Inflation has become arguably the biggest risk to overall political stability in Nigeria, according to the Economist Intelligence Unit, EIU.
It said “spiralling consumer prices for food and fuel exacerbated protests against police brutality in October 2020, and the movement quickly evolved into a wider expression of discontent that included mass looting.”
Inflation came in at 15.9% year on year in March, continuing a trend of rising annual inflation since December 2021. Core inflation (which excludes agricultural prices) was slightly lower in March, at an annual rate of 13.9%, compared with 14% in February. The Russia-Ukraine war is the primary driver, as global prices for food and fuel continue to surge.
According to the EIU’s latest dispatch, “the CBN was more divided at the latest monetary policy committee (MPC) meeting, in March, than at previous sessions. However, the consensus view remained that targeted lending schemes—notably for agriculture and manufacturing—will bring down inflation by raising output. This has been the strategy for several years, but concrete results have been elusive.”
Although there was disinflation in 2021 as agricultural output expanded, the headline rate never fell below 15.4% (in November) and rose again in December.
Read also: Nigeria’s inflation hits 15.92% as energy, food prices soar
As inflation is unlikely to fall without intervention, the EIU says, “we expect the CBN to tilt towards a rate hike in 2022 (totalling 100 basis points). However, the MPC is not inclined to take inflation back to target range, in our view.”
Chart showing persistently high inflation in Nigeria since 2015
“Besides inflation, the CBN will be mindful about narrowing interest-rate spreads with the US. The CBN governor, Godwin Emefiele, has attempted to downplay Nigeria’s exposure to changing international monetary conditions,” said the EIU dispatch, “but overseas holdings of short-dated central bank open market operation (OMO) bills accounted for about one-third of foreign reserves at end-2021. This was lower than the 46% share a quarter previously, mainly because a US$4bn Eurobond sale in late September boosted foreign reserves, and there was less overseas uptake of OMOs. Outflow pressures will only get more intense, and we expect the Federal Reserve (the US central bank) to hike its policy rate by a cumulative 175 basis points in 2022.”
Nigeria issued another US$1.25bn Eurobond in March 2022 but at a higher cost. The funds appear not to have fed into foreign-reserve data for that month, because the stock fell by US$316m against February’s level.
The EIU said “our forecast for inflation of 15.5% in 2022 will be revised up to account for changes to our global prices for cereals (wheat in particular), considering the Russia-Ukraine conflict. Although we anticipate monetary tightening by the CBN, a high inflation is still likely.”
