April 20, 2021/InvestmentOne Report
· In line with our expectation, March 2021 inflation numbers came in higher as pressure on food prices continue to mount. According to the figures released by the National Bureau of Statistics the headline inflation hit a new 4-year high of 18.17%y/y from 17.33%y/y in February 2021.
· We believe that the increase in the food sub-index might not be unconnected to the elevated level of insecurity in the country as manifested in the series of herdsmen and farmers crises. Despite the faster growth in agriculture in Q4 2020 (+3.42%), we believe high post-harvest loss and continuous ban on some food items (from official FX market) in the face of fast rising population have continued to add pressure on food prices.
· The core sub index rose by 12.67%y/y in March 2021 from 12.38%y/y in February 2021 as FX related challenges remained. However, the increase in the index slowed to 1.06% in March from 1.21% m/m recorded in February 2021.
· Going forward, we believe food sub index may maintain its fast uptrend on the back of the escalating insecurity in the country as farmers vs herdsmen crisis persists. We still maintain our view on the exemption of items like rice, flour, sugar and cement from the list of liberalized items under the African Continental Free Trade Area (AfCFTA). We believe some of the benefits associated with the agreement in terms of competition, which may cause prices of these items to fall, may not be realized. This may outweigh the positive impact of the recent reopening of land borders. As such, we think prices of these items may remain sticky and by extension put pressure on headline inflation.
· In the same vein, recent addition of Sugar and Wheat to the items banned from the official FX market may have negative impact on food prices which are already high. We expect refined food products from these items like flour, sugar, etc. to be negatively affected.
· With the recent announcement that the Federal Government may extend subsidy payment for the next six months (It may cost about N720billion) in order to carry out wide consultations before reaching a final decision on the issue, we do not expect an adjustment on the current PMS price within the period.
· Overall, we expect inflation to remain high for a while before slowing down due to high base effect. On the average, we have adjusted our base case inflation expectation to around 17% (from 15%) in 2021 higher than the average of 13.20% in 2020.