NSR H2 2020 Excerpts - Nigeria Inflation: A dance to the rhythm of Regulations
- In this report, we focus on the major themes that steered consumer prices over H1 20 and delineate our outlook for inflation over FY 2020.
- In our H1 2020 NSR, we postulated an upward trend in inflation this year, hinged on a trio impact of higher food prices from the land border closure, increased VAT from 5% to 7.5% and an anticipated increase in electricity tariffs by April. While the electricity hike did not materialize as expected, unanticipated shocks owing to the COVID-19 pandemic further amplified the inflationary pressures seen over the first half of the year. For context, the total lockdown implemented in March in a bid to curb the viral spread, led to supply chain disruption and a lot of panic buying, spiraling into artificial increase in food prices. Consequently, headline inflation ticked 80bps higher to average 12.26% over the first half of 2020, relative to the average of 11.46% recorded over H2 2019. The uptick emanated from a rise in both food and core basket.
- For the rest of 2020, we believe regulations will determine inflation trajectory. For context, the inception of the pandemic led to implementation of various regulations including devaluation in currency, restrictions in movement, adoption of the market-based pricing mechanism by the PPPRA and postponement of hike in electricity tariff beyond 2020. For us, while dissipating base effects and curtailed PMS prices should provide respite for CPI, currency depreciation and elevated transportation costs informs our projection of higher inflation rates. Precisely, we expect inflation to abate from September 2020 as the unfavourable base effect dissipates. That said, we project mean inflation rate of 12.3% YoY (2019: 11.40% YoY) and MoM inflation to flatline at 1% over FY 2020, which serves as our base case scenario. The downside to our forecast is a further devaluation in currency should crude oil prices fall significantly. This informs our bear case scenario of 13.4% YoY over FY 2020.
January to May 2020
Petroleum Products Pricing Regulatory Agency
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