Agusto & Co, a prominent credit rating agency, has issued a cautionary statement regarding Nigeria’s inflation, warning that the recent slight moderation could be short-lived due to several imminent fiscal measures.
The agency’s concerns are primarily centered on the proposed supplementary budget, increased Federation Account Allocation Committee (FAAC) disbursements, and the upcoming minimum wage hike, which they believe could reignite inflationary pressures and prolong the nation’s battle with high inflation.
In its latest monthly newsletter, published on Friday, Agusto & Co highlighted the risks posed by the government’s fiscal policies.
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“The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of N6.6 trillion, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the N70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process,” the newsletter stated.
The agency’s analysis underscores the complexity of Nigeria’s economic environment, where fiscal policies aimed at stimulating the economy could inadvertently fuel inflation. For instance, the supplementary budget and increased FAAC allocations are expected to inject significant liquidity into the economy. In contrast, the proposed minimum wage increase could raise consumption levels, both of which are naturally inflationary.
Economic Challenges and CBN’s Dilemma
Agusto & Co also pointed to existing economic challenges that exacerbate the risk of inflation, such as food supply disruptions and the high cost of fuel. These issues, coupled with the anticipated fiscal measures, present a challenging scenario for the Central Bank of Nigeria (CBN) as it navigates its monetary policy.
Given these conditions, the agency anticipates that the CBN may opt to maintain the current policy rate at the upcoming Monetary Policy Committee (MPC) meeting in September 2024. The decision to hold the rate would be based on recent inflation data, which, according to Agusto & Co, validates the CBN’s tightening stance.
“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 newsletter noted.
However, the agency cautioned that while inflation has moderated, the underlying structural issues driving core inflation remain unresolved. This suggests that the risk of inflationary pressures resurging remains significant.
CBN’s Strategic Pause
Agusto & Co’s analysis suggests that the CBN might adopt a “wait and see” approach at its next MPC meeting. With Q1 2024 GDP growth showing signs of strain due to rising borrowing costs, the CBN may decide to keep the policy rate stable, allowing time to monitor inflation trends, exchange rates, and the upcoming Q2 GDP data before making further policy adjustments.
“The CBN, at the last MPC meeting in July 2024, re-emphasized its 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,” the newsletter stated.
This strategic pause would give the CBN the opportunity to assess the effectiveness of its current measures and the impact of the government’s fiscal policies. It would also provide the bank with crucial data on how the economy is responding to both monetary tightening and fiscal stimulus.
Despite the recent decline in inflation, Agusto & Co. warned that the persistent structural issues reflected in core inflation indicate that the risk of inflationary pressures resurging remains significant. The agency highlighted that the underlying factors contributing to inflation, particularly those linked to structural elements such as supply chain disruptions and inefficiencies, continue to pose a threat.
“The underlying factors contributing to inflation, particularly those linked to structural elements, continue to pose a threat, making the possibility of further increases in inflation a real concern,” the report concluded.