GDP up, Inflation down

The national headline inflation rate (CPI) is now at its lowest point since January 2008 and has been on a declining trend in the last 15 months. This has given the CBN some respite from its price-stability objec-tive to focus on exchange rate management and control of liquidity conditions in the banking system. Based on our monthly analysis of the national consumer price index, we forecast a moderate decline in the headline inflation to 7.64% in March from 7.7% recorded in February. Our projection reveals a slower rate of change in consumer prices when compared to the same period in 2013. . Further to this, the contin-uous contractionary monetary policy by the CBN is expected to keep inflation muted in the near team. Also, the projection of a lower inflation rate coincides with the announced rebased GDP numbers. Most countries look towards achieving a high GDP growth rate in a low inflation environment. A high nomi-nal GDP in a low inflation environment increases the fiscal and monetary policy options open to policy makers. As an attractive market, the increase in capital flows will boost the external reserves level and enable the CBN bring down interest rates later.

Nigeria has moved up 10 places becoming the 26th largest economy in the world following the rebasing of its Gross Domestic Product (GDP). The country’s GDP increased by 89% from $270bn pre-rebasing to $509.9bn after the exercise, overtaking South Africa to become Africa’s largest economy. The massive leap in nominal GDP is attributed mainly to a more accurate reflection of the informal sector in the national accounts. Ironically, Nigeria’s GDP per capita moved up only 4 places to 121 globally and is three times lower than that of South Africa’s $7,507.67. However, income inequality continues to widen and the pop-ulation under the poverty line is increasing (at 63.60% in 2010).

The projected growth rate post-rebasing has been estimated at 7.4%. While the GDP sounds relatively ac-curate, the projected growth rate of raises a lot of questions because it is difficult to see how such an expo-nential increase in the nominal GDP will be accompanied by an increase in the growth rate.

A high nominal GDP in a low inflation environment makes it likely that the MPC will maintain status quo at its next meeting in May. On fiscal policy, the new status as the largest economy in Africa increases the borrowing capacity of the FG due to the reduction of the debt to GDP ratio. Increase in fiscal spending in a pre-election year especially with the new GDP and debt to GDP profile is inevitable. Hence, any increase in government spending will have significant consequences on consumer prices.

In March, FDC’s Lagos urban inflation increased to 8.93% from 8.63% in February. The change was influ-enced by a 0.55% and 0.18% increase in the food and non-food baskets to 8.67% and 9.07% respectively. The increase is in line with the increase in global food prices. The spike in food prices recorded in the ur-ban centers is attributable mainly to a decline in supply resulting from the commencement of initial plant-ing of crops in 2014. The increase in the non-food basket is associated with the resurging speculative pres-sure on the naira.

Source: Financial 

Derivatives Company Ltd.