This week, we torchlight the April 2024 Consumer Price Index (CPI) data published by the National Bureau of Statistics (NBS) and Q1:2024 International Payment Data (IPD) released by the Central Bank of Nigeria (CBN).
Starting with the CPI, NBS data revealed that Nigeria’s headline inflation rate for April rose less steeply than our forecast (up 49bps to 33.7% y/y vs 34.4% projected). Nonetheless, the increase in the headline rate in April marked the sixteenth consecutive monthly uptrend and was jointly driven by pressure across the food and core inflation sub-baskets. To be precise, the food and core (ex-food and energy) inflation sub-baskets rose by 101bps and 80bps respectively to 40.5% and 26.8% y/y, the highest prints on NBS record.
We estimate that energy goods inflation climbed by 48bps y/y to 34.0% in April from 33.5% previously. However, on a m/m basis, inflationary pressure cooled off across board – the first time of such since October 2023. Precisely, the m/m headline rate printed at 2.3% from 3.0% in March, while food and core inflation also printed lower at 2.5% and 2.2% as against 3.6% and 2.5% the prior month.
In our view, the further spike in the y/y food inflation rate in April mainly reflects low base-year effect, given that the index cooled off m/m. This performance mirrored that of farm and processed food inflation which intensified to 39.3% and 40.9% y/y from 39.1% and 40.3% respectively but eased off to 2.4% and 2.5% m/m from 3.4% and 3.7% sequentially.
On the other hand, we attribute the m/m slowdown to the impact of the off-season harvest in the North as well as the secondary effect of Naira appreciation in April, which also drove imported food inflation lower by 155bps to 2.3% m/m. For context, the official NGN-USD rate appreciated further by 22.1% in April to ₦1,072.74/$1.00 (on April 17th, 2024) in addition to the 21.8% gained in March. Additionally, we opine that the introduction of Dangote Refinery diesel at a relatively cheaper price to the Nigerian market supported the downward trend in production and logistics costs of companies. Similarly, the m/m improvement in core inflation was driven by the reduction in the price growth of clothing & footwear, healthcare, education, and restaurants & hotels.
For May, our model projects that monthly farm inflation would steady at 2.5% m/m (April: 2.4% m/m) amid unabating legacy challenges. Nonetheless, the ongoing off-season harvest in the North and the continued positive impact of the less costly Dangote refinery diesel output on the cost of logistics and transportation of farm produce could tilt the risk to the downside. For the nonfarm component, m/m inflation should mildly intensify to 2.2% (against 2.1% previously) due to the unmasking of the negative effect of the recent spike in PMS price since the 25th of April, as well as the renewed pressure on the FX rate from around the same period (NAFEM rate has lost 28.4% so far from a peak of ₦1,072.24/$ on 17th April). Overall, headline inflation should edge up to 2.4% m/m and 34.3% y/y.
Despite the uninspiring inflation outlook for May, we project that the CBN’s monetary policy committee would keep the benchmark rate unchanged at 24.75% during its meeting next week. Our position is informed by the expectation that the committee will positively appraise the broad-base moderation in the m/m inflation prints. In addition, we aver that the committee might consider that two months is inadequate for the full effect of the 600bps hike between February and March to have permeated the economy. Finally, caution might be exercised given that Q1 GDP data is yet to be published for the MPC to adequately assess the trajectory of the economic performance thus far in 2024. Hence, we expect a hold decision next week.
Shifting focus to the Q1:2024 IPD, the CBN data showed that Nigeria recorded $282.6m as total direct foreign exchange (FX) remittances in the period –representing a 6.3% y/y decline from Q1:2023 but a 127.9% improvement from the low base of $124.0m in Q4:2023. For context, total direct foreign exchange (FX) remittances include money transfers from other countries to family members or other individuals in Nigeria through the official channel. Decomposing the data on a monthly basis, the bulk of Q1:2024 remittances (reported through this channel) came in January ($138.6m), followed by March ($104.9m).
In our view, the y/y decline in remittances can be attributed to unabating FX rate volatility, high cost of transactions, and policy changes, especially for the International Money Transfer Operators (IMTOs), hence, luring significant chunk of remittances flow to the unofficial channels. For instance, while the World Bank estimated remittances flow to Nigeria in 2023 at $20.5bn (38.0% of total receipt in SSA), the official record by the CBN put inflows at $2.0bn. Recall that the apex bank released revised guidelines (among other reforms) for the operations of IMTOs in January – increasing the application fee for an IMTO license from ₦500,000 (set in 2014) to ₦10.0m.
Since peaking in Q3:2019, total direct FX remittances have largely declined, similar to the patterns observed in foreign capitals (FDIs & FPIs) and crude oil export revenue – the other major sources of FX in Nigeria. Precisely, direct remittances have shown the most volatility with a 5-year CAGR of negative 36.5% to $2.0bn in 2023, followed by capital flows with a 5-year CAGR of negative 30.4% to $3.9bn over the same period.
Given the decline in the y/y direct remittances performance in Q1:2024, Nigeria’s sub-par crude oil production (YTD monthly average is 1.31mbpd vs 1.87mbpd budgeted), as well as the slow recovery in foreign capital inflows, we opine that FX supply-demand imbalance would persist in the near term. Hence, the CBN and FG need to intensify reform efforts to attract inflows from capital importation, promote exports of both oil & non-oil products, and incentivise the diaspora to remit through official channels. Noteworthy, we laud CBN’s response to the abysmal performance of remittances by approving 14 new IMTOs (Approval-in-Principle – AIP) to double foreign currency remittances. However, Oliver Twist demands for more.
Afrinvest
