Nigeria – An insufficient policy response

The Standard Chartered-Premise Consumer Price Tracker (SC-PCPT) for Nigeria rose 1.35% m/m in March, after February’s 1.9% increase. 11 of the 12 sub-categories surveyed had y/y inflation, with particularly pronounced price increases in the ‘sugar’ and ‘oils and fats’ sub-categories. Of the items subject to FX controls since late June 2015, imported rice and tomato paste showed the highest inflation.

While our SC-PCPT is still relatively new (we have published price data from August 2014), and the y/y inflation in the SC-PCPT has typically been well within official food inflation prints, recent months have seen a surge in price pressure. Our SC-PCPT inflation measure surged to 5.5% y/y in March, with the Lagos sub-index accelerating to 7.52%. In terms of directionality this is consistent with the Nigeria Bureau of Statistics’ (NBS’) official CPI release, with CPI in Nigeria breaking into double digits in February, rising to 11.4% y/y. The robust rise in the SC-PCPT in March is consistent with further upward pressure in the official y/y NBS CPI release.

Following the surge in official CPI, the Central Bank of Nigeria (CBN) tightened monetary policy at its late March meeting (see Economic Alert, 22 March 2016, ‘Nigeria – Unexpected tightening’). The measures, a combined 100bps hike in the monetary policy rate (MPR) to 12%, a 250bps hike in the cash reserve ratio (CRR) to 22.5%, and a 200bps narrowing of the asymmetric corridor around the monetary policy rate (MPR), only partly reversed November’s policy easing. Given sustained price pressure, likely to be exacerbated by Nigeria’s ongoing fuel and FX shortages, we think this tightening is unlikely to be enough to contain inflationary pressure.

Weak economy, rising inflation – FX shortage is still driving inflation higher

The results of the SC-PCPT, with food price increases in every month since December 2015, suggest that inflation continues to be pressured higher, despite Nigeria’s weak growth backdrop. Official releases point to real GDP growth of only 2.8% in 2015, in line with our forecast. While we expect higher oil prices by the end of the year to provide a modest lift to growth in 2016, and forecast 3.2% full year growth, the IMF expects growth to decline even further in 2016, to 2.3%, “based on the results of policies under implementation”.

The policy environment remains constrained. Failure to allow the FX rate to provide more of a buffer to external shocks means that the real economy continues to bear the burden of adjustment to lower oil prices. Policies to reduce import demand have instead helped to create bottlenecks, with restrictions on imports in some instances driving food prices higher. The lack of official FX rate flexibility has also worsened the FX shortage, which has contributed to constrained fuel availability. More transactions have been pushed to the less formal parallel FX market, which lends itself to overshooting, resulting in even more pressure on import prices, and higher inflation. Ongoing supply bottlenecks look likely to drive price pressures further, with weak economic growth providing an insufficient offset.

The CBN tightening measures put in place at the March 2016 meeting only reversed c.50% of the surprise easing enacted at the November 2015 meeting. (As the lower CRR in November only applied to banks that were able to increase real sector lending, it is not clear how much easing was put in place to begin with). Nonetheless, inflationary pressure is clearly rising (Figure 1). With more activity taking place in the parallel market, and less through formal banking channels, the traditional transmission of monetary policy is weakened further. We doubt that the March policy tightening will be sufficient to arrest rising inflation. The supply-side nature of price increases in an additional challenge for monetary policy.

Near-term, greater pressure on fuel prices looks likely to exacerbate the situation further. With the Nigerian authorities still hoping to provide a counter-cyclical boost to growth, and discussing single-digit loan rates for strategic sectors, it is not clear that meaningful monetary policy tightening will be enacted just yet. More significantly, the provision of subsidised credit to strategic sectors may be inconsistent with FX liberalisation, implying that FX shortages will persist.

The 2016 Budget is delayed

Much of the counter-cyclical stimulus the authorities are planning rests on the intent to increase spending significantly, to c.NGN 6.1tn in 2016. However, new delays to the passage of a revised 2016 budget may mean that spending, especially capital spending, will emerge more slowly than initially expected – posing further downside risks to growth.

Moreover, it is not clear whether additional revenue measures will be presented under revised 2016 budget plans. According to IMF estimates, revenue-to-GDP has fallen to c.7.8% on lower oil prices. The IMF has urged Nigeria to raise the VAT from its current 5% in order to close a growing fiscal deficit. The IMF also advocates a more independent price-setting mechanism to address petroleum subsidies. The authorities are concerned about the potential inflationary consequences of a higher VAT, and more meaningful fuel price deregulation. However, the absence of fuel price deregulation, especially given Nigeria’s propensity for frequent fuel shortages, may also be contributing to higher prices, with little wider economic gain.

Dealing with fuel supply shortages

Near-term the authorities hope that independent sources of fuel imports will increase, with the FX provided by upstream oil companies to their downstream counterparts. Under this scheme, approximately USD 200mn will be provided by international oil companies to finance increased fuel imports. It is hoped that production from the Kaduna refinery, with a capacity of 110,000 barrels per day, will resume by mid-April, following disruptions to the supply of crude attributed to attacks on oil pipelines. However, these measures are unlikely to provide sufficiently rapid relief. Ongoing fuel shortages near-term, with almost immediate transmission into transport prices, are expected to exert further pressure on the SC-PCPT over the course of April.

Until Nigeria addresses its economic challenges with a more comprehensive package of measures, price pressures may persist – even given the backdrop of weaker growth. The pressures are largely supply-side, but look likely to be sustained. Weak public finances, especially at the sub-national level, poor private sector confidence and limited portfolio investor appetite for Nigerian assets suggest that further tightening is unlikely to be viewed as the ideal response.