The Nigerian economy continues to deteriorate as July inflation data went up for the ninth consecutive month, pressuring the central bank to increase interest rates, as it officially enters recession.
The country’s Gross Domestic Product went down by 2.06 percent in the second quarter of the year after a 0.36 percent drop in the first quarter, according to the National Bureau of Statistics on Wednesday.
The West African country has already increased its interest rates in July to 17.1 percent from 16.5 percent in June, according to the Abuja-based National Bureau of Statistics in an email on Wednesday. It has been the country’s highest rate since October 2005 as reported by the Central Bank of Nigeria’s website. The median expectation of estimates from 16 economists was at 17.3 percent. Prices in August increased 1.3 percent.
The central bank continued to block certain importers from accessing the foreign currency inter-bank market, including steel and rice products, even when it had removed the naira peg against the dollar on June 20. Consumer prices were also affected due to fuel shortages, which adds to the pressure of inflation that pushed up consumer prices and resulted in a currency loss of over one-third since it was allowed to float.
“Inflation will continue to accelerate, reaching about 20 percent later this year,” said a London-based economist at Capital Economic Ltd., John Ashbourne, before Nigeria released its data. “One of the big factors right now is the devaluation of the naira.”
Food prices experienced 15.8 percent inflation up from 15.3 percent. Fuel prices went down to 148 naira in July compared to 159 naira in June, according to the statistics agency in a separate statement.
The Nigerian oil industry problem is the biggest driver of the country’s economic slump as oil prices continued to be at one of their lowest points for two and a half years. It was exacerbated by disruptions in the oil-rich Niger Delta caused by the Nigeria Delta Avengers, a militant group. The group attacked both Shell and Chevron in May and March, respectively.
The central bank’s benchmark interest rate was increased by 200 basis points up by 14 percent compared to the previous month in a response against inflation and to strengthen the currency by attracting foreign investors. The next policy move of the bank will be released on September 20 according to Governor Godwin Emefiele. The Nigerian economy is expected to contract by 1.8 percent this year, as per guidance of the International Monetary Fund.
Raza Agha, an economist in London at VTB Capital, said that before the country released its data they “expect at least another 100 basis points hike this year,” as inflation accelerates.
“Economic activity in Q3 16 continues to be hampered by security concerns in the Niger Delta, ongoing FX shortages, rising inflation and significantly tighter monetary policy. That said, the decision by militants to stop attacks, the implementation of the 2016 budget and better availability of FX, despite it remaining a massive constraint, suggests a marginally better outlook for H2,” Ridle Markus said in Sub-Saharan African Daily.