Nigeria’s Inflation Rate rose to an 8-month High of 16.82% in April 2022

We expect headline inflation to continue its upward trend in the coming months due to the supply disruptions that have ensued from the conflict in Eastern Europe which has left a mark on the local economy, given Nigeria’s dependency on imported energy and food. These factors will consequently lead to an uptick in the prices of goods and services. Also, FX pressures in the FX market will further fuel inflation expectations.

On the policy end, there is the possibility of an upward adjustment in the Monetary Policy Rate (MPR), in an attempt to keep the net foreign flows positive and also signal the monetary authority’s concern regarding inflation. However, the CBN could continue its current stance by judging that Nigeria’s inflation has a different set of drivers and as such may not respond to monetary policy decisions. Hence, we think the CBN would call on the fiscal authorities to address the structural impediments to food supply to contain higher prices. Therefore, we expect that at the next monetary policy committee meeting, the committee will hold the benchmark interest rate constant at 11.50% in order to continue to maintain post-covid economic recovery.

Aftereffect of the festive season Leads to a Marginal Slowdown in Inflationary Pressure

Looking further into the year, we recognize the possibility of upside inflation surprises, as the sub-par food harvests of last year could cause food supply to be slim during this year’s planting season, hence, propelling staple food prices northwards. Also, the impact of a base-effect sponsored moderation should become less material as we move further into the year, leaving the rate of inflation susceptible to the pass-through effect of soaring energy costs (fuel, electricity and gas), increased taxes associated with the finance act and currency depreciation. Our baseline expectation is for the headline inflation to average 14.81% in 2022 compared with 16.98% in 2021.

Maintaining PMS Subsidy Payments to Put more Pressure on Nigeria’s Fiscal Burden

The cost of the PMS subsidy rose from 4 percent of Federation oil and gas revenue captured by the NNPC in 2020 to 35 percent in 2021, an untenable fiscal burden for a country with Nigeria’s enormous infrastructure deficit and vast underserved population. Moreover, the PMS subsidy distorts efficiency incentives, promoting its nonessential or inefficient use. The subsidy also creates a very large price differential between Nigeria and neighboring countries that encourages smuggling, benefitting criminal syndicates at the expense of the public.

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