June 18, 2020

New electricity tariff, VAT rate to sustain upward pressure on prices

Commotion as high tension cable snaps in Lagos

…As inflation rate hits 25mths high

By Babajide Komolafe & Elizabeth Adegbesan

Nigeria’s annual inflation rate rose for the ninth consecutive months to 12.4 percent in May from 12.34 percent in April, the highest in  25 months, with analysts projecting that the upward trend will persist, driven by commencement of the new electricity tariff and Value Added Tax (VAT) as well as the new planting season.

The inflation rate has been on the up-trend, from 11 per cent in September last year, initially   driven by the effect of the border closure but now compounded by the effect of the Coronavirus (COVID-19) induced restrictions across the country.

In its Consumer Price Index report for May 2020, the Nigeria Bureau of Statistics, NBS, said, “The consumer price index, (CPI) which measures inflation increased by 12.4 percent, year-on-year, YoY, in May 2020. This is 0.06 percentage points higher than the rate recorded in April 2020 (12.34%).”

The report further stated: “Increases were recorded in all Classification of Individual Consumption According to Classes (COICOP) divisions that yielded the Headline index.

“On month-on-month basis, the headline index increased by 1.17 percent in May 2020, which is 0.15 percent higher than the rate recorded in April 2020 (1.02%).

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“The percentage change in the average composite CPI for the twelve months period ending May 2020 over the average of the CPI for the previous twelve months period was 11.79 percent, showing 0.08 percent point from 11.71 percent recorded in April 2020.”

Analysts react

Attributing the higher inflation rate in May to    continued depreciation of the naira, analysts at Cowry Assets said: “The higher inflation rate was partly due to a rise in imported food index by 16.26 percent    (higher than 16.24 percent in April) –  against the backdrop of further depreciation of the naira  against the dollar.”

Projecting continued rise in the inflation rate in the coming months, they said: “We expect the general price level in the coming months to further increase amid  current planting season and in view of the planned increase in electricity tariff kicks off later in the year.”

On their parts, analysts at United Capital Plc attributed higher inflation rate to the impact of the restriction  of interstate movements, border closures on supply chain as well as the impact of foreign exchange scarcity drove up the price of imported foods.

Also projecting higher inflation rate in coming months, they said: “In the month of June-2020, we expect the pressure on the headline inflation rate to persist. Specifically, we expect pressure food prices to remain despite the ease in lockdown policies, as restrictions on interstate travel and closure of borders continue to limit the supply of foods across the country.

“Further out, we note that the biggest pressure point for inflation remains the potential implementation of an upward adjustment in electricity tariffs by July-2020.”

Noting that the continued rise in Nigeria’s inflation rate, which is contrary to the trend in other African economies, Professor Uche Uwaleke, stressed that the inflationary trend poses challenge to the monetary policy decisions in the coming months.

Uwaleke who is the Professor of Finance and Capital Market, Nasarawa State University and former Commissioner of Finance, Imo State, said: “Be that as it may, the important message for policy makers is that inflation rate is still on the rise unlike what obtains in many economies, including South Africa and Egypt, where inflationary pressure is moderating due to COVID’19-induced downturn in economic activities.

“The Central Bank of Nigeria (CBN) should worry that the core inflation rate, which has been single digit for many months, has now crossed the 10 percent psychological threshold. This development will certainly influence decisions around MPR going forward. It doesn’t take much to predict that inflation rate will be too close to or even exceed the current MPR of 12.5 percent before the Monetary Policy Committee’s next scheduled meeting in July. Inflation rate above 12.5 percent would translate to negative real return which is inimical to attracting much-needed investments”.

Consequently, Uwaleke advised that in order to rein-in rising inflation, the government and the CBN should ensure that stimulus packages are well targeted to productive sectors especially agriculture since food inflation appears to be the main challenge.”