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By Chinwendu Obienyi
With the release of Consumer Price Index (CPI) data for the month of June 2022 by the National Bureau of Statistics (NBS) at the weekend, strong indication have emerged that the country’s growth prospects may be winding up in smoke.
According to the data, Nigeria’s headline inflation rate accelerated further 88 basis points (bps) to 18.6 per cent year-on-year (y/y) in June 2022 – the sharpest since 18.7 per cent in January 2017, underscoring unabated price pressure despite the Central Bank of Nigeria (CBN)’s hiking interest rate to 13 per cent in May 2022.
The surge in consumer prices was driven by the 111 bps and 85 bps spike in food and core inflation sub-components to 20.6 per cent and 15.7 per cent y/y respectively. Reacting to the development, economic analysts attributed the sustained rise in price pressure to the pass-through impact of the lingering geopolitical tension on energy cost, input prices, and imported food.
They also added that structural challenges affecting food production & preservation as well as Naira depreciation in the month contributed to the uptick in consumer prices. A look at the monthly trend showed that price pressure continued an uptrend for the fifth straight month in 2022 to 1.8 per cent (3bps higher than May level and the highest since 1.8 per cent in December 2021).
The food inflation sub-component was the main pressure point, rising by 3bps to 2.1 per cent month-on-month (m/m) aided by increases in the price of food, beverage, and tobacco. On the other hand, the core inflation rate moderated 32bps m/m to 1.6 per cent.
Furthermore, the Naira remains under severe pressure due to stunted dollar inflows triggered by protracted capital control measures by the CBN, poor oil receipt, and policy uncertainties.
Combined with global financial markets tightening, worrying domestic inflation, speculatory activities, buoyant pre-election spending, and discontinued FX sales to Bureau De Change (BDCs) have pressured demand for US dollar in the parallel market.
As a result, the divergence between the parallel market widened to N187.50/$1.00 (2021-end: N130.00/$1.00) close to the record N191.80 (Jan-2017) spread at the peak of the 2016/17 FX crisis. Notably, throughout H1 2022, the Naira appreciated 3.4 per cent year-to-date (YTD) (16/6/2022) at the I&E window whereas the rate in the parallel market depreciated by 7.1 per cent.
Currently across the FX windows, the naira depreciated by 1.0 per cent and 0.2 per cent to N430.33/$1 and N618.00/$1 at the I&E window (IEW) and parallel market, respectively, last week.
In the face of these economic and financial challenges, members of the rate-fixing arm of the CBN, the Monetary Policy Committee (MPC), are going to face tough choices as its 286th MPC meeting gets underway this week.
At its 2022 Monetary Policy Committee (MPC) strategic retreat in Lagos on Friday, themed; Monetary Policy Implementation: In a digitally evolving economy, the CBN Governor, CBN, Godwin Emefiele, says the apex bank is working on improving monetary policies suited for present realities of Nigeria’s economy.
Reacting, analysts at Afrinvest, said that given the m/m inflation which is sitting above 5-year average of 1.1 per cent, price pressure would remain elevated and, in turn, further tighten consumers’ wallets and increase cost pressure on businesses.
It noted that it expects prevailing global factors to sustain pressure on domestic prices especially as the Naira quagmire lingers in July.
“Furthermore, we anticipate that the resurgence in fuel scarcity and hike in PMS pump price by marketers (as against FG’s N165.00/litre ceiling) should dovetail to higher consumer prices. As a result, we estimate that headline inflation would print at 19.2 per cent y/y. It is worthy to note that despite the increase in MPR in May 2022, the hike failed to have an immediate impact on inflation due to weak and delayed transmission mechanism of monetary policy.
That said, we believe the MPC would maintain status-quo on MPR at its next meeting. Despite domestic price & FX pressure and the strong possibility of a sharper interest rate hike by the US Feds in July, our hold-steady outlook is premised on the expectation that the committee would prefer to give more time to assess the impact of the last policy change (+150bps hike in May) on price dynamics (at least till September). While we expect a hold-steady outlook, it is our opinion that the MPC should adjust the asymmetric corridor to support the transmission impact of the MPR on financial system liquidity and domestic inflation”, they said.
For their part, analysts at Cordros Capital, said they expect the Committee to examine the global economy’s health within the context of continued monetary policy tightening by global central banks and the lingering spillover effects of the spat between Russia and Ukraine.
“On the domestic front, we believe near-term inflation expectations will likely discomfort committee members, given the pass-through impact of elevated global energy prices on headline inflation. Moreover, we expect the Committee to maintain a cautious outlook on the domestic growth pace given the spillover impact of an impending global growth slowdown on the domestic economy amidst supply-side driven domestic inflationary pressures”, they said.
