Henceforth, the challenge of greater import costs on businesses occasioned by currency crises is expected to further impact both the core and food inflation rates, as cost push factors weaken operating margins amid demand pressure in the foreign exchange (FX) market, analysts in the financial services sector have said.

Earlier last week, the National Bureau of Statistics (NBS) released the January 2016 CPI report, which indicated that CPI stayed flat at 9.6 percent Y-o-Y but grew 0.9 percent M-o-M from 1 percent in December. The food sub-index increased at the same pace of 10.6 percent Y-o-Y in January, while it advanced at a slower pace of 0.3 percent from December at 0.9 percent M-o-M. The core sub-index however grew to 8.8 percent Y-o-Y from 8.7 percent in December, but stayed flat at 0.8 percent M-o-M.

“We believe the implication of the development in the FX market points to further pressure on inflation rate in subsequent month, as import costs continue to rise. In the interim, this is expected to continue to impair operating performance of companies, thus heightening recessionary tendency of the economy in the short to medium term,” analysts at Afrinvest Securities Limited said.

The local currency has depreciated 13.8 percent week-to-date in the parallel market following a report from the Bankers’ Committee last two weeks that international school fees payments and health demands constitute the bulk of FX utilisation demands of Deposit Money Banks (DMBs).

Consequently, speculations concerning the currency grew considerably, according to a report by Afrinvest Securities.

Meanwhile, the Central Bank of Nigeria (CBN) on Friday clarified to the general public that it has not stopped the allocation and sale of FX for purposes of paying school fees and settlement of medical bills overseas.

After opening last week at N345/$ on Monday, parallel market rate closed at N400/$ at the end of the week. This was followed the average depreciation rate of about N25/$, a far cry from the pre-Committee meeting weekly depreciation rate of N2.50/$. Consequently, the margin between the parallel market and official market rates – CBN at N197/$ and interbank N199.10/$ – have continued to widen sharply.

While the apex bank and the Presidency remain resolute, maintaining that it will not have the naira ‘killed’ despite calls for an official devaluation, the pressure on BDC and parallel market rates continue to mount as monetary authority’s inaction worsens concern about the outlook of the naira.

“Away from calls for naira devaluation, our view is that the uncertainty surrounding the outlook of the naira is more worrying as this amplifies speculative attacks and round tripping by speculators who bet on higher margin between the interbank market rate and the BDC/parallel rate,” Ayodeji Ebo, head, investment research, and his team of analysts at Afrinvest, said.

“Our view on the implication of the development in the currency market for capital flows (underscored by 53.8% Y-o-Y decline in capital inflows to $9.6bn from $20.8bn in 2014) seems over flogged, however, we note the expanding significance of the parallel market segment of the currency market, and the refusal of the apex bank to stem market volatility will unintentionally continue to hurt domestic economic activity (in the absence of an appropriate structural reform to engender domestic productivity) and hence welfare of the poor. Therefore, we stress the need for the monetary authority to step in to stem the rent seeking activities going on in the parallel market,” the analysts said further.

http://www.financialwatchngr.com/2016/02/22/currency-crises-analysts-predict-core-food-inflation-on-back-of-import-costs/