2020: FDC sees uptick inflation rate, decline in foreign exchange buffer

Economists at Financial Derivative Company (FDC) said the country will experience an uptick in inflation rate and a further decline in its foreign exchange buffer as the government juggles various economic options to steady the economy on the path of growth in 2020.

This is contained in its monthly economic outlook, FDC, owned by renowned economist and member of the Presidential Economy Advisory Committee, Bismarck Rewane said the hike in the Value Added Tax (VAT) rate to 7.5 percent from 5 percent 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.

Nigeria’s 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.

On Monday, President Mohammadu Buhari signed into law the new Finance Act, which effects the hike in 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 $37bn) 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, 2019, have fallen significantly to around $38.32 billion by Jan. 14, 2020.

-Global Financial Digest