Afrinvest Weekly Update | CBN Intensifies FX Reforms as Headline Inflation Rate Nears 30.0% Psychological Level
An Extraction of the Afrinvest Weekly Economic & Market Report for February 16th, 2024
Photo Credit: CBN
This week, we dissect the January 2024 Consumer Price Index (CPI) data published by the NBS and the new circulars rolled out by the CBN in its ongoing reform of the FX market. Starting with the CPI data, Nigeria’s headline inflation rate rose further by 98bps y/y to 29.9% in January (the highest since returning to democracy in 1999), negating our projection of a 40bps moderation to 28.5% premised on a high base effect. On a m/m basis, the headline rate advanced 2.6% (December 2023: 2.3%), marking the highest m/m reading since 3.2% in August 2023 – implying an annualised rate of 31.2% as against FG’s target of 21.4%.
The sharp increase in the headline rate was jointly driven by the persistent pressure from both the food and core CPI sub-baskets. The food price index accelerated 148bps y/y to reach 35.4%, marking the highest rate since August 2005. On a m/m basis, the food inflation price index printed at 3.2% (December 2023: 2.7%), the highest in the last five months. We attribute the spike in the food price index to weak farm output supply due to lingering insecurity and structural challenges. In addition, the further slip in the exchange rate in the month (the official rate lost 37.7% against the USD in January), the negative pass-through from elevated energy goods’ prices on the cost of processed foods as well as the knock-on effect of imported food inflation contributed to the disappointing reading.
Also, the core inflation sub-component rose 68bps y/y to 23.6% and 29bps m/m to 2.2%. This increase reflects the continued pressure from FX volatility (post-exchange rate floatation policy), the partial removal of PMS subsidies, and the pass-through effect of escalating geopolitical tensions on the global supply chain and prices. In particular, the increase in the core inflation rate was majorly felt in the prices of medical services and pharmaceutical products.
Looking ahead to February, we opine that risk factors remain tilted to the downside. Although the FG has commenced move to clamp down on food hoarding and direct the release of grains from the strategic reserves, we are less optimistic about meaningful relief from this move (especially in the near term) given that a sizeable share of food supply in Nigeria is imported. Amidst these developments and sustained volatility in the FX market, we estimate that the y/y headline inflation rate will increase by 2.1ppts to 31.9% in February.
Switching gears to monetary policy matters, the Apex bank in its efforts at restoring sanity in the FX market rolled out three new circulars, all of which focused on checking potential infractions on the demand side. In the first circular titled “Allowable channels for payout of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA)”, the CBN directed all authorised dealer banks to restrict PTA/BTA payout to electronic channels only, including debit and credit cards. In the second circular, the CBN revised upward, the allowable limit of price deviation for exports and imports to -15.0% and +15.0% of global average prices respectively from -2.5% and +2.5% previously, citing global inflation dynamics and other related challenges as reasons for the review. Lastly, the CBN directed banks to limit cash pooling on behalf of IOCs (that is, the transferring of offshore funds to parent accounts) to a maximum of 50.0% of the repatriated export proceeds in the first instance, and the remaining 50.0% after 90 days from the date of inflow of export proceeds subject to the fulfilment of all documentation requirements.
While we laud the commitment of the Cardoso-led CBN management to sanitise the FX market, we maintain that a lasting solution to Nigeria’s FX crisis would require similar reform energy from the fiscal side, especially as it pertains to fixing FX supply side problems and blocking of the mass leakages in key government establishments and alleged FX speculation practices by some arms of the executives. As per our view on the circulars released, we believe the restriction of PTA/BTA payout to electronic channels would help curtail FX roundtripping activities in that segment. Also, we posit that the upward review of the ceiling on price deviation for exports and imports should favour Nigeria’s exporters in competing markets, given that bilaterial trades (even among developed markets) are increasingly driven by pricing incentives. On the circular limiting the allowable cash pooling on behalf of IOCs, though we are oblivious of whether the CBN conducted stakeholders engagement before taking the action, we think that the good intention of the policy may snowball into declining investment flows into the oil & gas sector should mutual understanding be lacking between the CBN and the IOCs on the policy goals.
Chart 1: Worsening Food & Exchange Rate Shocks Drag Inflation Higher
