Ahead of the official release by the National Bureau of Statistics (NBS), analysts at Financial Derivatives Company (FDC) is projecting that Nigeria’s headline inflation will slide by 0.09% to 11.35% in January 2019.
This projection is hinged on a reduction in disposable income which typically falls most January due to the exigencies of Christmas and payment of school bills.
“This usually leads to a reduction in aggregate demand and subsequent possible fall in some commodity prices,” analysts at the economic think tank said in a report released on Thursday, February, 7.
FDC said the decline in inflation figures will make a good reading for fiscal authorities who have prepared for the impact of the 67 percen increase in minimum wage, and come as a relief to anxious policy makers in the country’s administrative capital, Abuja. This is because of fears that inflation was back on an upward trajectory in November and was likely to become intractable.
On a month on month basis, the think tank sees the inflation rate slowing to 0.72 percent from 0.74 percent in December 2018. “This will be as a result of a fall in the prices of the food basket, which is significantly impacted by a sharp drop in the price of onions which declined to N18,000 per sack after staying stubbornly high at above N30,000 per sack for five months, FDC further pointed out.
Another determinants of the inflation decline as identified by the FDC think tank is a drop in money supply growth in January.
Money supply was seen to decline on the back drop of lower FACC disbursements, increased Open Market Operating (OMO) activities and the introduction of the stabilization securities among other factors.
Total FAAC disbursements in January was 20.12% lower at N649.2 billion, indicating a fall in government spending.
“Similarly, efforts to mop up liquidity saw a 31.49% increase in OMO sales to N2.38 trillion and the introduction of stabilization securities (N50.24bn)–10% of money supply. This reduction in market liquidity is evident in the sharp drop of 42.87% in banks’ average opening position,” FDC said.
An 8% decline in the price of diesel prices is also driving down operating expenses, the FDC observed. Identifying the development as a determinant of the projected inflation decline. Highlighting some of its business implications, FDC said the 8% decline in the retail price of diesel is expected to reduce logistics and distribution costs.
“This expense item is now responsible for approximately 40% of total operating expenses.
Distribution expenses in the top manufacturing companies have been growing. For instance, Dangote cement’s haulage expenses grew by 53% to N63.99 billion in the first nine months of 2018 from N41.56 billion in same period of 2017.
The decline in diesel prices could reverse the increasing trend in firms’ operating costs.”
Further outlook by FDC indicates that the moderation in the headline inflation is expected to be short-lived as the boost in liquidity stemming from the minimum wage implementation and election related spending would increase aggregate spending and push up prices.
“In addition, the mobile payment launch by the mobile network operators would enhance efficiency in the payment system and increase the velocity of money in circulation. However, this could increase money supply and weigh on the general price level,” FDC noted.