On 15 March 2023, the National Bureau of Statistics (NBS) released Nigeria’s Consumer Price Index (CPI) report for Feb-2023. According to the report, headline inflation increased by 9bps from Jan-2023’s print of 21.82% y/y to settle at 21.91% y/y in Feb-2023. This reading is in tandem with our internal expectation of 21.93% and the Bloomberg consensus estimate range of between 21.50% and 22.40%. It is interesting to note that February’s inflation reading of 21.91% is the highest recorded y/y increase in the past 17 years. Nevertheless, on a m/m basis, the headline CPI stood at 1.71%, 16bps lower than Jan-2023’s m/m reading of 1.87%. The slight decline in February’s month-on-month reading can be attributed to the gradual “ease-out” effect of the Naira redesign policy on prices of goods and services compared to January 2023. However, it is expedient to note that February’s month-on-month reading was the highest inflation reading in February since 2016. This could be partly ascribed to the current economic peculiarities. Meanwhile, the direction of the CPI is in line with our prior forecast of 21.93% considering the effect of the CBN’s Naira redesign policy, and the extended faux fuel scarcity on the general price levels. Having considered the above, we expect general price levels to remain elevated as overall cost of importation (particularly cost of imported refined petroleum products), foreign exchange challenges, and effects of electioneering activities weigh on economic activities.

Looking at the specific items that made up the inflation report, across the sub-indices, food inflation expanded marginally by 4bps to print at 24.35% y/y in Feb-2023, from 23.32% y/y in Jan-2023. On a m/m basis, the food sub-index recorded a drop in its February’s reading, declining by 18bps to 1.90% in Feb-2023. The deceleration in m/m food inflation could be attributed mainly to a combination of the higher base in Jan-2023 and the effects of cash crunch that resulted in lower retail demand for agricultural products, which resulted in a significant number of suppliers offering their goods at a discount, especially perishables. That said, legacy inhibitions to the food supply, such as unabated insecurity challenges in food-producing states, increase in the cost of farm inputs (seeds and machinery) & associated logistics costs, and the cost of fertilisers remain pain points for food production and supply. In tandem, the core inflation sub-index experienced broad base decline, falling by 32bps y/y and 76bps m/m  to print at 18.84% and 1.06%, respectively. In Feb-2023, the core basket observed the highest increases in prices of gas, liquid fuel, passenger transport by air, vehicles spare parts, fuels, and lubricants for personal transport equipment solid fuel, the same as in the prior month. The core inflation index continued to expand due to a weaker currency, general high cost of energy & petroleum products, and high transportation fares.

Outlook: Inflation Expected to Ease Slightly in Mar-2023

As we advance into the year, we expect pressure on the general prices of goods and services within the Nigerian economy to ease slightly, primarily due to the high base effect. In the food inflation component, we expect unyielding inflationary pressures owing to several factors related to the food production output of the Agricultural sector. Legacy insecurity challenges in the crop-producing North-Western and North-Central states of the country will remain key pressure points on aggregate food supply. In addition, elevated cost of farm input (seeds, fertilisers, machinery etc.), remains a major bottleneck. Farmers also face route-to-market challenges. Nigeria continues to contend with imported inflation which is passed on to the final consumer. On the other hand, we expect food demand to sustain upward momentum.

For core inflation, we expect cost of energy and FX shortage to remain the most significant concerns. Crude oil and gas prices have remained elevated despite lingering worries about global oil demand. Although crude oil price is expected to be under control, it is likely to remain high in the near term, keeping prices of deregulated products like diesel, kerosene and jet fuel elevated. The effect of higher cost of petroleum products will have a multiplier effect on logistics (transportation basket), housing and production of goods and services. Similarly, we expect prices of service-based businesses (education, recreation and culture etc.) to remain elevated as they navigate a higher operating cost environment.

The suboptimal FX environment is likely to continue as inflows from foreign investors and foreign debt issuances are likely to remain subdued. However, the improved oil sector outlook would ease FX pressure slightly. Following a string of positive developments in the energy sector, (closure of two illegal pipelines in Oct-2022, improved crude oil production from 0.9mbpd in Sep-2022 to 1.3mbpd in Feb-2023, Shell Nigeria’s lifting of force majeure on Bonny crude exports, and the prospective commissioning of Dangote refinery in Jun-2023), we expect Nigeria’s revenues and FX holdings to improve in the year.

Further to the CBN’s currency “mop-up” exercise, about N1.4trn representing 58.1% of currency out of the banking system, has been mopped out from Oct-2022 to Jan-2023. Given this, we envisage the level of currency in circulation to decline further in the coming months. Consequently, the “mop-up” exercise may curtail the general surge of prices of goods and services in the economy. Similarly, we expect the core inflation sub-index to remain the key driver of the headline inflation rate in the rest of Q1-2023. Overall, we project a 21.8% y/y increase in headline inflation.  

Aggressive Monetary Policy Tightening… Not an Option

At the conclusion of its 24-Jan meeting, the Monetary Policy Committee (MPC or the Committee) decided to raise the benchmark interest rate (MPR) by 100bps to 17.5%. The decision was hinged on curbing elevated inflation in the economy, even though December 2022 y/y inflation reading printed at 21.34%, 13bps slower compared to November’s reading of 21.47%.

Though the MPC is resilient at taming inflation rate in the economy, we do not expect the Committee to keep a strong arm in its next week meeting of 20-21 March 2023. Our stance is based on the fact that the economy is already facing cash crunch issues, hence, further MPR hikes may depress the economy more as cost of borrowing soars across the various markets. It is expedient to note that aggressive policy at this point in time may have negative effect on productivity (Q1-2023 GDP). Based on the foregoing, we expect the MPC to retain the benchmark interest rate at 17.5% in its next week meeting.

Furthermore, fixed-income investors will continue to receive negative real returns. The market would remain volatile for the rest of Q1-2023. An MPR hike may slow down investors’ interest in the equities market. However, given our firm prognosis that yields will remain depressed through Q1-2023, particularly at the short end of the curve, investors’ risk-on sentiments would prevail within this period. This will be supported by positive earnings performance from listed corporates. Regardless, we expect system liquidity and MPR to remain key sentiment drivers through to the end of Q1-2023.