Nigeria’s inflation rate has increased from 11.98% recorded in December 2019 to 12.13% in January 2020. This is the highest rate recorded in the country since May 2018, which was 11.61%.
According to the NBS report, month on month, inflation rose by 12.13% in January, higher than the rate (11.98%) recorded in December 2019 and 11.85% in November 2019.
A closely-watched component of the inflation index rose by 14.85% in January 2020 compared to 14.67% recorded in December 2019. On a month-on-month basis, the food sub-index rose by 0.99% in January 2020, up by 0.02% points from 0.97% recorded in December 2019.
The average annual rate of change of the food sub-index for the twelve-month period ending January 2020 was 13.86% from December 2019 (13.74%).
According to the report, the rise in the food index was caused by increases in prices of bread and cereals, meat, oils and fats, potatoes, yam and other tubers and fish.
The ”All items less farm produce” or Core inflation, which excludes the prices of volatile agricultural produce, rose to 9.35% in January 2020, up by 0.02% when compared with 9.33% recorded in December 2019.
On a month-on-month basis, the core sub-index increased by 0.82% in January 2020. This was up by 0.01% when compared with 0.81% recorded in December 2019. Also, the average 12-month annual rate of change of the index was 9.11% for the twelve-month period ending January 2020. This is 0.04% lower than 9.15% recorded in December 2019.
The report showed that core inflation was driven by increase recorded in prices of hospital services, vehicle spare parts, cleaning, repair and hire of clothing, shoes and other footwear, glassware, tableware and household utensil, hairdressing salons and personal grooming establishments, repair and hire of footwear, garments, as well as passenger transport by air.
Rural and Urban Inflation
Similarly, the urban inflation rate increased by 12.78% (year-on-year) in January 2020 from 12.62% recorded in December 2019 while the rural inflation rate increased by 11.54% in January 2020 from 11.41% recorded in December 2019.
On a month-on-month basis, the urban index rose by 0.92% in January 2020, up from 0.9% recorded in the previous month, while the rural index also rose by 0.83% in January 2020, from 0.82% recorded in December 2019.
The latest inflation report implies a fast rise in the prices of overall goods and services in the economy. The report showed that Nigeria’s inflation rose to 21 months high, the fastest growth recorded since May 2018.
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It should be noted that the latest increase in the inflation rate means the purchasing power of consumers to buy goods and services deteriorated. That is, the ability of consumers to buy the same quantity of goods with a fixed income level has worsened within the period, despite investment yields being low.
FPI and FDI drop to $68 million and $18 million respectively in April, lowest since 2016
The Covid-19 economic lockdown impacted negatively on investor inflow into Nigeria.
Nigeria attracted just $67.9 million in Foreign Portfolio Investment (FPI) inflow for the month of April 2020, the lowest inflow recorded this year. This is contained in the latest capital importation data obtained from the Central Bank of Nigeria (CBN).
A cursory look at the Central Bank data shows that FPI sharply reversed from $2.30 billion at the beginning of the year (January) to just $67.9 million inflow in April 2020. Nigeria like most emerging markets relies heavily on foreign portfolio investments to shore up its external reserves and manage its exchange rate position.
Nigeria shut down its economy in the whole of April as part of its measures to contain the spread of the COVID-19 pandemic.
FPI and FDI hit 2016 recession low
The outbreak of the COVID-19 pandemic has affected the global economy with emerging markets like Nigeria feeling the full brunt from a fiscal and monetary perspective.
With the pandemic projected to spread recession across major countries including G20 nations, investors are wary of pumping money into poorer countries like Nigeria. This is despite trillions of dollars in stimulus packages injected by the likes of Japan, the US, Europe, and Canada. Foreign investor apathy is also due to the global lockdown which is still in full force in many sub-Saharan countries like Nigeria.
In total, Nigeria attracted only $316.8 million capital inflow in April, a 113.5% drop representing a significant decline when compared to the $2.30 billion capital inflow received in January 2020. Total capital importation was $2.4 billion and $615 million in February and March respectively. The majority of the inflows recorded in January and February flowed into Money Market Instruments.
The breakdown of capital inflow shows that the main components of capital inflow (FPI and Foreign Direct Investment) plunged significantly.
As at the end of April 2020, Foreign Direct Investment (FDI) received was estimated at $18.5 million, down from $110.9 million received earlier in January 2020. FPI, on the other hand, recorded a 3,297% decline from $2.30 billion in January to $67.9 million inflow in April 2020.
This is the lowest capital inflow received in the Nigerian economy in a single month since the 2016 recession. In 2016 December, Nigeria recorded $76.15 million FPI and $67.9 million in January 2017 respectively.
According to the recent report released by the World Bank on the Nigerian economy, in the first quarter of 2020, the total FPI flows into Nigeria declined by 54%, and this is due to increased risk aversion in global capital markets.
While FPI and FDI both declined, the Central Bank continues to offer high yield to foreign investors, causing the share of FPI in total capital inflows to rise to over 50 percent in 2019. The shift from FDI to FPI represents an increase in Nigeria’s reliance on “hot money” to finance the Balance of payment, which exacerbates the vulnerability of the current account.
Although, the foreign reserves have improved in recent weeks, averaging $36 billion in June 2020. Meanwhile, a sustained reversal in capital flow may further expose the country’s foreign reserves, a situation which may necessitate another round of exchange rate unification (Naira devaluation).
Economic Reopening still a longshot
In the past weeks, major economies of the world have embarked on gradual easing of lockdown, a move targeted at restarting local trade and initiate the recovery process. However, there are new pushbacks on reopening plans as renewed concern about the possibility of a second wave of the COVID-19 pandemic across the globe remains high.
Nigeria has also faced similar pushbacks on reopening the economy further prolonging a restart of full economic activities. Just recently, the federal government approved a N2.3 trillion stimulus package which they will fund from special accounts and a $3 billion loan from the World Bank. This is in addition to the $3.4 billion already drawn from the IMF. Whilst, these are all geared towards stimulating the economy, the economic devastation from COVID-19 remains a huge concern.
Both the IMF and World Bank have predicted the Nigerian economy to contract by 3.4% and 5.4% respectively in 2020. According to the World Bank, in 2020, the current account is expected to hold steady at about -3.1 percent of GDP in 2020, although imports and exports are both projected to contract considerably.
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Also, the World Bank disclosed that Nigeria’s exports are expected to fall by US$40.3 billion, 9% of GDP, because of the drop in global oil prices, and imports are expected to fall by US$50.5 billion, 12% of GDP, due to sluggish demand and disruptions in global supply chains.
Indeed, Nigeria is in a significantly weaker macroeconomic position than it was during the 2015/16 recession, and it has fewer policy instruments to cushion the shocks induced by the pandemic.
EFG Hermes highlights sectors that will boom Post-COVID
Investors and executives will nevertheless have to navigate a changed landscape.
EFG-Hermes Holding, a financial service corporation, has said that investments across certain sectors of the Nigerian economy would receive boosts when the COVID-19 pandemic ease by September, 2020.
The sectors, according to the experts, that would attract more investments and patrons after the pandemic subsided are Agriculture, Digital payments, health, consumer goods and capitalised financial institutions among others.
This was disclosed by experts during a virtual investors conference organised by EFG-Hermes and attended by Nairametrics.
Head, Frontier research, EFG-Hermes, Kato Mukuru, explained that the sectors will be investors delights post-COVID, as more investments would be attracted to them and they are essential products/services consumers can not do without. He said,
“The good thing about COVID-19 is that it has forced new sectors to come through. More local and foreign investors will be going into food cultivation, processing, storage and distribution to take advantage of the expansion in the industry.”
Mukuru added that Nigeria’s biggest financial institutions would also attract new investments and customers as most lenders are deficient in capital and many will need capital to stabilise after the pandemic.
“There are clients that are looking at very good opportunities and we are discussing with them. I know a local investor who is looking to do hospitals post Covid-19. We have started that dialogue,” he added.
The lockdown introduced by the Federal Government created opportunities for some operators in the digital payment space, as many moved from cash to digital payments.
Also, a crash in the price of crude oil, the nation’s major revenue earner intensified effort by the government to diversify income sources by supporting investments in agriculture and processing industries.
Despite current challenges facing the Frontier Emerging Markets (FEM), Mohamed Ebeid, co-CEO of the Investment Bank at EFG Hermes, explained that changes in the macro picture might create new opportunities for countries, markets and companies.
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He said, “We do see the prospect of some relief from immediate pressures, with an easing of FEM portfolio outflows expected as major central banks continuing to implement large expansionary programs.
‘We could also see a floor put under commodity price drops as major oil producers solidify their commitment to large output cuts. Investors and executives will nevertheless have to navigate a changed landscape, where previously more-or-less hidden structural trends come to the fore and accelerate.”
Ebeid added that the main objective of the Virtual Investor Conference was to provide participants with first-hand insights from key international players, spurring further investment in FEMs.
Nigerian businesses are optimistic about July – CBN
Regarding the currency outlook, respondent firms expect the Naira to depreciate in the current month.
A CBN survey revealed that Nigerian businesses have an optimistic outlook for the months of July, August, and December. The confidence index for the months stood at 31.8., 47.4 and 67.8 index points, respectively. This is following the largely pessimistic outlook towards the Nigerian economy for the month of June which had an overall confidence index (CI) of -24.3 index points.
The survey was conducted by the Statistics department of the Central Bank of Nigeria and it involved a sample of 1050 businesses that cut across small & medium enterprises (SMEs) as well as large corporations in Nigeria. Respondent firms also included import-based and export-based businesses alike. It attained a response rate of 96% and the sample took cognisance of companies in the agricultural industry, services, manufacturing, wholesale/retail trade, and construction.
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The overall outlook of respondents on financial conditions like working capital, access to credit, and average capacity utilization was also negative. The only good expectation was from expected volume of business activities.
The Major Challenges
The firms that took part of the survey highlighted issues like insufficient power supply, competition, high-interest rate, financial problems, unfavourable economic climate, unclear economic laws, insufficient demand, unfavourable political climate, access to credit and lack of equipment as the primary factors that constrain business activity.
Regarding the currency outlook, respondent firms expect the Naira to depreciate in the current month. Much like the overall outlook, they also expect it to appreciate in July, August and December. Inflation level is also expected to rise and borrowing rate is equally expected to rise in the same months respectively.