• Nigeria currency peg in focus after Egypt devalues
James Emejo in Abuja
Despite the federal government’s refusal to devalue the naira, the Consumer Price Index (CPI), which measures inflation, rose significantly to 11.4 per cent in February compared to 9.6 per cent the previous month, the National Bureau of Statistics (NBS) said on Tuesday.
It attributed the 1.76 per cent rise in the headline index to the faster pace of increase across almost all major divisions that contribute to the index with the exception of the restaurants and hotels division which also rose, albeit, at a slower pace.
The Central Bank of Nigeria (CBN) has argued at every opportunity that devaluing the currency would result in import-induced inflation. However, the currency curbs it put in place since last year to conserve foreign reserves and prop up the naira, have led to sharp spikes in the prices of goods and services in a slowing Nigerian economy.
According to the NBS, the pace of increase of food prices as recorded by the food sub-index increased at a faster pace in February, with the food index rising by 11.3 per cent, up by 0.71 per cent from what was recorded in January.
The NBS stated that “during the month (February), all major food groups which contribute to the food sub-index increased at a faster pace during the month with the exception of potatoes, yams and other tubers group and sugar, jam, honey, chocolate and confectionery groups”.
The urban index rose by 12.3 per cent (year-on-year) from 9.7 per cent in January, while the rural index also rose to 10.7 per cent in February from 9.5 per cent the month before.
On a month-on-month basis, both the urban and rural indices increased at a faster pace, as the urban index increased by 3.0 per cent in February from 0.9 per cent in January, while the rural index increased by 1.8 per cent from 0.9 per cent in January.
Also, the core sub-index increased at a faster pace in February as imported items as well as other domestic shocks resulted in ripple effects across many divisions that contribute to the core index.
The core sub-index rose to 11.0 per cent in February, roughly 2.2 per cent from the rate recorded in the previous month.
“Imported food items as well as other necessary inputs to producing key local staples such as bread continue to drive the food index higher. The food index increased to 11.3 per cent (year- on-year), 0.7 per cent points higher from rates recorded in January.
“The highest price increases were recorded in the fish, vegetables and bread and cereals groups for the second consecutive month,” NBS said in its monthly inflation report.
However, the average monthly price paid by Nigerian households for a litre of petrol across the country dropped to N99.76/litre in February compared to N109.59/litre, the NBS further stated.
The official pump price of petrol remained unchanged at between N86 and N86.50/litre, but figures provided showed that on the monthly average, Nigerians have continued to purchase petrol above the official rate in the period under review.
According to the NBS report for February, Ogun and Edo States recorded the lowest monthly average price of N86.53 and N86.50 respectively for a litre of petrol.
On the other hand, Yobe and Bayelsa States accounted for the highest monthly average price of petrol at N122.88 and N120.06 respectively.
Abuja and Lagos recorded monthly averages of N92.70 and N87.03 respectively.
In a related development, Egypt has abandoned its long standing struggle to prop up the value of its currency against the dollar, a shift that may prompt other countries like Nigeria to also undertake foreign exchange devaluations.
According to the London-based Financial Times newspaper, the Central Bank of Egypt said on Monday it would adopt a flexible exchange rate after devaluing the pound by 13 per cent against the dollar.
The currency market expects other central banks to follow Egypt and seek greater policy flexibility, with Nigeria among those seen undertaking a devaluation to alleviate economic pressures.
Nicolás Maduro, Venezuela’s president, last month devalued his country’s bolívar by 37 per cent in an attempt to boost its ailing economy.
Luis Costa, a currencies analyst at Citigroup in London, said Egypt’s “bold” devaluation could prove to be a model for other countries such as Nigeria.
“These countries can’t put off an adjustment in their currency any more. I know it can be painful, and we know there will be pressure on inflation, but a liberalised FX policy is the right way to go,” Mr Costa said.
Nigeria heads a list of countries with currency pegs or strict currency regimes that may loosen their exchange rate policies.
Pressure on commodity prices last year forced Kazakhstan and Azerbaijan to abandon their currency pegs, as the strain on their reserves to maintain a stable exchange rate became too great.
The Gulf states of Saudi Arabia, Bahrain and Oman are seen as vulnerable to devaluation, although the commodity rally of recent weeks may relieve that pressure in the short term.
“It’s helped some of those central banks still trying to maintain those pegs,” said Piotr Matys, emerging market foreign exchange strategist at Rabobank. “But it still feels like a short-term squeeze rather than a sustainable rebound in the oil price.”
Fundamentals would determine whether countries could maintain their pegs, according to Win Thin at Brown Brothers Harriman.
Whereas the Hong Kong dollar peg looks fairly secure, “countries with weak fundamentals will have a much harder time keeping pegs in place,” he said. He pointed to the Kazakh tenge, the Nigerian naira, Venezuela’s bolivar and the Argentine peso.
One currency showing early signs of stability following adoption of a weaker currency regime is the Russian rouble. But Mr. Matys said other countries might not be able to manage the adverse public reaction to the rise in inflation that followed devaluation.
“There are lots of central banks under political pressure to maintain these pegs,” he said.
“No one dares to challenge (Russia’s) President Putin, and he got away with (devaluation) fairly unscathed, but I don’t think other politicians would escape protests.”