Inflation will average close to 12% in 2019-2020 – Fitch Rating

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Story by Kayode Tokede

Fitch Rating has projected that the nation’s inflation rate will average close to 12 per cent between 2019 and 2020.

The rate, according to Fitch rating is well above the projected current “B” median of 4.8 per cent, propped up by cost-push factors.

The National Bureau of Statistics (NBS) in its previous report on inflation rate reported 11.37 per cent inflation rate in April from 11.25 per cent in March. Inflation rate according to NBS closed February at 11.31per cent and 11.37per cent in January 2019.

The report by Fitch on Tuesday noted that continued high inflation could contribute to an overvaluation of the exchange rate and remains a credit weakness.

Fitch said the multiple exchange rate regime of the Central Bank of Nigeria (CBN) is expected to be maintained for the foreseeable future, noting that the naira exchange rate on the “Investors and Exporters” (I&E) window where most foreign exchange transactions take place, has remained stable in a narrow range since September 2017.

The report by Fitch said the specialized window is the premium on parallel markets against the I&E rate has also mostly dissipated.

“These developments reflect improved FX availability supported by the recovery in oil prices and portfolio inflows, tight liquidity management and market interventions by the CBN as well as continued FX restrictions,” the report noted.

On the Monetary Policy, Fitch said, ” The impact of the monetary policy rate 50 basis-point cut in March on macroeconomic and financing conditions will be muted as the monetary policy stance is mostly determined by the CBN’s liquidity management operations.”

According to Fitch, Nigeria’s international reserves provide a sizeable external buffer, at $42.8billion equivalent to six months of current account payments at end-2018, well above the current ‘B’ median of 3.5 months.

“However, Fitch notes that around $6 billion of reserves are pledged in forward positions. Reserves are also buoyed by non-resident holdings of short-term CBN bills which amounted to $15.8 billion (four per cent of GDP) at end-April, exacerbating susceptibility to reversals in volatile portfolio inflows and generating rollover risks. Non-resident holdings of CBN bills might not be entirely reflected in Nigeria’s external balance sheets statistics,” the report noted.

The report further said, the country’s long-standing net creditor external position has shifted to balance in 2018 reflecting a rapid rise in gross external debt, which has doubled in three years, increasing to 30.6per cent of Gross Domestic Product (GDP) in 2018 from 15.3per cent in 2015. It still remains stronger than the current ‘B’ median of a net debtor position of 25per cent of GDP.

The report stated that, lower oil revenues will drive the current account close to balance in 2020 from an estimated surplus of 2.6per cent of GDP in 2018, under Fitch’s forecasts.

Fitch said, “Nigeria will continue to experience a sluggish recovery driven by the rebound in oil prices and the expansion of services. Fitch forecasts GDP growth to average 2.2per cent in 2019-2020, below its previous 10-year average of 4.2per cent and the current ‘B’ median of 3.4per cent.

“High unemployment and inflation will constrain private consumption while investment is held back by tight credit supply, a weak business climate and regulatory uncertainty in the oil sector. A large infrastructure deficit, which is illustrated by acute power supply shortages and security challenges, also dampen the medium-term growth outlook,” the report added.

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