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Investors Fear Resurgence Of Inflation May Hurt Nigeria’s Balance Of Payments - INDEPENDENT

JANUARY 25, 2022


LAGOS – Investors in the nation’s economy have implored fiscal and monetary authorities to show more concern to recent headline inflation rate that nudged up 23bps y/y to 15.6% .

They explained that the development was necessary in order to halt the eight successive monthly decline which began in April, adding that it may trigger Nigeria’s balance of payments shocks

They said the increase reflects the exchange rate depreciation that has a significant impact on headline inflation, especially the core sub index as well as the liquidity challenges in the foreign exchange market impacting adversely on manufacturing output.

They maintained that the fiscal and monetary authorities should address the long-term challenges in a timely manner to avoid significant economic consequences, with the potential for the future balance of payments problems.

They also told DAILY INDEPENDENT that there was need for the Federal Government to initiate policy measures that will address rising incidence of insecurity required for seamless farming, food production to build resilience to balance of payments shocks and ensure a sustainable recovery.

They said that the escalation of production and operating costs for businesses, leading to erosion of profit margins, drop in sales, decline in turnover and weak manufacturing capacity utilization can have significant economic consequences, with the potential for future balance of payments.

They advocated the need for the apex bank to keep policy variables unchanged at the end of its meeting this week, adding that he CBN’s MPC – monetary policy tone affects inflation pressure in Advanced Economies (AEs), crude oil price movement, COVID-19 variants threat, domestic inflation trend, growth in money supply and credit to private sector, and strength of the foreign reserves.

According to the Consumer Price Index (CPI) data for December 2021 released by the National Bureau of Statistics (NBS) , the headline inflation rate nudged up 23bps y/y to 15.6% to halt the eight successive monthly decline which began in April.

The agency said the increase in the headline rate was driven by a synchronized spike in both the food (16bps y/y) and core (2pbs y/y) inflation sub-components to 17.4% and 13.9% respectively. 

“Overall, headline inflation rate averaged 17.0% in 2021, slightly surpassing our revised projection of 16.9%”, it said.

Dr Muda Yusuf, Economist/CEO, Centre for the Promotion Of Private Enterprise (CPPE) in an exclusive  interview with DAILY INDEPENDENT, said the eight months steady deceleration in headline inflation was brought to a halt with the marginal spike in the December 2021 headline inflation from 15.4% in November 2021 to 15.63% in December 2021. 

He noted that the surge in demand during the December festivities must have played a role in the marginal spike and reversal of the deceleration trend in headline inflation. 

He added that the inflationary pressures remain a significant macroeconomic risk in the Nigerian economy. 

“It is a major concern to both businesses and the citizens. Meanwhile, food inflation, which is the biggest worry for the poor, rose from 17.21% in November to 17.37% in December. But on a month-on-month basis, there was an increase of 2.19%.The core inflation, which relates to non-agricultural products, maintained an upward trend. It increased from 13.85% in November to 13.87% in December. This was largely a reflection of the impact of currency depreciation and the liquidity challenges in the foreign exchange market”, he said. 

According to him, although the economy witnessed an incremental deceleration in inflation over the past eight months before the reversal in December, high inflationary pressures remain a major concern to stakeholders in the Nigeria economy. 

“The implications of the inflationary pressures will trigger escalation of production and operating costs for businesses, leading to erosion of profit margins, drop in sales, and decline in turnover and weak manufacturing capacity utilization 

“Lead to high food prices which impacts adversely on citizens’ welfare and aggravates poverty and weak purchasing power which poses significant risk to business sustainability as well as price volatility which undermines investors’ confidence”, he said. 

Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company, told our correspondent that the country’s inflation rate will remain structurally high at a full-year average of 13.3 percent in 2022. 

He predicted that economic activity in 2022 will be similar to 2021, owing to global inflationary trends linked to COVID-19, such as the lingering global supply shortage. 

“We can expect to see sustained cost-push factors, including a planned fuel subsidy removal, new electricity tariffs and additional taxes; alongside legacy issues, such as increased debt service burden and exchange rate conversion. Inflation will remain structurally high at an average of 13.3%, with an increase in Q1 and Q2,” Rewane said. 

He noted that the economic outlook for the country is not gloomy, despite its continued dependence on oil. 

He pegged Nigeria’s economic growth for 2022 at 3.4 percent on sustained growth in the information and communications technology (ICT) and the financial services sector. 

He said: “Nigeria would be richer and better off in 2022, and key sectors to drive the expected growth are ICT and the financials because other sectors use it to drive productivity. The economy will see a 90 percent surge in e-payment as well as an increased adoption of technology and digitisation.” 

He disclosed that Nigeria’s gross external reserves would decline towards $39 billion as the Central Bank of Nigeria (CBN) increased foreign exchange supply and allowed naira convergence. 

He added that the government would increase borrowing to meet deficit financing needs and may result in a sovereign debt default. 

Mr Segun Ajayi-Kadir, Director General of Manufacturers Association of Nigeria (MAN) in chat with DAILY INDEPENDENT that the exchange rate depreciation has a significant impact on headline inflation, especially the core sub index. 

To tame the current inflationary pressure, he suggested that government should reform the foreign exchange market to stabilize the exchange rate and reduce volatility, address forex liquidity issues through appropriate policy measures, address the security concerns causing disruption to agricultural activities and address productivity issues in the real sector of the economy”. 

Auwal Rafsanjani – Executive Director, Civil Society Legislative Advocacy Centre (CISLAC), told Daily Independent that there is urgent for the reduction of fiscal deficit financing by the CBN to minimise incidence of high-powered money in the economy. 


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