Afrinvest Weekly Update | First Disinflation in 19 Months... A Peak or Pause?

An Extraction of the Afrinvest Weekly Economic & Market Report for August 16th, 2024

Photo Credit: CBN

This week, we spotlight the recent activities of the CBN, assess the July 2024 CPI data published by the NBS, and share our views on the likely impact of the 150-day suspension of import duties & exemption of VAT on certain basic food items by the FG on the economy.

To start with, earlier in the week, the CBN announced its recommencement of publication of key forward looking macroeconomic data, which in our view, is essential, given that the non-availability of these important publications have deprived stakeholders of adequate artillery to leverage for future personal and business strategies. This announcement was immediately followed by the release of the July 2024 Purchasing Managers’ Index (PMI) report – the first of such since December 2020. For context, the PMI is a leading indicator that provides insight on the short-to-medium term direction of the broader economy by aggregating the assessment scores of sub-activities under key sectors of the economy into an index score. In Nigeria, the composite PMI reading is derived from the assessment scorecard of three key sectors – Industry, Services, and Agriculture. The PMI scores are generated from quantitative and qualitative responses to survey administered on a large pool of strategic players in key sectors of the economy.  PMI above 50.0 points indicates an expansion, while a reading below 50.0 points signals a contraction.

For July, the composite PMI printed at 49.7 points, extending its contraction spell to a thirteenth straight month though with a slight improvement over June's reading (44.8 points). The underwhelming reading of the composite PMI in July was largely driven by weak sentiment in the agriculture (49.7 points) and industry (48.3 points) sector. Precisely, new orders and  employment level faltered across these business segments - an unsurprising development given the dual shocks of exchange rate and energy goods price volatility over the last 12 months, which are core to activities in these segments.

Meanwhile, for the second month in a row, the services sector PMI was upbeat (albeit modest) registering a 50.3 points print vs 50.1 points in June. However, key indicators within the sector exhibited mixed performance. While business activity and stock of raw materials inventory expanded, the level of new orders contracted during the review period. Notably, employment levels remained stagnant. A closer look at the sectoral composition reveals a mixed performance, with eight of the fourteen subsectors growing and six contracting. The Motion Pictures and Music Production subsector led with the highest expansion to 58.2 points (previously: 51.0 points), while the Management of Companies subsector saw the largest decline to 42.3 points (previously: 49.3 points).

Shifting focus, NBS data revealed that the y/y headline inflation rate fell 79bps to 33.4% in July, marking the first decline in 19 months. While this disinflation outcome was in tandem with our expectation, the magnitude was disappointing. Recall that we estimated that the y/y headline rate would decline by 107bps in a base case to 33.1% in July, supported by high base year effect and decline in the price of certain farm outputs such as yam, pepper, and vegetables owing to gains from early harvest. However, resurgent in PMS scarcity (since mid-July) and exchange rate shock (NAFEM rate depreciated by 6.4% m/m to ₦1,608.73/$ in July) kept pressure on the core inflation sub-basket (27.5% y/y from 27.4% y/y previously). Meanwhile, pressure eased on the food inflation rate sub-basket (down 12.55ppts to 39.5%, first time in 19 months), conforming to our expectation.

Looking ahead, the weaker-than-expected decline in July inflation, sustained contraction in Agriculture PMI, and underwhelming Industry PMI suggest that the headline inflation rate in H2:2024 may deviate from our year-end estimate of 28.9% and annualized average of 31.7%. However, the successful implementation of the 150-day window of zero-import duties and tariffs on selected basic food items, complemented be efforts to improve security in the agrarian sector, along with sustained liquidity tightening by the CBN, could keep our projection on track.

Chart 1: M/M Composite PMI Trajectory Since 2023

Note: Blue bars indicate expansion while grey indicates contractions

Source: CBN, Afrinvest Research

Addressing the duty-free import window initiative, earlier in the week, the FG directed the Nigeria Customs Service (NCS) to begin the implementation of the policy initiative. Recall that in July, the Minister of Agriculture announced the FG’s plans to tackle rising food prices, through suspending import duties and tariffs on key food commodities like maize, rice, wheat, and cowpeas. Following this, the NCS released a list of guidelines to govern the implementation of this policy and they include:

  i. To participate in the zero-duty importation of food items, a company must be incorporated in Nigeria and have been operational for at least five years.

 ii. It must have filed annual returns and financial statements and paid taxes and statutory payroll obligations for the past five years.

 iii. Companies importing husked rice, grain sorghum, or millet need to own a milling plant with a capacity of at least 100 tonnes per day, operated for at least four years, and have enough farmland for cultivation.

 iv. Those importing maize, wheat, or beans must be agricultural companies with an out-grower network for cultivation and;

 v. Companies must keep records of all related activities, which the government can request for compliance verification.

Interestingly, the NCS also expressed concerns about the policy, stating that the agency may lose revenue worth ₦188.4bn due to the implementation of the 150-day tariff-free policy. While NCS argument is valid, we opine that the estimate revenue loss cannot be compared to the groaning pains of the populace due to multiple shocks experienced in the last fourteen months owing to FG's reforms. For emphasis, the World Bank in a recent Nigeria Development Update (NDU) report estimated that 4.0m more Nigerians fell below the poverty line ($1.90/day) in 2023, due to inflation-eroded purchasing power in the aftermath of FX and PMS subsidies removal. Given FG’s claim that it saves more than ₦400.0bn monthly from PMS subsidy removal, it is safe to say that it is economically prudent for the FG to sacrifice potential revenue of ₦188.4bn in six months to prevent economic shutdown like that of the 10 days #EndBadGovernment protest which caused the nation about ₦500.0bn (according to the minister of industry, trade & investment).