Inflation’ll Ease to 13.4% in 2018, Says Economist Group

Kunle Aderinokun

The Economist Intelligence Unit of The Economist Group has said inflation, which has maintained a downward streak since the beginning of this year, would ease to 13.4 per cent in 2018.

The EIU gave this projection in a 21-page Country Report on Nigeria, generated on July 1, 2017, a copy, which was obtained by THISDAY.

EIU, which presented the country’s Outlook for 2017-21, predicted that while inflationary pressure would stay high in 2019 as a result of pre-election spending and further drop in the value of naira occasioned by weaker oil prices, the rate would drop significantly to an annual average of 10.8 per cent in 2020-21 with tighter fiscal and monetary policy.

According to the report, “The effects of currency devaluation and efforts by the authorities to rein in the subsidy bill and boost power tariffs to cost-reflective levels will see inflation remain high in 2017, at an average rate of 17 per cent. Currency stability improved in the first half of 2017 after the massive volatility seen in 2016, but additional naira depreciation is expected later in 2017, so average inflation will ease only moderately, to 13.4 per cent in 2018. Pre-election spending and a further drop in the naira on the back of weaker oil prices mean that inflationary pressures will stay high in 2019, before it falls back slightly in 2020- 21, to an annual average of 10.8 per cent, as tighter fiscal and monetary policy takes effect.”

The National Bureau of Statistics, which recently released report on the Consumer Price Index for May 2017 put the index, which gauges inflation at 16.25 per cent (year-on-year) in May 2017, representing 0.99 percent points lower than 17.24 per cent in April. The decline is the fourth since January 2017.

Estimating that, in the second half of 2017, Nigeria would post a weak economic recovery from the recession it slipped into in 2016, the EIU report noted that, “ Oil production will pick up following the resumption of supply through the Forcados export pipe line, which had been shut down by militant activity.” Nigeria, it said, remained exempt from production cuts by OPEC.

The EIU, therefore, projected that real gross domestic product (GDP) growth for the full year of 2017 will be positive, but only reaching 0.8 per cent. “A full year of oil output via Forcados will lift export production a little more in 2018, although militant activity will be an ongoing threat and the current OPEC waiver is unlikely to continue if, as we expect, the organisation attempts to maintain global production cuts throughout the year. Export growth will then be slower in 2019-21 as the elongated reform process and militant action constrain development,” it noted.

Besides, it stated that, “Elsewhere in the economy, some pro-business policy reforms and a gradual improvement in infrastructure provision will support the non-oil sector. Overall, real GDP growth should pick up to 2.1 per cent in 2018. We then expect growth to slip back to 1.8 per cent in 2019, given election-related uncertainty, compounded by an expected recession in the US and an ongoing slowdown in China that will spook global markets and lead to a moderation in oil prices.”

Nevertheless, the EIU, in this report, which is the latest on Nigeria, forecast a moderate rebound in growth, to 2.9 per cent in 2021 as local and global markets strengthen. According to the report, “The average growth rate of 2.1 per cent in 2017-21 is weak for a country with a young and expanding population and will hit living standards and job creation—issues that will feed back into threats to political and social stability.”

Similarly, the report noted that, “The federal administration will attempt to continue its expansionary fiscal stance

into 2017-18, in an effort to drag Nigeria out of the recession it entered during 2016

and with the 2019 elections firmly in mind. However, expenditure growth will be hindered by capacity constraints and an inefficient bureaucracy. Indeed, the budget for the 2017 calendar year was only signed into law in June.”

While, the EIU also projected that, “Revenue collection in 2017 will increase strongly in nominal terms as exchange-rate depreciation boosts the value of Nigeria’s oil exports in local-currency terms”, it added that, “as a proportion of GDP, revenue will creep up to just 3.5 per cent, reflecting the narrow revenue base.”

“Oil revenue will continue to grow in 2018 in line with moderate production gains, offsetting a small price drop. The non-oil tax take in 2017-18 will increase in tandem with the recovering non-oil economy and government efforts to

widen the tax base, but this will be from a miniscule base, and oil will remain the dominant revenue source. Overall, we expect the budget deficit to come in at an average of 2.3 per cent of GDP in 2017-18.”

In the same vein, the EIU also predicted that, “Monetary policy will concentrate on attempts to support economic recovery while limiting inflation and supporting the flagging currency. However, this will yield contradictory pressures in the early part of the forecast period, with the private sector desperate for cheaper credit to spur growth, but inflation running high following currency devaluation.”

It added: “On balance, interest rates will not move much, staying high as pressure on the naira continues and inflation remains high. Even as inflation subsides from 2018, interest rates will have to remain at around double-digit levels, on the assumption that the Central Bank of Nigeria (CBN) will return to its preference for currency stability. Rates are likely to fall in 2019-20 as the global economy slows and the monetary authorities attempt to stimulate activity, with Nigeria following suit, before a small increase in 2021 as economic activity picks up.”