UPDATE: Businesses to remain under inflationary pressures as forex crises deepens

There are indications that Nigeria’s foreign exchange (forex) crises pressuring businesses is not softening soon. As a result, the inflationary consequences on cost of doing business as well as consumer demand would also remain.

Vanguard MoneyDigest findings and analysts’ reports show that despite the slower rate of inflation reported by the National Bureau of Statistics, NBS, for the month of June, the July rate would be much higher.

Food inflation is also expected to rise further despite harvest season impacts.

On the bright side, Nigeria’s foreign reserves experienced a positive impact from the rising global oil prices, up 6 bases points (bps) week-on-week (WoW) to $33.9billion as of August 2nd, 2023.

But this development failed to impact positively on the value of the local currency, Naira.

At close of trading last week, the Investors & Exporters (I&E) window of the foreign exchange (forex) market, activity level declined 10.1% ($43.7million) to $389.1million and the base currency (USDollar) rose 0.1% WoW against the price currency (Naira) to ¦ 776.50/$1.00. In the parallel market, the base currency (USDollar) appreciated 2.3% WoW against the price currency (Naira) to ¦ 890.00/$1.00.

These figures show a negative development where the spread between both forex rates deflected from last week’s thin gap, as the weekly average expanded by 25.7% to N111.9.

The implication of the development is that the initial objective of the CBN’s forex market reform is now being eroded as parallel market premium widens, whiling obliterating the convergence achieved in the early days of the reform in June, 2023.

Furthermore, market observers believe that the development is caused by inadequate supply of forex resource resources to the market, a situation which will put pressure on foreign input costs and overall cost of doing business.

Meanwhile, activity at the FMDQ Securities Exchange FX Contract Market stalled last week as the total value of open contracts stagnated at $6.3billion. This was due to the central bank’s decision to temporarily deactivate all contracts with durations ranging from one to twelve months as part of its ongoing reforms.

As a result of these developments in the forex market, currency dealers said they anticipate sustained pressure on the Naira due to sustained weak supply.

This is also expected to stoke inflationary pressures.

Inflation to spike further
Recall that in June consumer inflation figures released by the National Bureau of Statistics, NBS, surprised the market by coming in at slower rise, at 22.8% year-on-year, against May figure of 22.4%, despite price shocks during the month orchestrated by skyrocketed fuel price.

But food prices rose significantly to a 73-month high of 2.4% month-on-month, MoM, and a record 25.3% YoY, driven by weak domestic output and higher manufacturing costs.

Also, core inflation pressure eased slightly to 1.7% MoM, leading to an annual inflation rate of 20.3% in June, up from 20.1% in May.

However, analysts see a sharper rise in inflation rate for July.

The analysts at Afrinvest West Africa, a Lagos based investment banking firm, stated: ‘‘We project the headline inflation to increase by 2.5% MoM against 2.1% in June, and its 12-month average of 1.8%.

‘‘This monthly inflation print implies an annual consumer inflation rate of 23.6% (June: 22.8%) – which would mark the seventh consecutive increase.

‘‘Decomposing the broad performance, we anticipate strong core pressure amid sustained FX weakness (I&E window: -18.7% MoM to average ¦ 769.51/$, Parallel: -7.2% MoM to average ¦ 820.38/$) and readjusted retail PMS price.

‘‘Thus, we anticipate an uptick of 2.1% MoM and 20.7% YoY in the core basket against the previous month’s print of 1.7% and 20.3%.

‘‘Similarly, we expect food inflation to stay elevated (2.5% m/m and 25.8% YoY).

‘‘Precisely, we expect the planting season, adverse weather conditions, and lingering impact of crop disease outbreak to blunt the positive impact of the green harvest in the Southern region.

‘‘Thus, farm goods inflation should increase to 2.7% m/m against 2.4% previously.

‘‘For processed food, the passthrough impact of FX pressure, suspension of the Black Sea grain deal in Eastern Europe, and rising domestic input cost should sustain price pressure (+2.4%MoM) in July’’.