September 10, 2024/Cordros Report
The Nigerian National Petroleum Company Limited (NNPCL) effectively increased the base pump price of Premium Motor Spirit (PMS) by 47.4% to NGN855.00/litre on 3 September, up from NGN568.00/litre. This price adjustment follows a period of acute PMS scarcity and NNPC’s acknowledgement of substantial debt owed to international oil traders, which had constrained PMS supply. Coinciding with this development, Dangote Refinery Limited (DRL) announced the commencement of PMS production at the Dangote Refinery. Given the strong correlation between fuel costs and transportation expenses, coupled with its broad impact on the consumer price index, we foresee a further increase in inflationary pressures in the near term. Consequently, we have revised our base case average inflation projection for 2024E upwards to 32.64% (previous: 31.47%).
Higher PMS Prices to Exacerbate Inflationary Pressures
Our initial inflation forecast anticipated a softer increase in PMS prices in H2-24. Specifically, we forecasted PMS prices to retail in the NGN675.00/litre to NGN775.00/litre band in H2-24, slightly higher than the NGN668.30/litre – NGN769.62/litre range in H1-24. With the aforementioned, alongside an anticipated reduced naira volatility, we estimated an average inflation of 31.47% for 2024E, with a year-end print of 28.45% y/y. However, recent developments have necessitated a revision of these projections. We believe the faster than expected 47.4% surge in PMS prices, coupled with the persistent naira volatility, is likely to intensify inflationary pressures and underpin a slower pace of disinflation for the rest of the year.
Figure 1: PMS Pump Price vs Expected Open Market Price (EOMP; NGN/litre)
Precisely, the strong correlation between PMS prices, transportation (83.0%) and core inflation (76.0%) underscore the far-reaching impact of the higher price levels. We anticipate that rising energy and transportation costs, which constitute 21.0% and 13.0% of core items, respectively, will drive core inflation higher.
In the same vein, the tight link between transportation costs and food inflation (84.0%) suggests a significant pass-through effect on food prices. While the commencement of the main harvest period in mid-September is expected to slowdown food prices, we believe the increase in logistics costs could reduce the pace of decline.
Overall, we still project a moderation in headline inflation for August (32.24% y/y vs July: 33.40% y/y) due to the high base effect from August 2023 (3.18% m/m vs August 2024E: 2.29% m/m). However, we expect increases in September (32.33% y/y) and October (32.57% y/y) before falling to 32.09% y/y by year-end. Consequently, we have revised our average headline inflation projection upwards to 32.64% for 2024E (previous estimate: 31.47% y/y).
