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Rising inflation heightens macroeconomic risks

Rising inflation heightens macroeconomic risks

18 October, 2020

Nigeria’s macroeconomic situation faces daunting challenge with continuing rise in inflation as domestic consumer price pressure drove headline inflation to its highest level in more than two and a half years.

Most analysts at the weekend agreed that inflation may trend all through the fourth quarter, after rising to a high of 13.7 per cent by the end of the third quarter ended September 2020. Inflation is projected to rise to 14.21 per cent.

Bismarck Rewane’s Financial Derivatives Company (FDC) Limited said rising inflation would translate to losses on many fronts.

According to FDC, higher inflation will continue to reduce consumer purchasing power and increase cost of living, increase operating and production costs and erode corporate margins and with lower interest rates, rising inflation will further widen the negative real rate of return on investments, which could douse investor confidence.

“Headline inflation is expected to continue its upward trajectory through fourth quarter 2020 in spite of the suspension of the cost reflective electricity tariffs. The on-going protest will intensify inflationary pressures in the near term as business activities are disrupted. Food pressures will also intensify due to output constraints, supply chain disruptions and foreign exchange (forex) rationing strategy,” FDC stated.

Analysts noted that the unrelenting rise in inflation coupled with a deeper contraction in third quarter Gross Domestic Products (GDP), which is scheduled to be released on November 23, 2020, would make the outcome of the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) meeting tough.

FDC pointed out that alongside the upward inflationary trend, the faster pace of increase suggests that inflation is unlikely to start tapering in the near term.

According to analysts, the rising rate of food inflation has raised concerns about food security in the country. Food security has four major components including accessibility, affordability, utilisation and stability. The restriction of imports of finished foods and fertiliser will lead to shortages and cross elastic price increases for substitute products.

Analysts noted that Nigeria’s stagflation-rise in inflation with a major contraction in growth, in the midst of a health crisis will make the resolution more complicated but this may be salvaged with a cocktail of fiscal, monetary and trade measures.

Afrinvest Securities pointed out that the trend in consumer prices reflected weakness in the agriculture sector as the harvest season should normally drive moderate food price increases.

“We believe harvests have been challenged by the disruption to the agriculture value chain brought by the pandemic during the planting season, unfavourable weather patterns and persistent insecurity. Similarly, the recent and existing FX restrictions around food imports as well as the removal of energy subsidies and currency devaluation have negatively impacted consumer prices. In the subsequent months, we expect sustained pressure on consumer prices, especially given the troubling state of food insecurity,” Afrinvest Securities stated.

Cordros Capital explained that the rise in food inflation to 16.66 per cent reflected the intermingled effects of four factors-the impact of weak harvest season owing to subdued activities during the planting season, widening supply gap associated with the continued closure of the land borders, episodes of flooding in the northern part of the country, and the pass-through impact of devaluation in the local currency on imported inflation.

According to Cordros Capital, with the government not showing signs of rolling back the closure of the land borders alongside foreign exchange liquidity challenges and weak domestic capacity in bridging the supply gap due to structural barriers, the food index will remain the preeminent driver of headline inflation.


The post Rising inflation heightens macroeconomic risks appeared first on Smart9jaMedia.

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