Post-Christmas expenditure, others to dip January inflation to 11.35% -Analysts

…As liquidity mop-up pushes OMO sales to N2.38trn

Motolani Oseni

A group of analysts at Financial Derivatives Company (FDC) have projected that Nigeria’s headline inflation is expected to slide to 11.35per cent in January from 11.44per cent stood in the preceding month. The National Bureau of Statistics (NBS) had disclosed that the inflation rate of 11.44 per cent for December 2018 from per cent reported in January 2018. The FDC analysts made this projection in their Economic bulletin released during the week, where they said that the 11.35 per cent inflation rate validates that the assertion in personal income compression in January is partly because of the payment of school bills and the post-Christmas expenditure effect. According to the report, this likely to be a reflection of a fall in disposable income in January, leading to a decline in aggregate demand for consumer goods, the pattern of slow demand early in the year is seasonal and is empirically validated. In recent times, January inflation numbers have declined, as shown in the graph below. “The moderation in the headline inflation would come as a relief to policymakers who are concerned that inflation will continue its upward movement which started in November. Notwithstanding, the inflation number is still a mile away from the Central Bank of Nigeria’s (CBN’s) comfort zone of 6-9 per cent.” The analysts noted further that the month-on-month inflation, which is more reflective of current prices is projected to decline to 0.72 per cent (8.96% annualized) from 0.74per cent (9.31% annualized) in December 2018. “This we believe will be driven by the fall in the prices of the food basket. The most significant is the sharp drop in the price of onions which declined to N18,000 per sack after staying stubbornly high at above N30,000 per sack for five months. “Money supply growth in January was constrained by factors including lower FACC disbursements, increased OMO activities and the introduction of the stabilization securities. Total FAAC disbursements in January was 20.12 per cent lower at N649.2billion, an indication of a fall in government spending”, it stated. The FDC report stated that efforts to mop up liquidity saw a 31.49per cent increase in OMO sales to N2.38 trillion and the introduction of stabilization securities (N50.24bn)–10per cent of the money supply. This reduction in market liquidity is evident in the sharp drop of 42.87 per cent in banks’ average opening position. Consequently, 7.69 per cent decline in the retail price of diesel is expected to reduce logistics and distribution costs. This expense item is now responsible for approximately 40 per cent of total operating expenses. Distribution expenses in the top manufacturing companies have been growing. For instance, Dangote cement’s haulage expenses grew by 53per cent to N63.99 billion in 9M’18 from N41.56billion in 9M’17. The decline in diesel prices could reverse them increasing trend in firms’ operating costs.
They, however, expressed that the exchange rate appreciated across all segments of the foreign exchange market in January. “The naira gained 0.28 per cent at the parallel market to close the review period at N361/$. Similarly, the interbank and IEFX rates appreciated by 0.07 per cent and 0.38per cent to end the month at N306.75/$ and N363.03/$ respectively. “The appreciation in the currency was partly due to increased CBN forex intervention. Total forex sales was up 40.8per cent to $1.18bn in January. Given Nigeria’s high marginal propensity to import (MPI) of approximately 70 per cent, an exchange rate appreciation would reduce import costs and lower imported inflation. This is positive for firms’ production costs and margins –particularly in the manufacturing sector”, they said