Inflation to spike further as new VAT, fresh risks emerge
Although pressure from the nation’s border closure may have dissipated and slowed down the spike in inflation rate, the effect of the new 7.5 per cent value added tax (VAT) regime, as well as the impact of the coronavirus pandemic may continue to drive inflation rate higher than expected.
Indeed, with the cost of imports from key trading partners such as Italy and China likely to spike, resulting in cost-push inflation, as well as slowdown in the economy as a result of lockdown in many economies, Nigeria’s inflation rate may not be slowing down soon.
Specifically, inflation in Nigeria rose for the sixth straight month to a near two-year high, the statistics office said yesterday, as the impact of the country’s closed borders continued to be felt.
Inflation stood at 12.20% in February, compared with 12.13% in the previous month. It is the highest inflation rate since April 2018, when it stood at 12.48%.
A separate food price index showed inflation at 14.90% in February, compared with 14.85% in January.
“This rise in the food index was caused by increases in prices of bread and cereals, fish, meat, vegetables, and oils and fats,” the National Bureau of Statistics said in its report.
The central bank’s monetary policy committee will meet next week to set its benchmark interest rate, even though the apex bank expects to keep monetary policy tight in 2020 to combat inflation and support the currency amidst slow growth of around 2%.
Analysts at Cordros Securities noted that for March, softer price increase expectations from robust market supply underpin our slower food inflation forecast (-4bps to 0.83% m/m).
“Elsewhere, the recent naira weaknesses are not expected to bleed over to either the core or food basket in the short term as the CBN continues its aggressive supply of FX for eligible imports across its different strata of FX windows. Thus, core inflation is expected to print 0.71% m/m, a 2bps lower than the previous months. Tying it all together, headline inflation is expected to print 1.79%, cascading to 12.20% y/y.
“For the next few months, the recent precipitous decline in crude oil prices, which now questions the CBN’s ability to keep the naira range-bound, poses a fresh upside risk to both the core and food baskets, and by extension, the headline inflation. We expect the CBN to explore all available options, including ‘gun-boat’ tactics, to defend the currency.
“However, we believe that the lack of substantial fiscal buffers and foreign investors continued aversion towards naira assets, will eventually force the CBN to re-price the currency should oil price sustain its downward spiral”, Cordros’ analysts added.
Assuming, the border remains shut through 2020 and the proposed electricity price hike is implemented in April, Cordros expects inflation to hit 15.89% in December, and average 13.21% over 2020FY.
Analysts at Afrinvest Securities Limited said: “We suspect that the month-on-month moderation in consumer prices in February reflects the thinning-out effect of festive season purchases and land border closure.
“However, we believe this would be short-lived once consumer prices fully reflect the recent VAT increase. In addition, as fallout from the effects of the COVID-19 pandemic, we expect exchange rate pressures and supply chain disruptions with trade partners to impact domestic consumer prices in the coming months.
Vetiva Capital Management Limited said: “Although we expect domestic demand to be in congruence with the global trend and remain fragile, we see little room for a sharp moderation in inflation in full year 2020.
“As such, we expect the annual inflation rate for full year 2020 to print at 11.5% year on year, weaker than our previous estimate of 11.8 per cent year on year, as fears of an impending recession and the impact on supply chain disruptions rein in domestic demand.
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