Growth broadening to other sectors but oil, says IMF
Extreme food price volatility has resumed in earnest, pushing Nigeria’s headline inflation to 17.7 per cent, last month’s consumer price index (CPI) has shown.
According to the index, which tracks inflation trends and patterns, food inflation soared by 2.01 per cent month-on-month (MoM) in May. The rate was a moderate 0.01 percentage points higher than April’s figure.
On a year-on-year (YoY) basis, the composite food inflation was on the uptick, hitting 19.5 per cent in May, which was 113 basis points (bps) higher than 18.37 per cent posted in April.
The April food inflation was a remarkable departure from the sideways movement witnessed from December to March when it maintained a 17 per cent range.
The food inflation is the highest in eight months and suggests that the relative calm experienced during harvest season is over.
With a 4.6 per cent gap between the core and food Segment, the unpredictable trend in prices of food may be pushing up the composite to the level witnessed in the first and second quarters of last year.
Already, the inflation rate is at its 11-month high experts predicting that the situation could be worse in the coming months.
The World Bank, on Tuesday, warned that the war in Europe would worsen the crisis in food prices. The caution was contained in the latest World Bank Nigeria Development Update (NDU) tagged ‘The Continuing Urgency of Business Unusual’.
Calling for policy actions to stem the challenges, the bank said the twin sad concerns could push additional seven million Nigerians into poverty. It warned that inflation could be higher than expected, reversing its inflation projection upward from 13.5 per cent to 15.5 per cent.
“Inflation in 2022 is projected to be higher than anticipated, increasing to 15.5 per cent. Before the war, inflation was already a major macroeconomic challenge for Nigeria, and it was among the highest in the world. Inflationary pressures were compounded by policy distortions, in particular lack of flexible foreign exchange (FX) management, trade restrictions and conflicting monetary policy goals,” the report pointed out.
For the first time in 18 months, the hitherto dovish Monetary Policy Committee (MPC), in May, increased the interest rate by 150 bps to 13 per cent, citing “inflationary pressure” as a reason. While impacts of the rate hike may only be reflected in this month’s CPI, experts baulked at the efficiency of the decision as the country’s inflation is majorly seen as a supply-side challenge.
On Tuesday, marketers warned that the cost of diesel, a major power source for many manufacturers, could hit N1, 500/litre in the next two weeks if nothing drastic was done to address the challenges faced by importers of the commodity.
There is fear that an unaffordable diesel could cripple more manufacturing plants and trigger a fresh supply shock and increase the transportation cost component of essential commodities, including food, which points to a worsening domestic inflation outlook.
Nigeria’s uptick in inflation is not an isolated case. For instance, the United States inflation defied the Federal Reserve System’s bold stance, increasing to 8.6 per cent in May, the highest in over 40 years while that of Germany was 7.9 per cent. Europe (particularly hit by Russia’s invasion-triggered energy crisis), Asia and other regions are also battling resurging inflation not seen in decades.
In May, the rate-fixing arm of the Fed, the Federal Open Market Committee (FOMC), increased the policy rate by 50bps for the first time in about two decades. But the courageous move did not keep the inflationary trend under check.
At press time, the market was still awaiting the decision of its latest meeting, which started on Tuesday. However, analysts believed a 75bps interest hike could put an economy already at risk of recession.
The World Bank, the International Monetary Fund (IMF) and other economic think tanks have warned that higher interest rates in developed countries suggest more outflow of capital from risky markets, like Nigeria.
Meanwhile, the IMF has expressed concern about the rising inflation but remains bullish on the growth prospect.
In a press release on its team’s visit to Nigeria, which was led by Ms Jesmin Rahman, IMF noted that Gross Domestic Product (GDP) growth is broadening to other sectors except oil even though inflation remains “elevated”. It added that the growth prospect is challenged by insecurity and rising food prices.
“Inflation has reached 17.7 per cent YoY in May led by a renewed surge in food prices, exacerbated by the war in Ukraine, and raising food security concerns as over 40 per cent of the population live below the poverty line. To contain inflationary pressures, the CBN has recently hiked its monetary policy rate by 150 basis points to 13 per cent.
“Regarding the external sector, the current account deficit narrowed significantly in 2021 helped by import compression and higher net oil balance. However, the improving trade balance, which has continued so far in 2022, is having a limited impact on Foreign Exchange (FX) strains with the exchange rate premiums in the parallel market staying in the 35-40 per cent range since October 2021.
“Despite supportive oil prices, gross FX reserves fell to $38.6 billion at end-May 2022, having reached $41.5 billion in September 2021 boosted by SDR allocation and Eurobond issuance,” the statement said.
It warned that petro subsidy remained a downside risk to the near-term growth even as the fiscal deficit is expected to hover at 6.1 per cent of the GDP. Low COVID-19 vaccination and political risk, it said, are other challenges facing growth.
