The National bureau of Statistics (NBS) released inflation numbers for July 2024, revealing a 0.79% decline in headline inflation to 33.4%, and validating our forecast for an inflexion point at the start of the second half of 2024 (H2 2024). This was the first moderation in the consumer price index in 19 months, driven by a deceleration in food inflation, which slowed to 39.5% from 40.9% in June. As anticipated, the onset of the harvest season has begun to alleviate supply-side pressures. The naira’s relative stability in recent months and the waning impact of last year’s price surges have also played a role. In addition, the escalating cost of living has compelled consumers to tighten their belts, as everyday essentials become increasingly out of reach. This growing consumer resistance has undoubtedly contributed to the moderation of price pressures.
Cost-of-Living Crisis fuels Public Discontent
The dip in inflation is a welcome respite for Nigerians grappling with a severe cost-of-living crisis. However, the relief is tempered by the broader economic challenges that have ignited widespread public discontent. Recent “End Bad Governance” protests demanding government reinstate fuel subsidies, electricity tariffs, amongst others, underscore the depth of public frustration. Nigerian consumers have endured a relentless assault on their purchasing power over the past two years, with the cost of living escalating at an alarming rate. Food prices, in particular, have skyrocketed, placing a heavy burden on household budgets. The NBS data paints a stark picture: the national average Cost of a Healthy Diet (COHD) surged from ₦703 in October 2023 to ₦1,241 in June 2024, representing a staggering 76% increase in just eight months. It is crucial to emphasise that a decline in inflation does not equate to falling prices; rather, it indicates a slowing pace of price increases, which is indicative of easing pressures and a move towards stability. While this offers a glimmer of hope, it is essential to recognise that the overall cost of living remains elevated.
Retail Dutch Auction System Reintroduced to Stabilise Naira
We believe inflation has turned a corner and will decline further in the coming months supported by several developments. The Central Bank of Nigeria (CBN) has reintroduced the Retail Dutch Auction System (RDAS) to address Nigeria’s chronic foreign exchange shortage and stabilise the naira exchange rate. By allowing authorised dealer banks to submit bids on behalf of clients, the RDAS introduces a market-driven mechanism for currency allocation. The inaugural auction on August 6th saw $876.6 million allotted to 26 banks at a rate of ₦1,495/$. This system is anticipated to facilitate efficient price discovery, aligning the naira’s value more closely with market fundamentals.
Nigeria’s Inaugural $500 Million Domestic Dollar Bond
Nigeria is also set to issue an inaugural $500 million domestic dollar bond on August 21, marking a significant step in its debt management strategy. By tapping into local and international dollar reserves, the government aims to bolster foreign exchange liquidity, diversify its funding sources, and mitigate risks associated with rising global interest rates. This five-year bond, offering semi-annual interest payments and a minimum investment of $10,000, is structured to appeal to a broad investor base. By providing a comparable yield to existing Eurobonds, the government hopes to attract both domestic and foreign investors. Ultimately, this initiative is expected to strengthen the naira through increased foreign exchange reserves and a reduction in reliance on external debt markets.
Fiscal Measures to Combat Inflation
The Federal Government of Nigeria has also approved fiscal measures aimed at combating rising inflation on staple food items, effective from July 15, 2024, to December 31, 2024 (150 days). The Nigeria Customs Service will implement 0% import duty and VAT exemptions on specific items, including grain sorghum, millet, maize, wheat, beans, and husked brown rice, with duty waivers ranging from 5% to 30%. Eligibility for importers is restricted to established businesses with at least five years of good governance and tax compliance, and they must possess sufficient farmland or milling capacity. We believe that the eligibility criteria for importers under the new policy recognise the significant investments and efforts made by key players in enhancing backward integration within the agro-value chain. If these criteria are adhered to and not circumvented, they position these businesses as direct beneficiaries of the policy. Furthermore, at least 75% of imported items must be sold through recognised commodities exchanges, with exports of these goods prohibited. While we acknowledge the increased pressure on the naira in recent weeks following the announcement of the policy, we believe that these measures will ultimately alleviate food price pressures and support the moderation of inflation. In addition, the government’s intensified security measures in key agricultural regions are expected to bolster food production as the harvest season progresses. These developments, coupled with the anticipated waning impact of the petrol subsidy removal and exchange rate adjustments on prices, create a positive outlook for inflation in the coming months.
Balancing Act: Growth vs. Prices
The latest inflation data vindicates the CBN’s tightening monetary policy stance. The consistent moderation in month-on-month inflation since March, coupled with a slower pace of year-on-year increases in the latter half of H1 2024, reinforces the CBN’s conviction that the contractionary monetary measures are yielding positive results. The CBN, at the last MPC meeting in July 2024, re-emphasised commitment to stay on course with the tightening cycle in view of the urgent need to address inflationary pressures to consolidate on the gains thus far achieved. While acknowledging the recent progress made, Governor Cardoso hinted at potential rate cuts in the future if inflationary pressures continue to ease. Given tepid GDP growth numbers in Q1 2024 amid a constrained business environment, worsened by rising borrowing costs, the CBN could decide to ‘wait and see’ and hold the policy rate stable at its next meeting in September. This strategic pause would allow it observe the trend of inflation and the exchange rate in the coming months as well as the Q2 2024 GDP growth numbers before making further adjustments to its monetary policy stance.
On evidence, the slowdown in inflation will be protracted, and given that all the sub-indices except core inflation (which is a structural) moved in tandem with the headline index, we believe that the threat of a further rise in inflation remains potent.
The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of ₦6.6 trillion, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the ₦70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process.
