BY FESTUS OKOROMADU
Econometric analysts from Financial Derivatives Company Limited have predicted a fresh 17-year high inflation rate of 22.7 percent for the month of May and a bogus 25.2 percent for June.
The forecast is coming on the heels of the release of Nigeria’s consumers price index otherwise referred to as inflation rate for the month of May by the National Bureau of Statistics, this week.
The FDC analysts led by Bismarck Rewane, Managing Director and Chief Executive Officer, made the forecast in their monthly economic bulletin for June, released recently.
The economic experts noted that the Central Bank of Nigeria had over the past 12 months adopted orthodox and unorthodox measures to cool inflation in Nigeria, but to no avail.
He added that while the monetary policy rate has increased by a total of 700bps to a 20-year-high of 18.5%pa from 11.5%pa in April 2022, inflation has maintained its upward trend to 22.22 percent (April 2023) from 16.45 percent, when the CBN began its tightening cycle.
“Based on our econometric analysis, we are projecting another increase in the headline inflation rate to a fresh 17-year high of 22.7% when the NBS publishes the CPI report for the month of May. Aside from the sustained upward trajectory, the rate of increase in the level of inflation has become more rapid than in earlier months this year. The major drivers of inflation during the month of May remain money supply growth (up 18.87% y-o-y), supply shortages (planting season effect) and exchange rate pass-through (down 3.3% to N765/$),” the report stated.
On why they predicted 250bps hike inflation between May and June, the analysts noted that inflation data for May is not reflective of the effect of the 150 percent jump in the price of petrol resulting from the removal of the PMS subsidy.
FDC explained that the full impact of the petrol price adjustment will be felt in the inflation numbers for June, which initial estimate was put at 25.2 percent.
Meanwhile, the price of diesel (which is the major fuel used by trucks for logistics) declined by 12.70 percent to N660/ltr in June from its peak of N756/ltr in May. The drop in price of diesel is expected to taper inflation in June.
Insisting that all sub-indices will move in tandem with headline inflation, FDC said, “From our econometric model, all inflation sub-indices will move in the same direction as the headline inflation. The month-on-month sub-index, reflecting current price movements, is expected to rise by 0.28 percent to 2.19 percent (29.57% annualized) in May from 1.91 percent (25.55% annualized) in April.
“More so, food inflation will increase to 24.86 percent from 24.61 percent in April, despite the reduction in the global food price index to 124.3 points. Higher food prices stem from supply shortages due to the planting season (April-June). Our recent market survey in the Lagos Metropolis showed that commodity prices jumped by an average of 14.3 percent compared to April.
“Additionally, the core sub-index, which is inflation-less seasonalities, will inch up by 0.17 percent to 20.31 percent in May from 20.14 percent in April, driven by Naira depreciation and high diesel prices. In May, the naira depreciated by 3.4 percent at the parallel market to N765/$ from April’s close of N740/$. In the interim, diesel prices soared to N757/ltr before declining towards N650/ltr at the commencement of June.”
Addressing fuel subsidy impact on the nation’s economy, FDC noted, “Removing fuel subsidies was a difficult sell, but it had to be done. The once temporary measure that began in the 1970s to shield Nigerians from higher petrol prices has now cut a big hole in government revenue today. As of 2022, the government spent N4.39 trillion subsidizing fuel, higher than the N2.45 trillion spent between 2018 and 2021.
“Worse, the NNPC, paying these subsidies on behalf of the government, has been unable to remit a dime to the federation account for the past 10 months, leading to a decline in FAAC disbursements to state governments. FAAC allocations fell by 33.7% to N656 billion in May from N990 billion in January 2023.”
On the inflationary impact of the fuel subsidy removal, the FDC economists said they expect the petrol subsidy removal to add 3 percent to headline inflation, pushing it to 25.2 percent in June before tapering towards the end of the year due to the positive multiplier effects of policy reforms.
“However, ripping the Band-Aid off has immediate and far-reaching implications on the cost of living for consumers as food and transport costs skyrocket. As a result, many more Nigerians will slip below the poverty line of $1.20 per day. Already, 133 million Nigerians are considered multidimensional poor, incapable of adequately meeting the basic needs of life (food, shelter, education, health).
“The other aspect is the increase in operating expenses and possible drop in sales for businesses. The reduction in aggregate demand due to weak consumer purchasing power will impact GDP growth negatively,” FDC said.
