J.P. Morgan, Nigeria’s headline inflation might go to 28% by the end of the year as policy measures “feed through” and continue to trend upward.
In its market research report on the Nigerian economy titled “Reform pause rather than fatigue,” the American major investment bank makes the following statement. Over the weekend, the report was made public.
The article points out that the high inflation number for July is an early sign of the effects of the fiscal and foreign exchange (FX) reforms, which will keep driving up the headline inflation in the months to come.
“Higher parallel market rates in recent weeks are likely to have an impact on August’s inflation reading and will be most noticeable in higher food and core prices,” J.P. Morgan stated.
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The group believes the Central Bank of Nigeria (CBN) should concentrate on alternative liquidity instruments and keep the present monetary policy rate (MPR) at 18.75% for the remainder of the year.
The Monetary Policy Committee (MPC), the CBN’s rate-setting body, increased the benchmark interest rate by 25 basis points (bps) at its most recent meeting, suggesting that the aggressive tightening may be coming to an end.
Even though there appears to be a pace in the advancements made since the beginning of the current administration, according to J.P. Morgan, the government has shown dedication to economic changes.
However, it emphasizes that given the strong inflationary pressure on the economy, the speed of the changes linked to fiscal adjustments and the FX market could be gradual.
The government’s intention to maintain the price of petrol at its current level has raised concerns that the period of subsidy payments may return. However, it makes the case that the government is not currently providing subsidies for the goods.
“While we think the FX market could benefit from better price discovery, we do not interpret the freeze on petrol prices as a reversal of the subsidy reform for now. This is because we estimate that at current average retail prices (N615/litre) and crude oil prices ($85/barrel), the authorities are not currently subsidising petrol,” the report explains.
There are suggestions of “a continuation of the previous administration’s approach when the President appointed himself as the Minister of Petroleum and Gas Resources,” it is noted as it evaluates the most recent cabinet appointments.
The paper spends a lot of time on the FX reforms and what the CBN needs to do to draw in foreign investment to pay off the backlog. The bank claims that it is essential to remain on the reform route in order to attract FX flows due to the high debt-servicing obligations and relatively lower net FX positions.
It is concerned that the nation will need a lot of money to pay down its Eurobond debt starting in 2025. The research’s findings indicate that over the next few years, debt services with public and private guarantees will total more than $2 billion.
It mentions that fewer foreign exchange reserves make it less likely that a flexible exchange rate regime will be implemented in the near future.