Economists at Financial Derivative Company (FDC) have said the country will experience a rise in the inflation rate and a further decline in its foreign exchange reserves as the government juggles various options to steady the economy on the path of growth in the year.
Nigeria’s inflation rate increased, for the fourth month, to 11.98 percent in December of 2019 from 11.85 percent in the previous month. The November rate was the highest rate since May 2018.
The FDC monthly economic outlook said the hike in the Value Added Tax (VAT) rate to 7.5 percent from five per cent in spite of the increase in the minimum wage would have a knock-on effect on consumer disposable income.
“The wage increase and higher VAT will exacerbate inflationary pressures. Inflation has increased consecutively since September 2019 and an increase in consumer price inflation is imminent,” the company wrote in its economic outlook.
FDC warned that any increase in inflation rate in January could trigger the beginning of a tightening cycle by the Central Bank of Nigeria (CBN) and the subsequent increase in the benchmark interest rate.
“If the higher VAT leads to a spike in inflation in January, the MPC would be left with no alternative but to commence a tightening cycle and raise the MPR,” economists in the company said.
Consumer inflation rose to 11.85 percent in November from 11.61 percent in October due to the impact of the closure of land borders by the government and uptick in the prices of food items.
Last Monday, President Mohammadu Buhari signed into law the new Finance Act, which increased VAT rate from five percent to 7.5 percent.
The company also predicted further drop in the country’s external reserves, saying the forex buffer could drop below $37 billion mark, while the local currency is seen coming under pressure, as a result, rising demand at the domestic forex market.
“We expect external sector vulnerabilities to persist in January. External reserves will continue its steady decline (could fall below $37b) and naira could come under pressure due to increased demand at the forex market for international school fees payment.”
The nation’s external reserves, which peaked at $45.09 by July 17, last year, have fallen significantly to around $38.32 billion by January 14, 2020.