The National Bureau of Statistics released Nigeria’s inflation figures for the month of December 2020, which puts headline inflation rate at 15.75%, a big leap from the 14.89% recorded in the previous month.
It is evident that Nigerians have continued to grapple with the effect of the Covid-19 induced lockdown, sustained border closure (until December 2020), insecurity, amongst others, that has plummeted the economy into recession.
Nigeria’s inflation climbed to its highest in 3 years, which is a cause for worry as analysts predicts higher inflationary pressure for the year 2021.
In a chat with Wale Okurinboye, CFA, Head Investment Research, Sigma Pensions, he addressed the factors that would determine the direction of Nigeria’s inflation in 2021.
“I expect lingering impact of the main shocks to 2020 inflation i.e., fuel price increments (+25-30%), electricity price hikes (55-65%), currency weakness and food price pressure to drive headline inflation towards 16-18% levels in the first half of 2021.
“However, strong base effects from 2020 will help contain upside over H2 2021. In all, I expect inflation to remain elevated over the year reflecting the shocks to key input prices.”
While commenting on actions to mitigate the current trends, he added that in order to lower inflation, Nigeria needs to address cost issues: supply chain around food (tackle insecurity issues in key crop producing areas), ensure exchange rate stability and hope no major increase in international oil prices.
He however stated that, “given the impact of Covid-19 on Nigeria’s external and fiscal accounts, this might be too much to ask.”
Victor Aluyi, Head, Portfolio Management, Commercio Partners says;
“I believe we are going to see the headline figures continue to spike over the next couple of months, although not as much because the December spike was quite expected as we saw pent up spending, which basically characterises that period whilst putting pressure on food inflation.”
This added to the factors we have been experiencing before now, the currency weakness, supply chain disruption amongst others.
“We could also see that the border closure has also played a significant role in exerting that upward pressure on headline inflation. However, we are likely to see the pressure ease due to the presidential directive to open up land borders in December 2020.”
“Nigeria’s inflation is likely to top 16% and probably closer to 18% in 2021. Although, the recent inflationary pressure is due to structural issues but monetary policies can also play its part in trickling down the numbers.”
According to Wale Olusi, Head of Research, United Capital, there are a number of factors that will determine inflation rate in 2021, but posits that the inflation figure is likely to top 16% or go as high as 19% if nothing is done about it.
“We at United Capital expect the headline inflation rate to peak at around 16% before pulling back, if no further policy adjustment is made.”
He, however, suggests that inflation could ease due to the reopening of the land borders as food prices are already trickling down in some regions of the country. He also mentioned that other factors such as oil prices, monetary policy and structural issues could drive the headline inflation higher if adequate measures are not put in place.
On tightening monetary stance
Wale Okurinboye opines that he expects the Apex bank to raise the MPR at some point in the year, possibly by 100 – 200 basis points. He, however, projects that Nigeria will exit recession by the second quarter of the year assuming there is no re-introduction of lockdown measures.
Okurinboye explained that, “this is an epidemic induced recession not a structural one, so as business activities return to normal on the non-oil side and as OPEC lifts output curbs on oil production, I expect Nigeria to exit recession in Q2 2021.”
In the words of Victor Aluyi, “the response of the Monetary committee has been that of an output growth, which is why we see reduction in the benchmark rate. They are trying to starve off the complete impact of the Covid-19 challenge and also reflate the economy.
“Meanwhile, I don’t see any adjustment in the coming months in terms of tightening, but it remains to be seen what the impact of the loosened rate has been, whether it has spurred growth in helping the economy recover quicker.”
Wale Olusi expects the Monetary Policy Committee (MPC) of the Apex bank to tighten its monetary policy stance at some point in the second and third quarter of the year.
He also expects the economy to rebound by about 1.7% to 2% buoyed by increased economic activity and improvement in the global oil market.
What you should know
- Nigeria’s inflation rose to 15.75% in December 2020, which is the highest rate recorded since December 2017.
- Inflation has been on a persistent upward trend since September 2019, around the time the federal government ordered the closure of land borders.
- The 2021 budget projects that Nigeria’s inflation will close at 11.95% in 2021 and a projected GDP growth of 3%.
- Nigeria’s food inflation also rose to its highest in 3 years. The last time Nigeria recorded a rise in the food index as high as 19.56% was November 2017.
The Nigeria economy has been ravaged by the effects of the Covid-19 outbreak, global oil prices, and border closure, which exerted inflationary pressure, thereby eroding the purchasing power of consumers in the country.
Meanwhile, analysts have predicted more doom in the short term but expects a positive spin as we go to the second half of the year.
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