Nigeria’s Complex Policy Approach Hampers Inflation Fight – Fitch

The decision by Nigeria’s central bank to raise the main policy interest rate sharply in May does not signal a fundamental shift in the country’s unorthodox monetary policy, which will continue to impede efforts to rein in inflation, Fitch Ratings has said.

“We believe Nigeria’s complex policy approach will be maintained at least until the next presidential election in February 2023. A significant strengthening of macroeconomic performance appears unlikely in the near term, despite the supportive effects of higher global oil prices for the economy.”
The Russia-Ukraine war’s impact on global prices, notably for food and energy, has seen inflation accelerate in 2022.

Consumer prices rose 17.7% in May, up from last year’s low of 15.4% in November.

Fitch now forecasts Nigeria’s inflation to average 17% in 2022, unchanged from the 2021 average.

In March 2022, it had predicted inflation would average 14.6% in 2022.
The authorities had planned to phase out fuel subsidies in 2022, but they are now unlikely to be removed before 2023.

This helps to contain 2022 inflation, but the cost of the subsidy – borne by the Nigerian National Petroleum Corporation (NNPC) – has reduced NNPC transfers to government. As a result, Fitch forecast the general government deficit to narrow only moderately to 3.4% of GDP this year, from 4.2% in 2021.

Fitch had expected at least one interest-rate hike in 2022, but the 150 basis points increase in the main policy rate, to 13%, on 24 May 2022 was larger than it had anticipated.

Further increases, it said, are possible, as officials with the Central Bank of Nigeria (CBN) have indicated a preference for real interest rates to be less steeply negative.

Moreover, it believes the CBN will use the Cash Reserve Ratio and the issuance of CBN special bills to tighten liquidity.