Rising Oil Price, Moderate Inflation Set Stage for Economic Recovery
As crude oil price rises to $62 per barrel, coinciding with the release of the January inflation figures which showed a marginal 0.2 percentage rise, the prospect of Nigeria’s economic recovery looms large, reports Festus Akanbi
For a nation at the receiving end of the recent oil price shock, last week’s marginal increase in crude oil price at the international market came as a big relief to Nigeria. Another report that obviously gave the current administration a sigh of relief was the inflation figures for the month of January, which according to the National Bureau of Statistics (NBS) was moderate at 8.2 per cent as against 8 per cent in December.
The central bank devalued the naira by 8 per cent in November, with many analysts fearing the downward pressure on currency in a country that imports almost 80 per cent of what it consumes could stoke inflationary pressures.
The latest figures suggest those fears have not yet been realised, although price pressure could still feed through later this year
The naira has remained under pressure despite the one-off devaluation trading outside central bank’s target band of 160-176 to the dollar, on weak global oil prices and escalating tensions after presidential elections in Africa’s biggest economy was delayed.
The NBS has said in its outlook for 2015, that it expected inflation this year to rise to 8.78 per cent, up from an estimated 8.0 per cent last year, driven by the devaluation of the naira.
Reuters’ report said a sharp rise in inflation would be an added headache for President Goodluck Jonathan before a closely fought election in which his record on security, corruption and the economy is under scrutiny.
In November last year, inflation rate was around 7.9 per cent. And following the devaluation of the naira by eight per cent by the Central bank of Nigeria in November last year, analysts had predicted the inflation rate would increase. There were fears that inflation could hit a double digit on the back of the devaluation.
Hope Rising
Economic affairs commentators said, the slight increase in inflation rate notwithstanding, there are reasons to cheer given the fact that the increase did not reflect the devaluation of the naira and other pre-emptive measures put in place by the Central Bank of Nigeria to arrest the dwindling value of the naira. According to a report by Reuters, price of oil rose to $62 a barrel on Tuesday, close to its 2015 high, supported by threats to Middle East supplies and expectations lower prices may prompt a slowdown in U.S. output.
“The oil price is finding additional support from renewed greater perception of the risks to supply,” said Carsten Fritsch, analyst at Commerzbank. “In the short term, the momentum suggests that prices will climb further.”
Brent crude rose 60 cents to $62.00 a barrel. It reached a 2015 high of $62.57 on Monday. U.S. crude was 43 cents higher at $53.21 a barrel.
Marginal Rise in Inflation
Meanwhile, according to the latest CPI figures which were released on Monday by the statistical agency, inflation rose at a marginally slower pace relative to December as prices rose by 0.81 per cent (month-on-month) in January, lower than the 0.82 per cent recorded in the previous month.
Food prices as measured by the Food sub-index rose by 9.2 per cent in January, roughly unchanged from price increases recorded in December.
The NBS said price increases were marginally higher from the 12-month low recorded in November of 2014 at 9.1 per cent.
On a month-on-month basis, food prices increased by 0.9 per cent in January, increasing at the same pace for the second consecutive month.
However, price increases slowed for all groups yielding the food sub-index except for vegetables, the NBS added.
Meanwhile, Year-on-year, urban inflation increased by 0.3 percentage points to 8.2 per cent in January, while the rural prices also increased marginally from 8.0 per cent in December to 8.1 per cent in January.
On a month-on-month basis, both the urban and rural indices recorded the same pace of increase in January at 0.8 per cent. Price increases have held at the same rate for two consecutive months.
Core inflation which excludes the prices of volatile agricultural produce also picked up in January as prices rose by 6.8 per cent (year-onyear), up from 6.2 per cent in December with the strongest increases recorded in the “housing, water, electricity, gas and other fuels” divisions.
In its analysis of the current inflation figures, FBN Capital believed the impact of currency depreciation; particularly in the interbank market following the restriction of access to the CBN’s bi-weekly FX auctions are being felt on a wide range of imported goods and services.
The research firm, in its report last week, noted that “Imported food prices rose by 0.8 per cent m/m in January, slightly lower than the increase of 0.9 per cent recorded the previous month. They have a 13.3 per cent weighting in the index, and are the only component composed solely of imports,” adding that the benign m/m changes may be indicative of the downward trend in international commodity prices.
The report also recalled that the naira exchange rate closed at N189/US$ on the interbank market in January which is outside the official corridor of N168 +/-5 per cent.
“The latest meeting of the MPC in January left all monetary policy variables unchanged. The committee noted possible risks to inflation in the near-term primarily due to likely higher import prices on the strength of an appreciating dollar and food supply bottlenecks. A second devaluation is very likely given the gap between the official and interbank rates,” the report said.
Analysts believed the modest inflationary trend coupled with appreciation of crude oil price and the potential for the sustenance of the current upward trend are factors which will raise optimism on economic recovery in Nigeria.
The optimism is coming on the heels of initial panic caused by the erosion of the nation’s foreign reserves and the attendant pressure on the local currency. However, as tension continues in the Middle east, analysts believe oil price appreciation has come to stay, saying the trend, if well managed could translate to a degree of stability in the Nigerian economy and ultimately switch attention away from the current panic mode on the run up to next month’s general election.
The oil price rise is also said to have been precipitated by spending cuts by oil companies and by further declines in the number of active US oil rigs, which fell by 98 to 1,358 penultimate Friday, representing 406 rigs fewer than the figure recorded the same time last year, according to weekly data from Baker Hughes Inc.
OPEC Strategy
Chairman and chief executive officer of International Energy Services Limited, Dr Diran Fawibe, was quoted as saying that the current rise in the price of crude oil was as a result of the strategy of the Organisation of Petroleum Exporting Countries (OPEC) not to cut output so as not to lose market share to non-OPEC members.
He noted that the OPEC strategy was aimed at forcing high cost producers of shale gas in North America to curb output so that the market would stabilise.
OPEC, particularly Saudi Arabia and the Gulf producers that produce oil at a lower cost, used the strategy to force the high cost producers to reduce their output as oil prices sank below their cost of production, Diran Fawibe reportedly said.
Speaking further he explained: “You see, in the past, one of the drivers of oil price in the world market was not just the economic situation in the consuming countries. You may have some major developments in some oil producing countries that will disrupt supply and lead to speculation.”
He added that the speculation in turn will lead to rising oil prices. For example, if certain things happen in a major oil producing country that disrupts the flow of oil to the market, it can lead to price escalation.
“As a matter of fact, one only hopes that it does not remain at $50 to $60 and continues to rise. But the best we can achieve this year is about $70 a barrel,” he said.
Modest Food-price Disinflation
A report by THISDAY last week had noted that despite the pressure being exerted on the Nigerian economy by the twin- challenges of preparation for next month’s elections and the disruptions to agricultural production as a result of the activities of Boko Haram in the Northeast, Nigeria still appears to be experiencing modest food-price disinflation.
This information was contained in the latest edition of the Standard Chartered-Premise Consumer Price Tracker (SC-PCPT) report, which revealed a 0.5 per cent m/m decline in January prices and a 1.3 per cent fall since August 2014 when Standard Chartered first started tracking prices.
According to a report by the firm titled: Nigeria –The SC-PCPT and delayed elections, “To date, nationwide inflationary pressure as a result of the unrest in the northeast has not been evident. However, the authorities have expressed concern over disruptions to agricultural production as a result of the deteriorating security situation in the region.
The number of internally displaced people is estimated by the UNHCR at over 1.5mn, and Maiduguri–the largest city in north eastern Nigeria–has been the target of a Boko Haram offensive in recent weeks, marking a significant escalation of the conflict,” the report stated.
However, the report noted that “Weak economic linkages between the north east and the rest of the country are one explanation; other factors may also be limiting price increases.”
It explained further that the naira weakness and government spending are both passed through to prices with a lag, which may be delaying their inflationary impact.
Continuing, the report said the slowdown in economic activity as a result of weaker oil prices and increased pressure on public finances may also be limiting the pass-through to inflation. “Nigerian fuel prices were cut modestly in January, by c.10 per cent, but global prices of agricultural commodities have also decelerated. The FAO food price index has fallen every month since April 2014, apart from a brief hiatus in October. Nigeria’s inflation trends may reflect these global trends,” the report stated.