FSDH Predicts 13% Inflation for Nigeria in 2020

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Obinna Chima

Analysts at FSDH Merchant Bank have predicted that inflation rate in Nigeria will average 13 per cent in 2020.
The financial institution stated this in its macroeconomic review for the second quarter and 2020 outlook obtained yesterday.
The Consumer Price Index which is used to gauge inflation in the country rose to a two-year high of 12.34 per cent in April.

According to the FSDH report, government fiscal stimulus for COVID-19 interventions would have inflationary impact on the country. It also pointed out that restrictions of some economic activities due to social distancing policies as well as increase in the cost of transportation are other factors that would fuel inflationary pressure in the country.

Furthermore, it stated that pressure on the local currency would be a major risk to inflation in coming months
Following the outbreak of Covid-19 in the country, economic activities were constrained due to movement restrictions, social distancing policies and lockdown of key states.

In April, economic activities for non-essential items were restricted in major states such as Lagos, Ogun, Delta, among others and the Federal Capital Territory.
The impact of the restriction was felt directly by key sectors such as transportation, manufacturing of non-essentials, trade, construction, etc.

Owing to this, analysts at FSDH estimated a significant negative Gross Domestic Product (GDP) growth in the second quarter of the year.
Precisely, the report estimated that overall GDP growth for 2020 at –2.9 per cent in a moderate case scenario and –5.9 per cent for the worst case.

Nigeria recorded a GDP growth of 1.87 per cent in the first quarter of 2020. This was the lowest growth rate since the third quarter of 2018.
The slow rate of economic expansion was as a result of restriction of economic activities and social distancing policies which were implemented to control the spread of Covid-19.

It stated that a significant number of sectors would be severely negatively affected by the pandemic and its associated impact in 2020.
“For the crude oil sector, lower oil prices and demand will slow investments into different segments of the sector as well as raise non-performing loans.

“The movement restrictions and lockdown of economic activities will have tremendous negative impacts on sectors such as transport, education, trade and entertainment.
“Construction sector will suffer from lower government revenues. Higher demand for ICT and health care services will lead to expansion of both sectors.

“Agriculture has remained resilient during and post 2016 recession. Constant demand for agriculture output for both consumption and as intermediate input will sustain the sector.
“The outlook for external reserves and exchange rate is hinged on the movement of crude oil price and improvement in oil sales.
“External reserves reversed its downward trend in April following improvement in oil prices,” it stated.

Brent crude price increased by 74 per cent to $40 per barrel in June, from $22.9 per barrel at the end of April. As a result of this, external reserves position improved by 9.2 per cent in May.

According to the report, major downside risks to reserve accretion include lower oil prices; slow growth in oil production and sales; high foreign exchange demand following the relaxation of restrictions, curfews and the opening up of some sectors.

“Following the above factors, we expect reserve accretion to slowdown in coming months even as CBN interventions to keep the exchange rate stable will increase as economic activities pick up,” it stated.

According to the report, government revenue would experience a sharp decline.
It noted that despite the significant drop in revenue, expenditure remained almost the same, which implies a widening fiscal deficit.
“The rationale for such high expenditure is to stimulate economic activities in view of the looming economic recession,” it added.