Inflation Rate May Hit 20% in First Quarter —Experts

U.K. Inflation
  • Inflation Rate May Hit 20% in First Quarter

Economic and financial experts have said that the country’s inflation rate may rise further to 20 percent during the first quarter of this year from the current 18.4 percent.

They, however, said the inflation rate was expected to reduce significantly as the fiscal and monetary authorities would begin to implement certain policies to better the economy.

The experts made this known in investment notes detailing their outlook for this year on Sunday.

An economic analyst at Ecobank Nigeria, Mr. Kunle Ezun, wrote, “Inflation is likely to accelerate towards 20 per cent by the end of Q1 17, driven by fiscal expansion, energy cost and high FX cost caused by the over 30 per cent naira devaluation in 2016.”

“Slow but steady rise in liquidity arising from projected government spending in 2017 will add to the pressure on the naira owing to higher import demand; this will stoke inflation.”

Speaking further, he said tight monetary policy, higher borrowing and higher inflation rate would continue to put pressure on domestic interest rates.

He said, “Exchange rate uncertainties will persist due to sustained low oil prices, lower FX reserves, and robust import demand; we expect a managed interbank exchange rate of 305.50/dollar and a parallel market rate of 495/dollar in 2017.

“The naira will remain under pressure largely due to a structural imbalance between the dollar supply and demand, which will be reflected in proliferated FX market and rates.”

According to the expert, there will be high but declining banking sector liquidity as structural imbalance between the dollar supply and demand continues to weigh on the economy.

On key risks to the outlook, Ezun said a fall in oil prices would add pressure on external reserves, fuelling more pressure on the naira.

In the same vein, the Managing Director, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said if the CBN reviewed its foreign exchange policies to enable the market to function effectively, the gap between the official and parallel market rates of the naira would become smaller.

He said, “Forex policies usually complement trade and investment policies. The Nigerian government will in 2017 strive towards greater coordination of these policies, and will move from its current bias for a command economy monetary policy towards a mixed economy.

“I believe that with oil prices at $55 per barrel and production back up to 2mbpd, the naira will slip in the interbank markets to N350-N380/$. It will fall at the parallel market to N520/$ before recovering sharply to N425/$. These projections are based on the assumption that the market will be reformed and that sanity will return to what is now essentially a foreign exchange asylum.”

To escape from what he described as forex trap, Rewane stressed the need for the authorities to understand the importance of a properly functioning market.

He said, “The CBN will need to eliminate or phase out regulations that stifle market activity, create a sense of two-way risk in the market, reduce its market-making role and stop indirect or overt rate determination, and increase market information on the sources and uses of foreign exchange.

“There must be liquidity, transparency and openness, and the CBN as a regulator must be firm in dealing with market infractions.”

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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