Headline Inflation has assumed a new pattern over the last three months, primarily driven by pressures in the food basket, reflecting a shock to crop cultivation from covid-19 restrictions and border closures. In addition, more recent developments in currency markets, where the Naira has weakened, as well as the increases in petrol prices following the removal of blanket subsidies have underpinned inflationary expectations. Looking ahead, sizable increases in electricity tariffs which came into effect in September as well as continuing fuel price pressures could see inflation head towards 14% levels in Q4 2020. Given the supply-side driven nature of the inflationary bout as well as the recent pivot to unorthodox monetary policies (which include liquidity tightening measures via CRR debits) it is likely that the CBN will ignore these numbers and persist with its current stance.
Nigeria’s inflation surged in August with the CPI rising 13.22% y/y (July: 12.8% y/y), the highest level since April 2018, largely driven by pressures in the food basket, where prices climbed 16% y/y (July: 15.48% y/y) while the core index (which includes energy prices) expanded by decelerated to 10.5% (July: 10.1% y/y). On a monthly basis, the inflation climbed by 1.34% over August (July: 1.25%) — the highest monthly number since June 2017.
Pressures in Food, Utilities and Transport are driving the rising inflation numbers: Disaggregating the inflation numbers, three segments stand out (Food, utilities aka Housing, Water, Electricity and Gas and Other Fuels, HWEGF and transportation) as central to the pick-up in inflation as they accounted for ~80% of the variation in the monthly CPI print. Food was central and I shall set out my thoughts on the drivers later in this report, but on the latter two, pressures are linked to pick-up in fuel prices following the removal of subsidies in March which has seen fuel prices rise by 15% over the last two months.
Figure 1: Component analysis of monthly inflation
A combination of weaker farming activity, Naira weakness and covid-19 lockdowns are behind the uptrend in food inflation: Looking at food inflation, the big pressures came from the farm produce component which accounts for over 90% of food inflation. August usually marks the start of the main crop harvest season in Nigeria which peaks in September-October and as such in normal years, monthly inflation peaks in July and decelerates thereafter. However, in 2020, monthly farm produce and food inflation readings over the last three months are at levels not seen since 2017 which would suggest factors hurting the supply side. Indeed, most grain and tuber crop prices are moving towards five-year trend levels.
Figure 2: Component Analysis of Monthly Food Inflation
In 2017, my thesis then was that a sharp Naira depreciation drove heightened exports of Nigerian farm produce into the wider sub-region forcing an upward adjustment in domestic prices. In 2020, in addition to the sharp shift in the FX rate as well, the sense from reading on-ground sources like FEWSNET is that Covid-19 movement restrictions hurt the flow of labourers from neighbouring countries during planting season. Accordingly, field surveys are indicating that the area under cultivation for most grain and tuber crops is lower than levels in prior years which is pointing towards a subpar crop harvest for 2020. As such, Nigeria is facing a more fundamental supply shock, which alongside the rising transport costs is likely to drive higher food prices.
The price pressures are likely to be steep in urban centres as is evident in the spreads between rural and urban inflation which have widened since the border closures. Thus, in a departure from prior years, when regional supplies from neighbouring countries moved through the border to temper these pressures, existing blockades imply that limited relief is forthcoming. Solving the price runaway for food items clearly involves a combination of allowing targeted food imports or at least re-opening the borders to allow regional food trade flows to resume. However, Nigeria’s economic managers appear to be on the other side of this fence.
Figure 3: Rural and Urban Inflation
But money supply growth has been restrained by CRR debits in the banking sector: The textbook monetary policy response to accelerating inflation is to raise interest rates to induce a shift away from consumption towards savings in a bid to force inflation to within a target level. This would pre-suppose inflation was driven by an expansion in money supply often through credit growth. A look at developments on this front would rule this out.
As at the end of July 2020, annualized growth in monetary aggregates was mixed with strong growth in M1 (+33%) and M2 (+27%) relative to M3 (+10%). The muted growth in M3 relative to the narrower measurers of M1 and M2 reflect declines in OMO bills (- 72%) after the CBN elected to proscribe non-bank domestic investors from its sterilization securities sales. This resulted in a drop in OMO bills from NGN8trillion at its peak in November 2019 to NGN3.5trillion in July 2020. As these monies flowed unhindered into the banking system, they spurred an expansion in Demand Deposits (+42% and Quasi-Money (+24%). Although these should ordinarily stoke concerns, a look at the monetary base (M0) throws up evidence of how the CBN has still managed to sterilize liquidity: via the cash reserve requirements. Specifically, bank reserves have expanded at an annualized pace of 132% to NGN11trillion at the end of July or by some NGN4.8trillion – which is more than double than the quantum of growth in Naira terms in M3 (NGN2trillion). Effectively, as many have argued, the entire move to outlaw access for non-bank (and tacitly banks) was essentially targeted at zero cost liquidity sterilization. Thus while there has been growth in money supply from maturing OMO bills, the concurrent expansion in monetary base via CRR debits has effectively drained the financial system of excess liquidity.
From a more structural perspective, money supply growth is often driven by two sub-parts: net domestic assets (NDA) and net foreign assets (NFA). The CBN’s use of CRR debits has ensured that NDA growth over the first seven months of 2020 has been subdued (+1.3% annualized) relative to a faster expansion in net foreign assets (+54%) following the surge in FX borrowings with the IMF loan. In simple terms, the liquidity deluge from OMO bill maturities have been managed away.
Figure 4: Growth in Money Supply
So what gives?
In the near term, my suspicions are that the CBN is set to follow the global trend of ignoring the inflation numbers, which suits its ‘home-grown’ philosophy, that has underpinned a spate of interventions across a host of sectors. These interventions has resulted in the CBN directing credit towards certain sectors (manufacturing, renewable energy, gas-to-power, housing, agriculture etc) at single digit interest rates in a bid to stimulate activity. In combination with the Loan-Deposit Ratio (LDR) policy as well as the arbitrary nature of the CRR debits, which are well above the 27.5% target number, the CBN has been able to force banks to boost loan volumes as a coping mechanism in the face of collapse in net interest margins from lower rates on government securities. Though sceptics remain over the efficacy of supply-side policies on stimulating production among other unorthodox policies such as offering better rates for offshore investors relative to onshore investors, the CBN’s recent policy of lowering minimum savings rate has provided a strong signal of its direction: there will be no reward for risk-free anymore. Will this work or not? We will have to wait to find out. But interest rates are likely to remain lower for sometime.
And 3 more things…
- Changing the definition of core inflation: Presently, Nigeria defines core inflation as headline inflation less farm produce which reflected historic stability in fuel prices due to the existence of subsidized regime. With the removal of subsidies and 30-day averaging period, fuel prices now move from month-to-month implying higher volatility. Now is the time to change the definition of core inflation to exclude farm produce and fuel in line with the theoretical meaning. Looking back, the spread between headline and the true core definition which the NBS publishes suggests maybe we should not have tightened policy as aggressive as we did in 2016-17 by focusing communication on the true core number. Economic policies should focus on more lasting structural drivers than transient one-off shocks like fuel & electricity price hikes which tend to have disinflationary base effects afterwards.
- Adopting a more meaningful inflation target: In Nigeria, that target level for inflation is defined as 6-9% for the headline number. Given the weight of food inflation (55%) in the CPI numbers as well as elements without recourse to monetary policy (like fuel and electricity prices), some (including myself) have argued that the 6-9% target for headline is meaningless. In countries which pursue inflation targeting, the target is more refined with preference for demand-side inflation metrics like core inflation, wage inflation or personal consumption expenditures. Nigeria needs to adopt something similar.
- Explicitly incorporating FX into Nigeria’s monetary policy reaction function: In theory, the core mandate of central banks is price stability, but this does not preclude the pursuit of other objectives. In the US, the Fed has a dual mandate that explicitly includes unemployment. I believe a proper explicit mandate for the CBN is one that requires that it optimize a reaction function of price stability and an export competitive exchange rate. The price stability mandate should entail lowering some measure(s) of inflation (preferably ‘core’ demand side measures) towards a target band defined as conducive for consumption and welfare in Nigeria over a medium-term period set as 2-3 years. This allows to evaluate the efficacy of monetary policy and provides a good feedback loop. On the other factor, given the importance to policymakers we need to include that the CBN target a competitive exchange rate. The idea in mind is a variant of what obtains in Singapore, wherein the nominal exchange rate must coincide with a REER level that ensures that Nigeria’s non-oil manufacturing exports are competitive. This way, we resolve this obsession for nominal exchange rate stability. Balancing both items and ensuring better communication are the ultimate goals for monetary policy.
Figure 5: Trends in headline and core inflation
* core (Nig) refers to the present definition of core inflation, Core (True) is the theoretical definition of core inflation. Spread is the difference between headline and True core inflation.
* REER: Real Effective Exchange Rate is the weighted average exchange rate of a currency with its trading partners adjusted for inflation. In Nigeria, this effectively defaults to the bilateral REER against the USD given the dominance of the USD in Nigeria’s trade basket.
 In Nigeria, the operational definitions are as follows: M1 = Currency outside banks + demand deposits, M2 = M1 + quasi-money (time and savings deposits) and M3 = M2 + CBN T-bills.
 M0 is defined as currency in circulation and bank reserves. In theory, central banks monetary policy influences the monetary base via bank reserves while banks behaviour and actions influence money supply.
Covid-19: Nigerian record worst consumption expenditure in over 12 quarters
Nigerians spent less on consumption expenditure in the first half of 2020 as Covid-19 hit income
Nigerians spent a total of N46.99 trillion on household consumption expenditure in the first half of 2020 (January – June). This is contained in the Nigerian Gross Domestic Product report (Expenditure and Income approach), released by the National Bureau of Statistics (NBS).
According to the report, the final consumption expenditure of Nigerian households in nominal terms stood at N46.99 trillion in H1 2020, indicating a 4.2% decline compared to N49.06 trillion recorded in the corresponding period of 2019.
In terms of quarterly breakdown, household consumption expenditure grew by 8.62% in Q1 2020 to stand at N25.49 trillion, while it dipped by 15.96% at N21.5 trillion in the second quarter of the year.
What this means
Consumption expenditure is an important factor in determining economic growth for any country. Thus, as Nigerians suffered the effects of the Covid-19 lockdown in the second quarter of the year, consumption expenditure dropped meaning more Nigerians spent less as they stayed at home.
- A major driver of the lower spending was households with consumption falling to N21.5 trillion, the lowest in over 12 quarters. The data dates to the first quarter of 2018.
- Covid-19 meant more Nigerians stayed at home reducing the amount they spent on household consumption. Most Nigerians spent more on staple food items, and critical supplies required to stay safe.
- Spending on internet data also rose in the period as Nigerians relied on social media and streaming to stay informed.
- Nigeria needs consumption expenditure to rise if it is to exit the recession.
- Consumption expenditure of non-profit institutions serving households grew by 56.8% from N267.7 billion recorded in H1 2019 to N419.7 billion in H1 2020.
- Compensation of employees also recorded a 1.9% increase to stand at N18.77 trillion between January and June 2020 as against N18.42 trillion recorded in the comparable period of 2019.
- Also, changes in inventories were estimated at N602.7 billion in H1 2020, a 2.76% increase compared to N586.6 billion recorded in the corresponding period of 2019.
- National disposable income for the first half of the year stood at N68.7 trillion in nominal terms. grew by 4.26% (year-on-year) from N65.87 trillion.
A cursory look at the data in real terms showed that household consumption expenditure in Q1 and Q2 2020 declined by 4.03% and 0.08% (year-on-year) respectively compared to 2.68% negative growth and 0.75% growth for the corresponding periods of 2019.
It is worth noting that household consumption accounted for 63.11% of the total real GDP at market prices in the second quarter, an increase of 3.7% points when compared to Q2 2019.
In nominal terms, government expenditure grew by 9.61% in Q1 and 157.01% in Q2 2020. General government expenditure accounted for 6.23% of the gross domestic product in real terms in the first quarter and 14.58% in the second quarter of 2020.
- In Q1 and Q2 2020, real general government expenditure grew by 6.80% and 152.05% respectively, with the half-year growth rate recorded at 77.25%.
Compensation of employees
In nominal terms, compensation of employees rose by 9.5% in Q1 but recorded a decline of 4.64% in Q2 2020 compared with growth of 7.83% and 14.35% for the comparative periods in 2019.
- In real terms, however, compensation of employees recorded growth of 6.7% in Q1 and 6.47% decline in Q2 2020, year-on-year). For the first half of 2020, growth in this component was marginal at -0.34% year on year, or 7.74% points slower than 7.4% in 2019.
Net lending to rest of the World
Net lending grew by 348.25% in Q1 but declined by 51.11% in Q2 2020 compared with declines of 172.06% in Q1 and 242.85% in Q2 2019.
- While, for the first half of 2020, nominal Net lending grew by 52.43%, compared to a decline of 213.85% recorded in 2019.
What you should know
- The Nigerian economy contracted by 6.1% in the second quarter of 2020, and consequently slipped into recession after enduring a second contraction in Q3 2020.
- The decline in economic activities in the country can be attributed to the disruptions brought about by the lockdown as a result of covid-19 pandemic.
- Household disposable income, which measures the income of households after taking into account net interest, dividends received, payment of taxes, and social contributions grew by 2.55% and 0.66% in Q1 and Q2 2020 respectively.
Here are macro trends that will shape Nigeria in 2021 – KPMG
Analysts in KPMG Nigeria have stated that there are 10 macro trends that will determine the fate of the nation’s economy next year.
Nigeria may be out of recession by the first quarter of 2021, as projected by the Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, but analysts in KPMG Nigeria have stated that there are 10 macro trends that will determine the fate of the nation’s economy next year.
The macros are Global dynamics, fiscal sustainability, uncertain forex environment, stringent policy posture, constrained productivity and accelerated credit penetration.
Others are cautious private sector investment activities, emerging digital economy, socio-political threats, and consumer pressure points.
This was disclosed by Olusegun Zacchaeus, Associate Director, Strategy and Economics, KPMG, during the American Business Council webinar recently.
Zacchaeus explained that the modest recovery expected in 2021 is threatened by the second wave of COVID-19 pandemic. According to him, everyone should expect more pressure that will emanate from the global economy. For instance, the change of baton of the Democratic government in the United States is expected to impact several economies, including Nigeria. He said,
“The emergence of a new democrat president will have implications on the global economy. The bigger fiscal stimulus package totaling US$2.5 trillion from 2021 to 2024 is expected to drive recovery.
“On oil price dynamics, bilateralism with possible easing of trade tensions between the US and China. Possible catalyst for distortion in oil prices given strong advocacy for shift away from fossil fuel.”
KPMG added that OPEC is considering deepening oil production cuts amidst rising Covid-19 cases, and fresh economic lockdown in Europe Outflows from SSA between February and March totaled $5 billion.
According to the firm, 47% of investors think emerging market economic activity will slow over the next 12 months, compared with 37% who think it will accelerate and borrowing costs are still high and financial conditions remain difficult.
“WTO expects a significant downturn in global trade in 2020 between 13% and 32%, and some recovery in 2021 at 8%. Risks to the outlook include a second wave of COVID-19 with the results being very sensitive to the length of time that the Covid-19 threat remains in place or trade restrictions,” he added.
It stated that the proposed 2021 budget provides indications of tight spending and worsening debt. KPMG projected that the Budget implementation will likely underperform in line with historical trends.
According to the firm, Nigeria’s fiscal flexibility is constrained by a high interest bill as a percentage of general government revenue and by inefficient non-oil tax collection.
Noting that the impact of new tax policies could be watered down by overall low economic outputs, KPMG advised that the Integrated Revenue Monitoring System (IRMS) needed to ease revenue recognition.
Uncertain FX environment
It stated, “The foreign exchange environment will remain under pressure exacerbated by lower FX earnings.
“Fair value estimation at N422/$1, reflecting a 9% overvaluation of real effective exchange rate. Fair value may improve but rates will still be misaligned in 2021.
“Liquidity is low due to the pressure on foreign reserves and sharp fall in capital importation by -78% in Q2 2020 (QoQ). Liquidity will remain challenged given oil price outlook and capital flows,” it added.
On the multiplicity of rates, KPMG stated that multiple exchange subsist, considering the spread of N80 between BDC, government intervention rate, and official rate. CBN may not likely close the multiple exchange rate window.
KPMG stated that Volatile, Uncertain, Complex and Ambiguous (VUCA) policy environment has negative impact on the overall growth in the economy.
Following this, social wheel pressure is spinning and this has resulted in a growing flux of skilled talent to other climes like Canada, U.K, Australia, and the United States.
“The nature, speed, volume, and magnitude of change is not predictable e.g. rising Inflation and low aggregate demand. Lack of clarity resulting in multiple and conflicting interpretations.
“Lack of predictability in issues and events make it difficult to see future outcomes or make decisions. Focus will be more on social vs economic growth,” it added.
Accelerating credit penetration
The tax firm stated that Nigeria has been credit starved despite increased supply to the private sector. On what is expected in 2021, it added that deepened credit penetration is expected to continue in 2021. Albeit, there may be increased concentration
While concluding on this, it noted that LDR stipulated at 60%, now increased to 65% and that the OMO restrictions increasing overall liquidity in the banking sector.
“Increase in CRR from 22.5% to 27.5% to tame excess liquidity and inflation. The Reduction in MPR by 100bps from 12:5% to 11.5%. Development Finance Initiative as a policy tool will enhance credit penetration,” it recalled.
Cautious private sector investment activities
According to KPMG, the Private sector confidence remains low as FDI is expected to dim in 2021. The firm noted that the largest component of capital importation, contributing 58.8% of total capital importation.
It attributed this to the government aggressive policies toward enhancing other strategic investments e.g. technology development in the economy.
It also attributed the Portfolio investment, which declined by 91% (YoY) at $385.32million in Q2 2020 from $4,292.893million in Q2 2019, to the impact of Covid-19 on global activities, which dampened investors’ sentiments.
Emerging digital economy
The emerging digital economy is expected to witness growth in 2021, as Nigeria boasts of an industry driven by increased investment resulting in capital to drive growth.
On the influx of start ups in the segment, KPMG stated that the total funding in Nigerian startups in 2018 up to $178 Million. Entry of new players, 15 startups raised more than $1million in the fintech segment.
“Tech start-ups have begun to attract funding from venture capital firms, however, foreign investors provide over 80% of this funding,” it added.
The social wheel of pressure is spinning, as an additional 5million Nigerians are expected to be pushed into poverty in 2021 due to crisis. This will be driven largely by contraction of remittances and growth in population (2.6% annually) above the GDP growth rate.
Consumer pressure points
Even in 2021, the tax firm is optimistic that there are several macro forces pitched against the consumer. One of them is employment, which remains a major challenge in Nigeria, as inflationary pressures on the rise are expected to be sustained in 2021, driven by rising costs.
Despite the challenging environment, consumers’ confidence is expected to be positive, as consumer spending will remain under pressure.
In conclusion, unemployment and erosion of purchasing power, due to inflation, will form additional pressure points.
What you should know
Speaking at the same forum in 2019, as reported by Nairametrics, Zaccheaus explained that the the global developments in 2020 portends significant risks for the Sub-Saharan countries. Other factors are investment for growth, productivity, technology and digital disruption, socio-economic pressure and consumer pressure points.
While providing an update on the Nigerian economy, it was stated that it currently stands on a slippery slope of recovery. According to KPMG, the Nigerian economy which recorded a growth rate of 6.21% in the first quarter of 2014, has continued to witness very slippery growth recovery since the 2016 recession.
No more N100 a plate meal in Nigeria
Food items across markets have experienced a spike in prices, making it impossible for one to find a decent meal for N100 today even in local outlets.
Gone are the days when an average Nigerian could purchase a meal with N100 and be filled to the brim. Even in Lagos, where foodstuffs are generally perceived to be expensive, a hungry Nigerian with just N100 could buy a loaf of ‘Agege’ bread for N60, beans for N30, and two sachets of pure water at N5 each; or White rice for N50, beans N30, spaghetti N10, and 2 pure water.
Similarly, with N100, an average Nigerian could purchase 1 wrap of “amala” for N50 and 2 slices of meat at N20 each with 2 pure water, while some other person could prefer to buy “fufu” in place of “amala” and still be filled.
However, prices of food items are known to be downward sticky in Nigeria, as food items across diverse food classes have experienced price increases in recent times. Of all items, staple food items are the most affected, especially the prices of rice, garri, yam, potato, cassava, and yam flour, to the prices of relatively ostentatious items like semovita, semolina, or poundo yam.
Even the market prices of spaghetti and indomie, which are considered close substitutes for rice, have experienced major spike in recent times. By taking an investigative stance, one would realize that Golden penny pasta (spaghetti) which sold for between N120 – N150 a year ago, ow sells for between N230 – N250 a piece, marking about a 66.67% increase in 12 months.
Similarly, egg, a pocket-friendly and close substitute for fish, meat, chicken, and turkey, is not so pocket-friendly anymore, with a price increase from N25 a year ago to N50 as of today – a 100% increase.
In line with the recent development, coupled with the widespread economic vulnerabilities in the nation, it is obvious that the cost of cooking a meal in Nigeria today is twice as expensive as it was a year ago. As the price of cooking ingredients like tomato paste has increased by more than 200% this year alone. The price of onion, which is a widely eaten vegetable in the country, has also increased.
Consequently, the cost of buying cooked food from ‘Mama Put’, food restaurants, and other outlets has also gone skyrocketed — it is impossible to get a satisfying meal without spending as much as N300 or more in the process, depending on the type of outlet you patronise. If a person were to spend on meals, an average of N300 twice a day for 31 days, it therefore indicates that an average Nigerian spends at least N18,600 on feeding in a month considering that many Nigerians still earn below the minimum wage of N30,000.
What they are saying
A food vendor in Abule Egba, known by her street name, Iya Sodiq, said that the cost of items she uses in cooking has gone up recently, and the only option she had was to increase the price she charges her customers to compensate for the recent increase. She disclosed that most times when asked to sell a fixed amount of food by a customer, the quantity she sells now is considerably lower than what she would have sold at the same amount earlier this year.
She stressed that even the smallest bread she sells in her shop currently goes for nothing less than N100.
“The prices of everything in the market is now high. Even the customers are complaining that my food is now small, but they don’t understand that I am not even making many gains anymore because food items are now so expensive in the market,” Iya Sodiq said.
In a conversation with another food vendor at Ikeja, by the name Mrs. Tobiloba, she highlighted that the cost of preparing a pot of soup has spiked significantly, given that the price of tomato paste, onions, pepper, seasoning, fish, meat, and even rice has gone up relative to last year, which meant her customers have to spend above N100 to quench their hunger.
She said, “Onions, pepper, tomatoes, rice, fish, meat and everything you need to prepare soup or stew have increased in prices in the market. If I sell in the quantity I was selling before, I will definitely run at a loss.”
What this means
The persistent increase in the prices of food items has put downward pressures on the real value of money and also the real income of Nigerians. With food inflation rate moving towards the 2017 level of 17.38%, the purchasing power of Nigerians has never been this constrained, with nothing to compensate for the recent increase in the prices of food items, despite the increase in the national minimum wage.
What you should know
After a careful comparison of the composite food index between September 2015 and September 2020, Nairametrics reported last month that food inflation increased by 110.5%, this shows that the purchasing power of Nigerians is constrained, as real income has reduced significantly, despite the 66.7% increase in the National minimum wage from N18,000 to N30,000.
Article jointly written by Samuel Oyekanmi and Omokolade Ajayi