Nigeria’s stagflation caused by poor policy choices: Capital Economics
Nigeria is stuck in stagflation, occasioned by poor policy choices, a London-based economic research company, Capital Economics, has said.
Stagflation is an economic condition that combines slow growth and relatively high unemployment with rising prices, or inflation.
“The past week has brought further evidence that Nigeria is suffering from stagflation and we suspect it’s a ‘chronic condition’ arising from poor policy choices rather than an ‘acute disease’,” its Emerging Markets Economist, Virag Forizs, said in a note on Friday.
He said “price pressures in Nigeria are certainly elevated”, with the headline rate exceeding the central bank’s 6-9 percent target range since mid-2015.
He noted that figures released earlier this week showed that inflation jumped to a four-year high of 17.3 percent year-on-year in February.
Forizs said, “Meanwhile, the economy contracted by 1.9 percent last year, the steepest downturn since 1993. And unemployment rose to 33.3 percent in Q4 – the second highest globally according to Bloomberg.
“We suspect that stagflation in Nigeria is the by-product of policy preferences that the authorities seem determined to stick to. Chief among them is keeping the currency stable.”
According to him, policymakers’ reluctance to let the naira weaken means that it remains overvalued.
“Indeed, the currency trades over 20 percent weaker on the parallel market. A large gap between the official and black market rates has probably contributed to high inflation as traders using the parallel exchange have increased the price of imported goods,” Forizs said.
He said foreign exchange restrictions imposed by the Central Bank of Nigeria to reduce pressure on the naira appeared to be disrupting economic activity.
“For instance, about 200,000 tons of agricultural exports were stuck at ports in December due to a new CBN rule. At the time, the National Cashew Association of Nigeria estimated that this resulted in the loss of around $1.3 billion in non-oil export revenues,” he added.
He noted that this week, the World Trade Organization joined other multilateral institutions in raising concerns about Nigeria’s foreign exchange management.
Forizs said, “Disagreements over the currency seem to be behind the hold-up in approving Nigeria’s $1.5 billion loan request from the World Bank.
“Nonetheless, Nigerian policymakers don’t seem to have any inclination to shift tack. And as long as that remains the case, stagflation is likely to persist.”
