Recently released September inflation report showed that headline inflation rate rose to 11.24% year-on-year (from 11.02% in August 2019), a sharp reversal, and the highest in three months.
The northward movement in the annual inflation was chiefly due to the sharp increase in annual food inflation rate, in addition to the gentle upshift in core inflation rate which, howbeit, remains single-digit.
Particularly, annual food inflation rate jumped to 13.57% in September 2019 from 13.17% in August 2019. Also, monthly food inflation climbed m-o-m to 1.30% in the month of September, from 1.22% in the month of August, amid the closure of Nigeria’s land borders.
August food inflation rate rose to 16.65% (from 14.61%), 16.57% (from 14.08%), 16.31% (from 15.12%) and 16.08% (from 15.04%) in Niger State, Nassarawa, Abuja and Ogun States respectively.
Annual core inflation rate rose to 8.94% y-o-y in September 2019 from 8.68% in August 2019, partly arising from the rise in energy costs (0.16%) and transport (0.12%).
Also, we saw core inflation rate rise on a monthly basis to 0.89% (from 0.67% in August). In the same vein, m-o-m change in price level for imported food increased by 1.28% amid the depreciation of the Naira against the USD at the interbank window where two months moving average foreign exchange rate rose (i.e Naira depreciated) m-o-m by 0.06% to N357.96/USD in September 2019.
In terms of regional inflationary pressure, both urban and rural regions inflation rates rose to 10.77% and 11.78% respectively in September from 10.61% and 11.48% respectively in August.
In another development, total debt figure released by the Debt Management Office (DMO) showed that Nigeria’s total public debt stock for the second quarter of 2019 increased by 3.01% to N25.70 trillion in June 2019 (from N24.95 trillion in March 2019).
The increase in the country’s total debt stock was due to a rise in external debt stock as well as a slight increase in local debt stock. Specifically, external debt stock rose to N8.32 trillion (or USD27.16 billion at N306.40/USD) in June 2019 from N7.86 trillion (or USD25.61 billion at N306.95/USD) in March 2019.
Although external debt stock rose, we saw external debt service payments decline to N77.30 billion (or USD252.30 million) in June 2019 from N109.66 billion (or USD357.26 million) in March 2019.
Hence, implicit interest rate, annualised, rose to 2.32% in H1 2019 (from 1.94% in H1 2018). Similarly, local debt stock rose by 1.71% to N17.38 trillion in June 2019 (from N17.09 trillion in March 2019).
Further breakdown of the domestic debt figure showed that Federal Government of Nigeria’s (FGN) domestic debt stock increased to N13.41 trillion in June (from N13.11 trillion in March); however, states’ share fell slightly to N3.96 trillion (from N3.97 trillion) in the same period.
Domestic debt service payment fell q-o-q by 68.89% to N189.83 billion in Q2 2019 from N610.28 trillion in Q1 2019 despite the rise in local debt stock. Hence, implicit interest rate, annualised, fell to 4.64% in H1 2019 from 5.96% in H1 2018.
The current administration’s debt management objective of subtituting external debt for local debt in line with its “60:40” debt mix target was missed as the local debt to external debt ratio stood at “68:32” in Q2 2019.
We expect annual inflation rate to increase further in October as food prices increase following the recent border closure amidst supply gap.
More so, we feel cost push inflation stemming from the huge infrastructure gap should further fuel the rising inflation rate. However, the increase should be limited as harvest season creeps in towards the end of the year.
Meanwhile, Nigeria’s rising debt stock alongside significant infrastructure deficit speaks to the fact that much of its borrowings is being spent on consumption rather than on productive capital projects.
Hence, we note that the high inflation rate (resulting from cost push factors and new minimum wage), coupled with the rising nonproductive debt and rising debt service are expected to further stunt economic growth.