Home Feature Inflation timebomb threatens Nigeria’s outlook

Inflation timebomb threatens Nigeria’s outlook

by Goddy Ofose
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Written on 17/06/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

There was a period when Nigeria displayed resilience against the inflation menace.

As other countries across the globe waged war on rising prices, Africa’s largest economy experienced periods of cooling inflation. This anomaly was a welcome development for the Central Bank of Nigeria (CBN) and offered room for interest rates to be left unchanged in an effort to stimulate economic growth. Fast forward to today, Nigeria’s annual inflation is back on the rise – accelerating for the fourth straight month to 17.71% in May. It was the steepest inflation rate since last June, fuelled by rising food prices, soaring diesel prices, and ongoing dollar shortages. On top of this, surging global commodity prices and pre-election spending have the potential to fuel the fire – especially after the IMF projected prices to rise between 18% and 22% in 2022.

The war in Ukraine has propelled global oil prices to levels not seen since 2014. This has sent shockwaves across the world and prompted central banks to adopt an aggressive approach toward raising interest rates. While other oil-producing countries are enjoying the gift of soaring commodities, Nigeria has failed to cash in thanks to sub-optimal oil production, heavy reliance on gasoline imports, and fuel subsidies. Meaning that the current commodities boom is not translating to higher export earnings for Nigeria but to higher costs and inflationary risks.

During the first quarter of 2022, Nigeria’s economy slowed for the third consecutive quarter to 3.1%. The CBN projects economic growth to be 3.2% this year while the IMF sees the country expanding by 3.4%. However, Nigeria’s economic outlook remains threatened by disruptive power outages, foreign exchange shortages, capital outflows, and untamed inflation.

Given how the CBN has triggered a tightening cycle, more hikes are expected down the road. Back in May, the central bank surprised markets with a 150-basis point rate hike. With the CBN now focused on fighting inflation and interest rates rising rapidly across the globe, more hikes could be on the table to limit capital outflows. According to a report on Bloomberg, the CBN is expected to raise interest rates by 50 basis points two additional times in 2022 – bringing benchmark rates to 14%.

Theoretically, the rate hikes could limit inflation risks at a time when external and domestic factors are threatening Nigeria’s economy. Ongoing geopolitical risks, extreme weather, and supply-chain disruptions could feed the inflation monster, while pre-election spending ahead of the general elections is likely to exacerbate the negative situation.

But the burning question is whether Nigeria is in a position to handle higher interest rates? Time will tell.

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