A Review of the Nigerian Energy Industry

2015: Economists predict weaker naira, double-digit inflation

05 January 2015, Lagos – Mr. Shola Aboluwade, an employee of a Lagos-based logistics firm, earns N120,000 as salary. He is expected to lose about N35,000, representing over 25 per cent of his total income, to double-digit inflation and weaker naira as the nation battles falling oil prices this year.

The same goes to Mrs. Chinyere Abbah, who earns N150,000 as salary from an Abuja-based manufacturing company. Over N40,000 from this amount will be eroded by the looming harsh economic conditions, according to economic and financial analysts.

Dr. Ngozi-Okonjo-Iweala
Dr. Ngozi-Okonjo-Iweala

The experts say when this amount is deducted from the disposable income of the average Nigerian, the resultant effect is a lower standard of living for many citizens in 2015.

They say the situation may be made worse if companies commence job and salary cuts in the second quarter of the year.

Already, stakeholders and trade association have hinted of plans by companies to downsize in 2015 if the naira continues to weaken.

Economic experts, who paint a grim picture of the economy in 2015, say the Central Bank of Nigeria may be forced to devalue the naira again in the second quarter of the year.

This, according to them, will lead to high inflation because Nigeria is an import-dependent country.

Analysts at Afrinvest, a research and investment advisory firm, say as the cost of living rises this year, the standard of living of most Nigerians will fall. As a result, they advise citizens to brace themselves for personal adjustment in living style and condition.

The analysts says, “The persistent decline in oil prices will further expose the weak structure (mono economy) of the Nigerian economy in 2015.

“As a result, we anticipate further devaluation of the naira in the second quarter of 2015 (post-election) to curb the depletion of the external reserves and indirectly increase dollar revenue.

“Inflation is expected to break the CBN upper band of nine per cent in 2014 due to the expected increase in core inflation (bolstered by the devaluation of the naira) and food inflation (poor harvest as a result of protracted insecurity in the northern part of the country).

“This will lead to reduction in individual’s purchasing power; real income may only buy few things.”

The Afrinvest analysts believe that three of the issues that will determine the micro and macro-economic direction in 2015 are the upcoming 2015 election, global oil price and the insecurity level in the country.

According to analysts at BGL Plc, the unfolding oil price scenario and the consequent exchange rate depreciation, official and unofficial by about 20 per cent on the average, may translate to a higher inflation scenario in 2015.

They say, “Major areas of impact include the imported price inflation which constitutes 13 per cent of consumer basket in Nigeria. Non-food import content of Nigerians could also be higher than 30 per cent and would be immediately affected by the exchange rate pass through effect of the depreciation.

“The combined austerity measure of the government and tighter monetary policy will put additional pressure on consumer prices. Therefore, we expect inflation rate to cross the double-digit level in the first half of 2015. We forecast inflation between 9.5 per cent and 11 per cent in 2015.”

Renowned economist and Chief Executive Officer, Financial Derivatives Company Limited, a research and advisory firm, Mr. Bismarck Rewane, says the company’s findings have shown that the nation’s macroeconomic environment will continue to be vulnerable to exogenous shocks in 2015.

This, he says, is mainly because oil prices and international capital flows will continue to be dominant features in the macro- economic equation.

Rewane notes that the headline inflation is expected to range between 10 per cent and 12 per cent in 2015, adding that in a highly import-dependent economy, some of the price effects of the devaluation will be passed to the consumer.

This, according to him, is based on the persistent decline in global food, energy and other imported goods and services prices.

He adds, “Although the devaluation of the naira is expected to increase inflation as a result of the pass-through effects on import costs, this impact is likely to be muted due to the lower global commodity prices and anticipated increase in local production of staple food crops.

“However, there is a marginal probability that inflation will temporarily spike above nine per cent due to the increase in electricity tariff, speculative trading around the elections and other policy developments.”

Another issue that will worsen the economic situation and may result in job losses and cut is the possibility of further devaluation of the naira.

Afrinvest analysts, BGL experts, Rewane and other experts predict the naira will fall below N200 against the dollar, at least at the parallel market.

“The parallel market rate of the naira is expected to cross 200 against the dollar as the demand for the greenback persists,” Rewane notes.

He, however, says that the N200 is only a 15 per cent adjustment against the 45 per cent devaluation by the CBN in 2009. Although, projecting the value of the naira is currently clouded by several domestic and exogenous factors, the fair value of the currency is expected to be between N180/$ and N195/$ at the interbank market.

On July 18, 2014, Goldman Sachs forecast that the naira would trade at N165/$ in three months, N175/$ in six months and N195/$ in 12 months.

Commenting on the value of the naira, Afrinvest analysts say, “We anticipate that the dollar may cross the N200.00 psychological line in 2015 at the interbank and parallel forex markets if oil prices remain below $60.00/b.”

The Afrinvest Analysts, who say that the development will affect the financial system, expect the year-on-year growth in net earnings of banks to either remain flat or decline as the banks continue to suffer from the effects of the various CBN policies.

The entire scenario will lead to challenging times for the real sector.

“The cost of lending to the SMEs may increase further in 2014 in line with the risk inherent as the cost of doing business escalates in 2015, hence increasing the potential for debt delinquency,” the analysts say.

Rewane also says, “Single-digit interest rates to the real sector and the cost of borrowing will remain in double digit. The contractionary monetary policy environment is expected to remain in 2015 but with limited appetite to tighten further.”

For BGL analysts, the reality in the economy suggests that monetary policy will be non-accommodating in 2015.

This, they say, will be dictated by the eventual trend of the oil price and the consequence effect on the government primary balances, foreign exchange rate volatility and the foreign reserves

– The Punch

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