Inflation poses the greatest threat to Nigeria’s overall political stability, EIU.
According to the Economist Intelligence Unit, inflation has become possibly the greatest threat to Nigeria’s overall political stability.
“Spiralling consumer prices for food and fuel increased protests against police brutality in October 2020, and the movement swiftly expanded into a larger expression of anger, including major looting,” the report added.
Inflation in March was 15.9% year on year, extending a trend of rising annual inflation that began in December 2021. In March, core inflation (which includes agricultural costs) was marginally lower than in February, at 13.9 percent vs 14 percent. The main cause is the Russia-Ukraine conflict, as global food and gasoline costs continue to rise.
“The CBN was more divided at the latest monetary policy committee (MPC) meeting, in March, than at previous sessions,” according to the EIU’s latest dispatch. The consensus maintained, however, that targeted financing initiatives, particularly in agriculture and manufacturing, would lower inflation by increasing output. For numerous years, this has been the strategy, yet actual results have eluded us.”
Despite the fact that agricultural output increased in 2021, the headline rate never went below 15.4% (in November) and surged again in December.
“We expect the CBN to tilt towards a rate hike in 2022,” according to the EIU, because inflation is unlikely to reduce without intervention (totalling 100 basis points). However, we believe the MPC is unlikely to return inflation to its target range.”
Since 2015, Nigerian inflation has been consistently high.
“Aside from inflation, the CBN will keep an eye on shrinking interest rate spreads with the United States. “The CBN governor, Godwin Emefiele, has tried to downplay Nigeria’s exposure to changing international monetary conditions,” the EIU dispatch stated, “but overseas holdings of short-dated central bank open market operation (OMO) bills accounted for about one-third of foreign reserves at the end of 2021.” This was down from 46% a quarter earlier, owing to a US$4 billion Eurobond sale in late September, which increased foreign reserves, and reduced international uptake of OMOs. We predict the Federal Reserve (the US central bank) to raise its policy rate by a total of 175 basis points in 2022 as outflow pressures intensify.”
Nigeria issued another Eurobond worth US$1.25 billion in March 2022, but at a higher price. The funds did not appear to have taken into account the foreign-reserve statistics for that month, as the stock declined by US$316 million compared to February’s level.
“Our prediction for inflation of 15.5 percent in 2022 will be revised up to account for changes in our global prices for grains (particularly wheat) in light of the Russia-Ukraine conflict,” the EIU said. Although we expect the CBN to tighten its monetary policy, we still expect substantial inflation.”
