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Home Opinions Blurb

Brace up, US Inflation rate of 9.1% will be bad for the Naira

Blurb Team @Nairametrics by Blurb Team @Nairametrics
July 14, 2022
in Blurb, Spotlight
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The latest data from the United States Bureau of Labour Statistics reveal the inflation rate of the world’s largest economy hit a new 40-year high of 9.1%.

The data shocked analyst globally who had expected inflation to moderate at about 8.8% or below 9% at the least. At a disastrous 9.1%, pressure is heavy on the US Federal Reserve (FED), which is their equivalent of Nigeria’s CBN, to act swiftly and more aggressively.

What this means, is that they expect the United states FED to increase their benchmark interest rates by over a hundred basis points or 1%. This has mega ramifications for emerging market economies, especially Nigeria.

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Last June, the US Fed reacted to higher inflation rate data by increasing its interest rates by a whopping 0.75% the highest rate increase since 1994. The interest rate is now between 1.5%-1.7%. If it does increase interest rates as predicted by as much as 1%, then the world could be in for a very long summer.

The US is not the only country raising rates. Canada also announced a rate increase of 1% and the UK and EU are expected to tow the same line of action. These actions are predicted to trigger another massive global recession which will be bad for investments, jobs, income, and global stabilization.

It could be worse for Nigeria’s Naira.

What this means for Naira

Nigeria’s exchange rate, Naira has been under pressure in recent weeks as increasing demand amidst chronic shortages has led to a depreciation of nearly N5 monthly. The rising US inflation rate could make it worse.

Strong Dollar – the world is already grappling with a strong dollar that saw the Euro trade at parity to the greenback for the first time in about 20 years.

  • Driving this is the hike in interest rates in the US forcing investors to flee other currencies in exchange for dollars.
  • This is because a higher interest rate now makes it attractive to hold the dollars when compared to other currencies.
  • This will also heavily impact the Naira because Nigeria relies heavily on foreign investment inflows to keep the exchange rate stable.
  • Exports out of Nigeria are basically oil and not enough to meet our dollar demand leaving the country to rely on foreign investments.

Higher Eurobond Yields – now that the US Fed is likely to increase its interest rates by 1% buying emerging market bonds like that of Nigeria is unlikely.

  • Eurobonds from Nigeria are no longer attractive at the last interest rates of 8.8% which Nigeria successfully got when it borrowed back in April.
  • Today, Nigeria’s 10 Eurobond yield is over 13% meaning we are unlikely to borrow.
  • The lack of Eurobond borrowing effectively shuts down a major source of dollar inflow for the country.
  • We explained this further in this article.

Imported Inflation – this refers to inflation brought into Nigeria because we import from high inflationary countries.

  • At a 9.1% inflation rate in the US, some of the major items that Nigeria imports from the United States will be more expensive meaning it will take more Naira to afford the items.
  • Examples are used cars, their parts, machinery, digital subscriptions, technology and royalties, and consulting services.
  • They will get more expensive to afford in dollars and by extension naira which is the currency that needs to be converted to dollars to pay for these items.
  • Other things like foreign travel will also be expensive to afford for a lot of Nigerians.
  • Turkey, the EU, US are some of the countries (continents) we should expect imported inflation from.

Diaspora Remittances – Nigerians abroad send an average of $20 billion back home in terms of diaspora remittances.

  • As the threat of a recession looms in the US and Canada, the ability of Nigerians to send money abroad will be negatively impacted.
  • A recession often leads to job losses, higher borrowing costs to finance mortgages, and a rising cost of living. Interesting to note that, despite experiencing a couple of recessions in the last decade, western countries have often enjoyed a stable inflation rate.
  • This will not be the same this time around. Stunted economic growth coupled with high inflation is termed stagflation.
  • Stagflation is often viewed as a plague because it leads to increasing poverty due to the twin impact of higher inflation and lack of economic growth.
  • As diaspora remittances are an important source of forex for Nigeria, a slow down of this source will exacerbate the value of the Naira.

To combat these challenges, it will be wise to turn to dollar-based investment or anything that can earn you income in foreign currency.

 

 


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Tags: Featuredglobal recessionUs inflation
Blurb Team @Nairametrics

Blurb Team @Nairametrics

The "Blurb Team" is the official conveyer of the opinions of the Nairametrics Research & Analysis Board on matters of financial reports, macroeconomic data, and economic policies.

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Comments 1

  1. Capital OZ says:
    July 14, 2022 at 9:19 am

    This is going to be too hard….

    Reply

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