rate to the highest point in 18 years.
Inflation rate, which stood at 22.41 per cent in May, rose for the sixth consecutive month to around 24 per cent in June, according to average projection by many analysts.
Economic intelligence reports by many economic and finance firms yesterday indicated that inflation rate had risen further as Nigerians grapple with continuing food shortage, amid rising energy costs and decline in value of naira.
But most analysts were optimistic that the ongoing fiscal and monetary reforms by the government would moderate costs of living in the foreseeable future, with the economy expected to gain a strong traction in the medium to long term.
President Bola Tinubu had last week declared a state of emergency on food security with a bouquet of direct policy interventions in food production, processing, storage, transportation and pricing. These include immediate release of fertilisers and grains to farmers households to mitigate the effects of the subsidy removal.
The government also plans a National Commodity Board that will review and continuously assess food prices as well as maintain a strategic food reserve that will be used as a price stabilisation mechanism for critical grains and other food items. Other plans include activation of some 500,000 hectares of land to increase the availability of arable land for farming, active irrigation through all river basins to ensure all-year round farming, increased security for farms and creation of ranches among others.
Ahead of the release of the official inflation report by the National Bureau of Statistics (NBS), independent consumer surveys and econometric models indicated that inflation remained high, driven by general increases across several baskets of living costs. The NBS is expected to release its official inflation report for June 2023 today.
Inflation rate had consecutively from 21.9 per cent in February 2023 to 22.04 per cent, 22.22 per cent and 22.41 per cent in March, April and May 2023.
Financial Derivatives Company (FDC), a leading independent economic and finance research firm, which took the lower band of the projections, stated that inflation could rise to 22.8 per cent in June, still within the highest point in 18 years.
FDC, which based its projection on time series model and survey of major retail markets in the nation’s economic focal point, Lagos, said headline inflation is now about 13.8 per cent above the upper bound of the Central Bank of Nigeria (CBN)’s 6.0 to 9.0 per cent target.
According to FDC, the sustained rise in the general price level was mainly due to the spike in the food basket due to the Muslim’s festival of Eid ul Kabir, planting season effect and higher transport and logistics costs owing to the removal of the petrol subsidy.
FDC stated that its econometric model indicates that “inflation risks are elevated and an inflection point may not be reached anytime soon”.
Cordros Securities stated that it expected the headline inflation to rise by some 217 basis points to 24.58 per cent, within the range of average prediction by several analysts.
“Our expectation is hinged on the effective PMS subsidy removal and liberalisation of the foreign exchange (forex) market fueling pressure on the core basket amid the below-average off-season harvest and Salah festivities intensifying food prices,” Cordros Securities stated.
Analysts at Cordros Securities however said “government reforms and policies are expected to reap benefits in the medium-to-long term if they are maintained”.
Afrinvest Securities projected that inflation would rise to 25.04 per cent in June 2023, driven by broad-based pressure across the consumer price index (CPI) components.
Arthur Steven Asset Management Limited expected inflation rate to rise by some 200 basis points to about 24.5 per cent.
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Highcap Securities also projected increase in inflation rate citing the prevailing macroeconomic situation.
Analysts meanwhile agreed that policy reforms by the new government were justifiable for the long-term benefit of the economy.
According to analysts, while policy reforms such as removal of petrol subsidy and abolition of multiple forex rates would be painful for households and businesses in the short term based on an anticipated squeeze in consumer wallets and increased production costs, the medium to long-term benefits would reposition the economy for sustainable growth.
“The subsidy removal, in line with the Petroleum Industry Act (PIA), was justified by significant declining fiscal power over the years, for instance in first half 2023 budgeted subsidy spend was N3.4 trillion while baseline budget deficit estimation for the year is N11.7 trillion, and need to allow market forces hold more sway in the oil sector,” Afrinvest Securities stated.
While expecting inflation to remain elevated in the third quarter due to the lingering food shortages, currency depreciation and the impact of the fuel subsidy elimination, FDC expressed optimism on the possible positive effect of good policy reforms.
According to FDC, policy reforms play a significant role in shaping inflation expectations in Nigeria.
“With properly designed and effectively implemented policy reforms, inflation expectations can be anchored at lower levels, thereby reducing uncertainty and facilitating economic planning and investment decisions.
“In Nigeria, major policy reforms have been announced and implemented in the last month, which will most likely drive inflation expectation,” FDC stated.