Nigeria’s inflation risks remain elevated, says FDC
While consumer price inflation is expected to continue its downward trend, inflation risks in Nigeria remain elevated due to heightened insecurity in some of the food-producing states, higher energy costs, and exchange rate pass-through, Financial Derivatives Company Limited has said.
Analysts at the Lagos-based FDC noted in a new report that the naira weakened to a record low of N525/$ following the Central Bank of Nigeria’s decision to discontinue the sale of forex to Bureaux de Change before appreciating by 1.9 percent to N515/$.
They said, “Currency pressures and the difficulty in accessing forex has forced some manufacturers to resort to local substitutes, which is reducing supply to retail markets (cross elasticity of demand).
“For instance, corn, which is usually in massive supply during the peak of the rainy season, witnessed scanty supply to retail markets this year. This is partly because it is used as a substitute for sugar in producing ethanol.”
The analysts said the International Monetary Fund’s special drawing rights allocation ($3.35bn) and the impending Eurobond issue ($6.2bn) would boost forex supply and taper demand pressures in the near term.
They said, “In Nigeria, annual inflation moderated for three consecutive months to 17.75 percent in June. The divergence between the global and Nigerian inflation trends has been a subject of controversy in the last three months. It was more disturbing that the published data seemed not to reflect market reality.
“Economists have attributed these diverging trends to ‘the outside lag’ and ‘consumer price resistance’. The outside lag is the time lag between when policies are implemented and when the economy or markets begin to feel the impact.”
The FDC noted that in the second quarter, there was an increase in interest rates both in the interbank and Treasury bill markets and an increase in cash reserve ratio debits i.e. a de facto tighter monetary policy.
