Nigeria’s inflation rate, last placed at 12.82 percent in July, may soar to more than 14 percent by the end of December, the central bank (CBN) has warned. This comes as Africa’s largest economy faces a rising government deficit and broader economic challenges amid the coronavirus outbreak.
“Specifically, headline inflation is expected to hover around 13.97 and 14.15 percent at end-December 2020,” the apex bank said in its 143-page Monetary, Credit, Foreign Trade and Exchange Policy Guidelines for Fiscal Years 2020/2021 released at the weekend.
The projection is based on supply shocks that may likely occur due to a decline in economic activities globally- demand shocks emanating from domestic and international lockdowns; food supply shocks associated with non-tariff border protection; and effect of the implementation of the new budget and minimum wage.
A further rise in inflation would hit the most vulnerable households, most of which are already struggling to cope with the economic fallout from the crisis. The Nigerian government had put in place fiscal and monetary policy responses to ameliorate the impact of slow economic activities arising. Among the measures are a ₦100 billion credit facility to the health sector, ₦50 billion lifeline for micro, small and medium enterprises, ₦1 trillion intervention in manufacturing as well as the extension of loan-to-deposit ratio from 60 to 65 percent.
But efforts have been undermined by “headwinds,” the CBN noted. An expanded budget deficit, rising unemployment levels due to weakened aggregate demand, increasing inflation arising from an increase in Value Added Tax, and border closure are some of the inhibiting factors.
With the upward trend in inflation from the first half of 2019, uncertainties from the external environment would exert pressure on monetary tools, the bank said, noting that the primary objective of monetary policy in 2020/2021 remains the maintenance of price and financial system stability.
However, that may prove to be difficult given the pressure on monetary tools and narrow fiscal space. The CBN expects external reserves to hover between $29.9 billion and $34.3 billion at the end of the year as export receipts still face enormous risks. This, coupled with the risk aversion of foreign investors and speculative activities, would put more pressure on the naira at the bureau de change and investors and exporters’ foreign exchange windows.
Nigeria’s total debt stock increased by ₦2.38 trillion or 8.3 percent in Q2 2020, hitting ₦31 trillion as of June 30, according to data from the Debt Management Office. That indicates an increase in debt profile by ₦3.6 trillion within H1 2020. And although about 35 percent of the debt is sourced from the local market, the CBN has warned it could crowd out the private sector.
