July 5, 2023/CSL Research

Following the World’s bank projection that the country’s inflation rate will likely reach 25% for the full year 2023, the Bank of America has predicted that inflation may reach 30% by the end of the year from 22.4% in May, noting that the Monetary Policy Committee (MPC) may need to increase interest rates by at least 700 basis points before the end of the year if foreign investments are to return. In an interview with Bloomberg, the bank’s sub-Saharan African Economist, Tatonga Rusike, warned that without a significant rise in the monetary policy rate
(MPR) to moderate the negative real interest rate, foreign investors may remain cautious about investing in the country.

Inflation in Nigeria has been surging, rising to 22.41% in May 2023, and is currently at a 19-year high. The CBN has tried to implement measures to control the nation’s rising inflation by increasing the monetary policy rate (MPR) by a cumulative 700 basis points, but these hikes have had a very minimal impact in curbing inflation given that the country’s inflation rate is not mainly driven by increased money supply. The rate hikes have significantly increased borrowing costs for manufacturers and business owners, who may also likely be impacted by the FX unification and removal of fuel subsidies.

We had estimated that inflation in June could rise to as high as 25.8% due to the direct and indirect effects of the removal of fuel subsidies on price growth. This figure however stands to increase substantially following the unification of the exchange rate and a possible increase in the electricity tariffs. Based on news reports, electricity tariffs may need to increase by as much as 40%. The new financial act also contains a number of new tariffs and taxes that will further contribute significantly to a rise in headline inflation in the near term.

We believe the MPC committee will face a tough choice at the next MPC meeting. Price pressures, elevated interest rates in advanced countries, and the need to attract foreign portfolio investors (FPIs) have remained top on the committee’s mind as the CBN has been clearly prioritising these concerns over growth. Nigeria’s real Gross Domestic Product (GDP) grew by 2.31% in the first quarter of 2023 compared with 3.11% in the corresponding quarter of 2022 and 3.52% in the preceding quarter (Q4 2022). The economy moderated on its current recovery trajectory, posting positive, albeit lower growth, for the tenth consecutive quarter. In our view, an increase in the pace of rate hikes in response to the anticipated spike in the inflation numbers will put the country’s fragile growth at risk while doing little to stem inflation.