•External reserves drop to $33.5bn
By Babajide Komolafe
As the financial market operators look forward to the release of the long awaited March 2020 inflation data by the National Bureau of Statistics (NBS) this week, there is apprehension that the combined effect of the recent devaluation of the naira and COVID-19 restrictions will lead to escalation of the inflationary pressure which began in the country six months ago.
The nation’s annual (headline) inflation rate rose for the sixth consecutive months to 12.2 percent in February, the highest in 22 months, from 12.13 percent in January.
The persistent rise in the headline inflation was driven by the continued effects of the border closure including increase in average imported food prices. According to the NBS, the imported food index, which measures imported food inflation, rose by 16.4 percent in February , higher than 16.1 percent in January.
However, prices of imported items especially food are expected to rise higher owing to the technical devaluation of the Naira by the Central Bank of Nigeria (CBN) on March 20th which shifted the exchange rate from N360 per dollar to N380 in the Investors and Exporters (I&E) window as well as in the bureaux de change segment.
Furthermore, the various measures introduced to contain the spread of the COVID-19 pandemic, including the lockdown in Lagos and Ogun states as well as Abuja and other parts of the country, triggered panic buying of food and related household essentials leading to shortages and hence further rise in prices.
Consequently, economy analysts are raising concerns that these developments will lead to a significant rise in the headline inflation rate for March in contrast to the moderate rise of 0.07 percentage points recorded in February.
This apprehension appears reflected in the personal statements of some members of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria at the last meeting of the committee in March.
“The pandemic may temporarily exacerbate an existing trend of rising domestic prices in the short term”, said Ahmad Aisha, Deputy Governor, Financial System Surveillance Directorate, CBN.
“The headline inflation (year-on-year) rose for six consecutive months to 12.20 per cent in February 2020 from 11.02 per cent as at August 2019 largely driven by the food index, which increased to 14.90 per cent from 13.17 per cent, over the same period. Stock piling of food by households and artificial supply shortages during the lock-downs may drive food prices higher in the short term”, she added.
Another MPC member, Asogwa, Robert Chikwendu, said: “There are still downside risks which may weaken growth further and slowdown an early recovery from the effects of COVID-19. First, Inflationary developments remain a huge concern with a seventh consecutive increase from 12.13 per cent in January 2020 to 12.20 percent in February 2020 which is the highest rise since April 2018.
“CBN Staff estimates suggest a further increase in the March 2020 inflation rates, with a slowdown expected as from May 2020, but the impact of an extended COVID-19 pandemic may further worsen the current inflationary situation”.
Similarly, Sanusi Aliyu Rafindadi, also a member of the MPC, said: “According to staff forecasts, inflation would continue an upward trajectory. The upside risks to inflation include increased shortages induced by the containment measures against the COVID-19 pandemic; increased foreign exchange market pressure; and high cost of imported food arising from the border closure.”
Also acknowledging the likely impact of COVID-19 restrictions and the naira devaluation, analysts at United Capital Plc projected a 150 basis points (bpts) increase in the headline inflation rate to 12.35 percent in March.
Explaining the rationale for this projection, they said: “We expect the pressure on food prices to resurface as domestic outbreak of COVID-19 sparks panic purchase of food items and weaken domestic supply.
“Also, a declaration of a total lockdown across the country might further exacerbate pressures on food prices. Additionally, we note that the continued closure of all land borders and resumption of the domestic planting season in March-2020, would constrain the overall supply levels.
“Factoring all the above, we expect the food inflation sub index for the month of March-2020 to cross into the 15.0 percent region (Feb-2020: 14.9 percent ). As such, we expect the headline inflation to increase from the current 12.20 percent, y/y to 12.35 percent, y/y in March-2020.”
Corroborating this view, analysts at Financial Derivatives Company said: “Inflation has increased for the 6th consecutive month to 12.20 percent in February to mark a 22-month high. The increase was largely driven by higher food prices as producers pass the increased cost burden amid the implementation of VAT of 7.5 percent in February to consumers. The upward trend in inflation is expected to be sustained in the coming month owing to panic buying and scarcity of goods as the spread of Covid-19 in Nigeria causes a shortfall in supply.”
Naira depreciation persist as external reserves drop to $33.49bn
The Naira depreciated further in the I&E window even as the nation’s external reserves dropped to $34.493 billion.
According to the CBN the external reserves which had been on the downward trend since July 5th last year, fell to $34.493 billion last week Thursday from $34.893 billion Thursday the previous week. This translated to week-on-week (WoW) decline of $650 million, representing 199 percent increase from $217 million in the previous week.
Financial Vanguard investigations revealed that the sharp increase in the WoW decline was triggered by increased dollar outflow by foreign portfolio investors (FPIs) in the face of weak dollar inflows into the country.
Investigations revealed that, in addition to the suspension of dollar sales to BDCs since March 20th, the CBN has been running skeletal services at I&E window, which has resulted in a backlog of foreign exchange demand, especially from FPIs.
The above prompted the naira to further depreciate by N1.3 in the I&E window last week as the indicative exchange rate for the window rose to N386.13 per dollar from N384.83 per dollar the previous week.
Analysts at Cowry Assets Management Limited projected further depreciation of the naira this week saying, “we expect marginal depreciation of the naira against the dollar, especially at the I&E FX Window amid declining external reserves.”