The high cost of diesel, partly caused by the Russian invasion of Ukraine, and impacting negatively on the manufacturing sector in Nigeria is set to push Nigeria’s inflation for Q2 around the 16% rate.
Ayobami Omole, an Equity and Thematic Research Analyst at Tellimer Research tells Nairametrics that despite the need for a devaluation to handle the current economic realities, Nigerians may not see a devaluation, as the plan would not achieve political support.
This also comes as global commodity traders have warned that the global diesel shortage is expected to continue for the rest of the year, causing economic hardships for developing nations without the capacity to refine.
The Optics
- Last month the Manufacturers Association of Nigeria (MAN) sounded the alarm on the rising diesel prices, stating that high costs of diesel used by manufacturers in Nigeria is expected to lead to high cost of goods and services arising from the high cost of production
- MAN warned that the development could further deplete the purchasing power on Nigerians, urging the Federal Government to reduce the pressure on the manufacturers and the entire population.
- As Nigerians, enter the Q2, the end of Q1 also showed signs that the fuel shortages will affect consumer prices, as Nairametrics reported Nigeria’s inflation rate changed direction in February as it rose 15.7% from 15.6% recorded in the previous month, according to the consumer price index report, released by the National Bureau of Statistics (NBS).
- The uptick in Nigeria’s inflation rate is attributed to the increase in the price of goods and services, following the fuel scarcity across the country which began in February.
What the expert is saying
Omole says the rising cost of production is expected to keep prices higher and also maintain the inflation growth rate.
She said, “We can already feel the impact of higher energy costs. Cost of production is higher, cost of transportation is higher as well and most of it is being passed to the consumer. Automatically, we should be expecting inflation rate to remain around the 16% band.”
She adds that official devaluation to handle the economic realities however may not be coming anytime soon due to political reasons.
“Ideally, continuous high level of inflation, dwindling foreign portfolio investment and so on should prompt a readjustment but I don’t think that devaluation decision is made like that in Nigeria.
“Naira is currently overvalued and should have been devalued before now but there are other reasons why the monetary authorities have decided against it. Election season is underway and there is also a political incentive not to devalue,” she says.
What you should know
- Last month, at the Financial Times Global Summit in Lausanne, Switzerland, Nairametrics reported that the heads of three of the largest commodity traders – Vitol, Gunvor and Trafigura, disclosed that the world may face a global shortage of diesel due to the ongoing sanctions on Russia, which is expected to affect poorer nations from Nigeria to Sri Lanka that import its diesel.
- They warned that 3 million barrels a day would be taken off the markets due to the sanctions on Russia.
- Nairametrics also reported that tensions in Europe have pushed up energy prices, and Nigeria may be forced to deal with high food inflation and inflated prices for diesel and other unsubsidized energy imports for a while.
