At 13.2%, Nigeria’s 29-month high inflation rate leaves economy with more losers
While Nigeria’s inflation rate has remained above the 2015 set preferred of 6-9 percent, the 13.22 percent reported in August is the highest Africa’s largest economy has witnessed in more than two years.
From 9.5 percent in 2015, Nigeria’s Consumer Prices Index (CPI) which measures inflation skyrocketed to 13.22 percent (year-on-year) in August 2020, according to data by the National Bureau of Statistics (NBS).
A higher cost of goods and services means additional suffering for many Nigerians whose purchasing power have already been eroded by the country’s current economic realities.
An inflation rate above the monetary policy rate (12.5 percent) also means a reduction in access to finance for small businesses as interest on loans is as high as 25 percent, going against the central bank’s drive to support the economy.
The inflation rate is a key determinant in deciding the policy rate – the rate at which commercial banks borrow from the Central Bank of Nigeria. It is also one of the important factors which banks consider in pricing their loans.
According to Ayodeji Ebo, MD, Afrinvest Securities Ltd, the high inflation rate in Africa’s most populous country leaves the economy with mostly losers.
“Real disposable income and investment returns continue to shrink. The higher cost of living for Nigerians, lower demand for goods & services, higher cost of doing business, negative impact on profitability margin,” Ebo said.
With an inflation rate that is higher than South Africa (3.2 percent) and Kenyan (4.36) put together, return on investment in Nigeria is negative in real terms.
Exacerbated by the recent directive by the central bank that slashes the minimum interest rate banks pay on savings deposits to 1.25 percent from 3.75 percent, the negative interest earned on deposits by Nigerian savers will widen to -11.5 percent from -8.7 percent when inflation rate of 12 percent is factored.
From a record double-digit return on investment in government securities some three years ago, yields on a short instrument like Treasury Bills has crashed to about 4 percent, the lowest record since Businessday started tracking the data.
“Savers continue to lose considering the current interest rate environment,” Ayo Ayorinde Akinloye, a Research Analyst at CSL Stockbrokers Limited said, adding that “naira investors are losers too.
“The sustained negative real return means USD inflows will remain scarce,” he added.
According to Kalu Aja, the CEO of the Abuja-based Afriswiss Capital Assets Management Ltd when local inflation goes up, “winners are holders of real tradable assets like dollars and gold…and earners of foreign currency. Losers are holders of Naira and earners of Naira.”
While food inflation (16 percent in August) has remained the key catalyst responsible for driving Nigeria’s core inflation rate, the new directive by President Muhammadu Buhari’s that instructs the central bank to place a ban on FX for food importation, when enforced will, according to analysts, increase the cost of living in Nigeria.
The president on the 10th of September stated that “nobody importing food or fertiliser should be given foreign exchange from the central bank”.