Agusto & Co, a prominent credit rating agency, has issued a cautionary statement regarding Nigeria’s inflation, warning that the recent slight moderation could be short-lived due to several imminent fiscal measures.

The agency’s concerns are primarily centered on the proposed supplementary budget, increased Federation Account Allocation Committee (FAAC) disbursements, and the upcoming minimum wage hike, which they believe could reignite inflationary pressures and prolong the nation’s battle with high inflation.

In its latest monthly newsletter, published on Friday, Agusto & Co highlighted the risks posed by the government’s fiscal policies.

“The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of N6.6 trillion, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the N70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process,” the newsletter stated.

The agency’s analysis underscores the complexity of Nigeria’s economic environment, where fiscal policies aimed at stimulating the economy could inadvertently fuel inflation. For instance, the supplementary budget and increased FAAC allocations are expected to inject significant liquidity into the economy. In contrast, the proposed minimum wage increase could raise consumption levels, both of which are naturally inflationary.

Economic Challenges and CBN’s Dilemma

Agusto & Co also pointed to existing economic challenges that exacerbate the risk of inflation, such as food supply disruptions and the high cost of fuel. These issues, coupled with the anticipated fiscal measures, present a challenging scenario for the Central Bank of Nigeria (CBN) as it navigates its monetary policy.

Given these conditions, the agency anticipates that the CBN may opt to maintain the current policy rate at the upcoming Monetary Policy Committee (MPC) meeting in September 2024. The decision to hold the rate would be based on recent inflation data, which, according to Agusto & Co, validates the CBN’s tightening stance.

“The latest inflation data vindicates the CBN’s tightening monetary policy stance. The consistent moderation in month-on-month inflation since March, coupled with a slower pace of year-on-year increases in the latter half of H1 2024, reinforces the CBN’s conviction that the contractionary monetary measures are yielding positive results,” the newsletter noted.

However, the agency cautioned that while inflation has moderated, the underlying structural issues driving core inflation remain unresolved. This suggests that the risk of inflationary pressures resurging remains significant.

CBN’s Strategic Pause

Agusto & Co’s analysis suggests that the CBN might adopt a “wait and see” approach at its next MPC meeting. With Q1 2024 GDP growth showing signs of strain due to rising borrowing costs, the CBN may decide to keep the policy rate stable, allowing time to monitor inflation trends, exchange rates, and the upcoming Q2 GDP data before making further policy adjustments.

“The CBN, at the last MPC meeting in July 2024, re-emphasized its commitment to stay on course with the tightening cycle in view of the urgent need to address inflationary pressures to consolidate on the gains thus far achieved. While acknowledging the recent progress made, Governor Cardoso hinted at potential rate cuts in the future if inflationary pressures continue to ease,” the newsletter stated.

This strategic pause would give the CBN the opportunity to assess the effectiveness of its current measures and the impact of the government’s fiscal policies. It would also provide the bank with crucial data on how the economy is responding to both monetary tightening and fiscal stimulus.

Despite the recent decline in inflation, Agusto & Co. warned that the persistent structural issues reflected in core inflation indicate that the risk of inflationary pressures resurging remains significant. The agency highlighted that the underlying factors contributing to inflation, particularly those linked to structural elements such as supply chain disruptions and inefficiencies, continue to pose a threat.

“The underlying factors contributing to inflation, particularly those linked to structural elements, continue to pose a threat, making the possibility of further increases in inflation a real concern,” the report concluded.

I have tried to ignore the own goal policy frameworks in Nigeria. But this one is painful to ignore since it is coming from NNPCL, an iconic national institution. Recall that in June 2023, I noted that Nigeria would be unable to float Naira and remove fuel subsidy at the same time.  I posited that within 18 months, the nation would get into a vicious circle of carry-capacity, where trying to “suppress” subsidies and “hold” Naira, Nigeria will trigger significant welfare losses for the citizens.

For NNPCL to drop this statement, it does mean it wants to open the veil: “NNPC Ltd. has acknowledged recent reports in national newspapers regarding the company’s significant debt to petrol suppliers. This financial strain has placed considerable pressure on the Company and poses a threat to the sustainability of fuel supply.” Whoever tells you that you can float Naira and keep the prices of petrol and diesel constant is lying to you.

PRESS RELEASE – NNPC Ltd Faces Financial Strain Due to PMS Supply Costs, Impacting Supply Sustainability

NNPC Ltd. has acknowledged recent reports in national newspapers regarding the company’s significant debt to petrol suppliers. This financial strain has placed considerable pressure on the Company and poses a threat to the sustainability of fuel supply.

In line with the Petroleum Industry Act (PIA), NNPC Ltd. remains dedicated to its role as the supplier of last resort, ensuring national energy security. We are actively collaborating with relevant government agencies and other stakeholders to maintain a consistent supply of petroleum products nationwide. – NNPC /1st September, 2024

A Great Summary from TC Daily newsletter

Nigeria’s petrol subsidy, a decades-long government intervention that has defied all efforts at dismantling, was scrapped unceremoniously in May 2023. It was hailed as an important but poorly executed reform, but other problems like FX volatility and a government struggling to raise revenues have made follow-through difficult.

The devaluation of the naira, for instance, has increased the cost of importing petrol and has ensured that a 3x increase in fuel price is no longer sufficient. Depending on who you talk to, the current landing price of petrol is ?1,000 ($0.63)/litre, significantly higher than the ?610 ($0.38) fuel currently retails for. It means the federal government has been paying subsidies for months.

Those subsidies have strained the government’s finances and caused late payments to fuel importers. Late payments lead to long fuel queues and Nigeria’s fuel scarcity, which has historically been seasonal, is now a feature in many major cities.

It is creating headaches for individuals and businesses. Logistics operators are struggling to get fuel and sometimes paying above market price. They’re also passing on those costs to end users. The scarcity also makes life difficult for millions of people who generate their own power given the country’s unreliable power supply.

Yet the situation may only get worse.

On Sunday, the Nigeria National Petroleum Company Limited (NNPC) admitted that its debts to fuel importers are significant and the “financial strain has placed considerable pressure on the company and poses a threat to the sustainability of fuel supply.”

If you’re not versed in government speak, the NNPC, which reported ?3.3 trillion ($2.07 billion) in 2023 profits in August, will likely use all of those profits to pay subsidies. And that may not even be sufficient. Some reports put the backlog of payments at $6 billion.

While NNPC continues to “engage with stakeholders,” Nigerians have to brace themselves for more queues and a possible fuel price increase.

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In the heart of Africa, a new landmark is rising in N’Djamena, the capital city of Chad. The Mandjafa Stadium, a project backed by China, is set to become a beacon of sports and unity for the nation. With a seating capacity of 30,000, this stadium is not just a construction project; it’s a symbol of the growing relationship between Chad and China, and a testament to the power of sports to bring people together.

China’s involvement in Africa’s infrastructure development is extensive and multifaceted, reflecting a strategic partnership that spans various sectors and countries across the continent. The Belt and Road Initiative (BRI), proposed by President Xi Jinping in 2013, is a cornerstone of this engagement, aiming to enhance regional connectivity and embrace a brighter future together.

Under the BRI, China has embarked on numerous infrastructure projects, including the construction of roads, railways, ports, and energy facilities. These projects are designed to fill the infrastructure gap in Africa, boost economic growth, and foster bilateral ties. For instance, the Tanzania-Zambia railway, an 1800 km line, stands as a significant example of China’s commitment to improving transportation networks in Africa.

Moreover, China’s role in African infrastructure extends to capital projects that are vital for the continent’s economic development. Investment in these projects is seen as crucial for promoting private sector activity, industrialization, and job creation for Africa’s growing population. The Deloitte Insights article highlights China as the biggest financier of Africa’s infrastructure, with Chinese banks playing a pivotal role in funding these developments.

The impact of these projects is far-reaching, with the potential to increase GDP per capita, foster innovation, and reduce transaction costs. This, in turn, facilitates trade and talent transfer, contributing to more inclusive growth and poverty alleviation across the continent. China’s infrastructure footprint in Africa is evident in 35 countries, with a concentration of projects in nations like Angola, Nigeria, and Sudan. Plans for new projects continue to emerge, demonstrating China’s ongoing commitment to the continent’s development.

The architectural marvel, designed with the principles of economy, practicality, and beauty, is poised to provide a ventilated, shaded, and comfortable environment for spectators. The design concept of “Victory” is embodied in the V-shaped columns that adorn the facade, representing a positive attitude and the Olympic spirit of “higher, faster, stronger”.

This stadium is more than just a venue for sports; it’s a platform for cultural exchange and a catalyst for economic growth. It will host national and international events, including the potential to welcome the prestigious “African Cup,” elevating Chad’s presence on the global sports stage. The project also signifies China’s commitment to supporting infrastructure development in African nations, fostering a spirit of cooperation and mutual development.

The Mandjafa Stadium stands as a promise of progress for Chad’s youth, eagerly anticipated by a generation aspiring to compete and excel in sports. It fills a long-standing void in sports infrastructure in the country, providing state-of-the-art facilities for athletes and fans alike. The stadium is not just a structure of steel and concrete; it’s a home for dreams, ambitions, and the indomitable spirit of Chadian athletes.

As the construction progresses, the excitement is palpable among the citizens of N’Djamena and beyond. The Mandjafa Stadium is set to become a hub of activity, a place where the community can gather to celebrate their athletes and their nation. It’s a project that transcends sports, embodying the hopes and aspirations of a country on the rise.

The completion of the Mandjafa Stadium will mark a new chapter in Chad’s sporting history, one that will hopefully inspire other nations to invest in the power of sports as a unifying force. It’s a story of partnership, perseverance, and the universal language of sports that connects us all.