Weaker Naira, Electricity Tariff, VAT To Push Up Inflation–Analysts - LEADERSHIP

JANUARY 27, 2020


As the year 2020 runs by, analysts at Afrinvest West Africa Limited has said a weakening of the naira coupled with a hike in electricity tariff, sustained closure of the land borders and the new Value Added Tax rate would see inflation rose to around 14.5 per cent this year.

Speaking at the Afrinvest Nigerian economy and financial market 2020 outlook, tagged “Nigeria in the new decade, nothing ventured, nothing gained” analysts at the investment firm said increased liquidity in the system and the lack of high yield investment instruments could cause the value of the naira to drop by the second half of the year.

Yields in the money market have been on the decline with the Nigerian Treasury Bills rate averaging three per cent as bond yields also dropped since last year. Local investors in order to maximize their investments have begun to seek foreign currency investments with a higher yield.

According to head, Afrinvest Research, Mr. Abiodun Keripe, the exchange rate was stable for the most part of 2019 due to the support of weekly foreign exchange sales by the CBN in various segments of the market.

He said: “The naira may be walking on eggshells, because in 2019, we expected currency pressure ahead of the elections and weak prospect for higher oil prices and capital inflows, but in 2020, we believe the dark clouds care gathering, indicating further currency pressures and an imminent devaluation.

“Aside the from weak oil prices and capital inflows which would be the fundamental drivers of the currency movements, there has been aggressive liquid build up in the economy which is due to expansion in the credit and large amount of OMO maturities without high yielding investment outlets.

‘‘This could lead to increased demand for imports and depress in current account balance, the currency could be stable in the first half of 2020 and a 10 per cent devaluation to N396 to the dollar in the second half of 2020 if capital flows remain weak and oil price falls below $60 per barrel.”

Deputy managing director of Afrivest, Mr. Victor Ndukauba, on his part, noted that inflation which had remained relatively stable for the early part of 2019, suddenly saw an uptick towards the tail end of 2019 and this is majorly because of the land border closure by the federal government.

Food inflation, he said had touched 14.7 per cent towards the end of August due to the land border closure which impacted on food prices “given the fact that Nigerian sort of depend on import from neighboring countries to meet food supply in our local market and because of that closure now, there was a bit of shortage and that impacted on prices generally.”

The outlook, he said is based on the implementation of the new electricity tariff, Value Added Tax (VAT) which has been increased to 7.5 per cent from five per cent with implementation starting in February 2020 which would result in rising prices.

“So, based on these, inflation outlook for 2020 is upward, a best case scenario is about 13.7 per cent, but if we add a bit of currency pressure to a devaluation in the second half of 2020, it would push inflation higher to about 14.5 which is just what our vast case scenario is.

“However if we don’t see any currency devaluation, the land borders are opened up and probably a delayed implementation of the new electricity tariff that then would probably suggest we see inflation at about 12.1 per cent for the year which somewhat slightly even higher than what we had for 2019,” he added.


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