Annual inflation in Nigeria, Africa’s largest economy, rose sharply in July on the back of soaring energy, transport and food costs, along with a fall in the value of the naira currency.
The National Bureau of Statistics said that in July inflation rose for the sixth consecutive month this year to 19.6 per cent, up from 18.6 per cent in June and the highest level since September 2005.
The latest rise means inflation is now double the Central Bank of Nigeria’s target of 9 per cent and raises the prospect of another increase in interest rates next month.
The statistics agency pointed to an increase in the price of gas and fuel, as well as air and road transport costs, along with food prices. Food inflation rose to 22 per cent caused by an increase in the cost of bread and cereals, as well as other food products such as potatoes, yam, meat, fish, oil and fat.
In a sign price pressures are becoming broader, core inflation, which excludes the changes in volatile food and energy products, quickened to 16.3 per cent.
The central bank has hiked interest rates by 250 basis points since May to 14 per cent. Policymakers are due to meet on September 26.
Razia Khan, chief economist for Africa and the Middle East at Standard Chartered bank, said Nigeria may have fewer tools to combat soaring inflation than other countries.
“The action [tightening of monetary policy] remains overshadowed by greater reliance on the central bank’s financing of government,” said Khan, referring to the Nigerian government’s announcement earlier this month that it owed $47bn to its central bank, according to a report by the country’s budget office.
The money is owed to the central bank as part of the so-called Ways and Means Advance, a law contained in the central bank act that allows the monetary guardian to fund the government when it experiences a shortfall in revenue.
Nigeria’s official oil earnings have not increased despite the surge in oil prices following Russia’s invasion of Ukraine. Theft, pipeline vandalism, years of under-investment in infrastructure and the increasing cost of petroleum subsidies have prevented the nation from profiting.
Nigeria’s economy is import-dependent and relies heavily on the US dollar. But importers have struggled to access dollars because of tight restrictions.
The central bank stopped selling dollars to retail forex traders in July 2021 to ease pressure on its dollar reserves and support its artificially low exchange rates. The naira is reported to be overvalued by between 10 per cent and 20 per cent against the greenback. The lack of dollar funds from the central bank has raised the cost of importing goods, forcing businesses to raise prices.
“Until official forex markets see greater turnover, the difficult to regulate parallel market, itself prone to overshooting, will continue to play a disproportionate role in price-setting behaviour,” said Khan.
Most importers access dollars on the black market, where the currency is freely traded. Due to significant demand and limited supply, the naira has plunged to historic lows against the greenback in recent months. The central bank says demand is high from manufacturers and because of Nigerians seeking to pay school and hospital fees abroad.
Inflation is expected to rise to more than 20 per cent next month, according to Michael Famoroti, head of intelligence at Lagos-based company Stears.
The economy and rising insecurity will be key campaign issues when presidential candidates officially begin canvassing for votes in September to replace the term-limited Muhammadu Buhari as Nigeria’s president. Elections are scheduled to take place in February.
