The Nigerian double whammy of inflation and unemployment… more of structured than event

By PFI Analysts

Earlier today, the National Bureau of Statistics (NBS) released the February 2020 inflation figures. According to the report, inflation rose for the 18th consecutive month in February 2021 and the highest in four years. Notably, headline inflation edged higher to 17.33% compared to the 16.47% recorded in January which is 0.10% higher than our estimate of 17.23%. On a month-on-month basis, the index advanced by 1.54%, this represents  a 0.05% increase  to the  1.49% recorded in January 2021.

Food Prices Remain Pressured…Overarching Impacts of Insecurity & Exchange Rate Bottlenecks

On a sub-component basis, the food inflation sub-index rose from 20.57% y/y in January 2021 to 21.79% y/y in February 2020. Food prices increased by 1.89% representing a 0.06% increase from the 1.83% recorded in January 2021. One notable factor remains the sustained shortfall in domestic food supply relative to the demand signifying a cost-push inflation rather than a demand pull inflation. Specifically, issues of insecurity and supply chain bottlenecks across the country have greatly impacted the prices of food items negatively.

Similarly, the core inflation sub-index went up to 12.38% y/y (vs. 10.52% y/y in Aug-2020) amid a month on month increase of 1.21%. Under the core inflation sub-index, the highest price increase was witnessed in transportation and healthcare services.

Impact on the Capital Market…NSE ASI down by 6.16% in February

The equities market witnessed significant selloffs across most tickers as the ASI retracted from the late 2020 and January rally. As at the last trading day in January, the market had already gained 5.32% for the year in addition to the record 50.03% gains in 2020. However, the weekly bearish sentiments started from the first week of February with the market plunging by 1.66% that week. This was followed by three consecutive declines of 3.04%, 0.63% and 0.96% for the remaining weeks in February. In summary, the market lost about 6.1% in the month of February alone, attributable to the continuous spike in fixed income yields in a bid to curtail rising inflation and also attract foreign investors.

Unemployment Not Slowing Down…23.18mn Nigerians Reported to be Jobless

In a separate report by the National Bureau of Statistics on Monday 15th of March, the Nigeria’s unemployment rate rose to 33.3 per cent in the fourth quarter of 2020 (Q4 2020) compared to 27.1 per cent in Q2. Notably, an additional 1.42 million people were added to the unemployment pool in the fourth quarter of 2020.

Traditionally, there exists an inverse relationship between unemployment and inflation, i.e. economic growth comes with inflation, which in turn should lead to more jobs and less unemployment. A weak 0.11% economic growth, employment rate above 30% and inflation rate of 17.33% clearly negate the this theory, as such, the country is termed to be facing a situation called stagflation (a period of simultaneous increase in inflation and dwindling economic growth).

While there is no direct solution for stagflation, policies targeted at improving productivity such as enabling business environment (security and infrastructure) has to be increased to the point where it would lead to higher growth without additional inflation.

Our Inflation Outlook for the Month of March

For the month of March, we maintain an upside bias for the headline inflation considering the price impact of the recent spike in PMS pump price that was later reverted. Secondly, food inflation is still being pressured on the back of continued insecurity inhibiting sufficient food production by farmers across the country. Other issues such as logistics constraints, exchange rate instability and high levels of system liquidity are also expected to push prices upward