Inflation set to rise further

E kaaro o, Ututu Oma, Barka da Safiya - Good morning, and a warm welcome to ThinkBusiness Nigeria, your Monday – Friday dose of commentary, contexts, and insights on business and economic news that matter to you.

Economics is politics, and politics is economics.

President Bola Tinubu has promised Nigerians that fuel price will not go up. In the face of weakening Naira, the economics is not looking good. So, to ensure that the economics does not get worse for Nigerians, politics will have to balance the rest.

However, it will be a massive, awful handling of Nigeria’s macroeconomic instability if the removal of subsidies collapses before its full third month.

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Markets

• On Tuesday, the benchmark NGX All-Share Index (ASI) shed 281.51 (-0.43%) points to close at 64,928.98, representing a week loss of 0.58%, a 4-week gain of 1.82%, and an overall year-to-date gain of 26.69%. As it was two days ago, Eterna share price led the decline in the market with a 9.86% drop, followed by Sunu Assurances Nigeria (-9.62%), Omatek Ventures (-8.11%) and Unilever Nigeria (-7.05%).

• Oil prices declined by over 1% on Tuesday on sluggish Chinese economic data coupled with fears that Beijing's unexpected cut in key policy rates was not sufficient to rejuvenate the country's sputtering post-pandemic recovery. Brent crude futures fell US $1.31, or 1.5%, to US $84.91 a barrel while U.S. West Texas Intermediate crude fell US $1.44, or 1.8% to US $81.07.

• Naira experienced a decline in value in both the official and street markets. At the I&E window, Naira depreciated by 4.07%, concluding at a rate of N771.77 against the US dollar. On the streets, the currency saw a slight devaluation of 0.61%, resulting in a valuation of N941 per dollar.

• US natural gas futures fell below US $2.7/MMBtu, the lowest in a week driven by prospects of lower demand into next week and strong production. US gas demand, including exports, is expected to rise from 103.1 billion cubic feet per day (bcfd) this week to 104.4 bcfd next week, below Monday's forecast.

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National Headlines

• Energy and food driving prices up – The National Bureau of Statistics (NBS) reported headline inflation rose year-on-year (YoY) to 24.08%, compared to 22.79% in June. It is the second inflation report following the removal of fuel subsidies May 29^th . (See News Analysis below).

• Back to fixing price of petroleum products? – The President has assured Nigerians that there will be no increase in fuel prices. Taken on face value, it means the government, rather than leave fuel prices to the market, will ensure the price does not go beyond the current band of N580 – N620 per litre across the country. There are reasons to expect increases in fuel prices in the coming weeks. First, crude oil prices have been rising, reaching US $86 per barrel last week. Also, the Naira has weakened considerably, with an arbitrage gap of almost N200 on the streets compared to the I&E window.

• MOFI and fiscal resources – The Ministry of Finance Incorporated (MOFI), the investment vehicle of the Federal Government, led by Dr. Armstrong Takang, has visited the Nigerian stock exchange with the hope of raising funds by placing the portfolios under it on the market. MOFI was established in the twilight of President Muhammadu Buhari, and President Tinubu appears to buy into it. MOFI can do well if it is well done – books prepared to international standards. Through MOFI, Nigeria can raise billions in US $ by first determining the true market values of those portfolio of companies. MOFI’s success depends entirely in doing the right things by these portfolios. If we end up with the usual pedestrian, confused and non-transparent manner of doing things, we will not see result, nor the expected investment and FDI.

• Google to support government’s 1 million digital jobs – Google plans to train as much as 20,000 Nigerians, especially women and youth in digital skills and provide a grant of US $1.6 million (about N1.2 billion) to support government towards the creation of 1 million digital jobs.

Global Headlines

• Russia’s Rouble in trouble – Russia's central bank hiked its key interest rate by 350 basis points to 12% on Tuesday, after the Rouble crossed the 100 to the US $ mark. Following Russia invasion of Ukraine February 2022, the country has been bombarded with sanctions while there is no conclusion to the war nor a ceasefire. Combined, these measures are weighing on the Russian economy.

• Is Covid – 19 back? – There is a new variant of Covid – 19 being monitored by the World Health Organisation for its mutation properties. Christened Eris, WHO is investigating if its features is different from existing variants with less severe impacts though vaccines are increasingly ineffective. The US will release a modified vaccine for Covid – 19 later this year.

• Canada’s sticky inflation – Canada's annual inflation rate up by 3.3% in July, stronger than expected. The index went up by 0.6% compared to June. The Canadian Statistical agency blame base year effect of gasoline prices for the rise in the index, but it may force the Bank of Canada to raise rates again when it meets in September. Meanwhile, China have cut rates to combat “deflation”. The People's Bank of China (PBOC) said it lowered the rate on 401-billion-yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans to some financial institutions by 15 basis points to 2.50% from 2.65% previously.

News Analysis - Inflation set to rise further

Yesterday, the National Bureau of Statistics (NBS) unveiled the inflation data for the month of July, shedding light on the evolving economic landscape. Headline inflation rate for July 2023 surged to 24.08%, marking a substantial increase from the June 2023 rate of 22.79%. This translates to an uptick of 1.29% points in the span of just one month, underscoring the rapid pace of inflationary pressures following the removal of fuel subsidies.

On a year-on-year basis, the headline inflation rate exhibited an even more pronounced ascent, standing at significant 4.44% points higher than the corresponding period last year, which recorded a rate of 19.64%.

Factors driving up prices are amplified energy prices, depreciation of the Naira, and the surge in money supply. These factors have collectively contributed to the overarching inflationary pressures that we see.

The July inflation figures also provides a comprehensive snapshot of the impact of the removal of the exchange rate cap, directly impacting core inflation, which soared to a rate of 20.47%. The persistent rise in food inflation further exacerbates the overall inflationary landscape. In July 2023, food inflation registered at a substantial 26.98%, compared to previous month's rate of 25.25%, following increases in transportation costs, agricultural planting season, and the prevailing security challenges that have impacted supply chains.

The outlook is further rise in inflation. The ongoing reforms are anticipated to exert substantial upward pressure on consumer prices throughout the latter half of 2023. As a result, inflation is projected to average over 25% for the entirety of 2023, marking the most substantial annual rate since the 1990s.

This Week

• On Wednesday, 17^th August 2023, the U.K Inflation figure for July will be released.