Nigerian
inflation rises by a surprisingly high 2.8 percent m/m in May, which has driven the
y/y print to a multi-year high of 15.6 percent y/y, exceeding our expectation. A more
rapid pace of price gains was noted across all the divisions that contribute to
the index, although fuel, food and electricity were notable sources of
pressure. This happened even against a backdrop of subdued economic activity,
given the outright contraction in GDP in Q1 2016, and indications that oil
output in Q2 is likely to be even weaker.
The
findings are broadly consistent with the Standard Chartered-Premise Consumer Price
tracker which rose by a record 2.75% m/m in May (see OTG Nigeria,
Inflation Surges). With core inflation rising as much as 15.1% y/y, the
key question is what the policy implications of this print are likely to be.
In our
view, rising price pressures were likely instrumental in the authorities’
changed stance on FX policy. Nigeria’s fixed exchange rate regime had merely
pushed activity to the parallel market, which is prone to overshooting, less
susceptible to formal policy tightening, and likely played a significant role
in exacerbating current price pressures.
The
challenge for the authorities is how to go about normalising the FX regime, and
more broadly, activity – in their bid to resolve fuel and other supply
bottlenecks that have constrained growth while driving inflation higher.
Given where
inflation already is, there will be a need for gradualism. However, in
our view, any moves towards meaningful FX flexibility will need to be supported
by tightening, in order to restore some degree of credibility to policy.
This may well have implications for the timing of any announcement on currency
flexibility.
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