Bank of America sets Nigeria Growth, Inflation Estimates at 6.3% and 15% Respectively

Bank of America Merrill Lynch cut its 2012 growth forecast for Nigeria while raising its estimate for inflation after the government of Africa’s top oil producer reduced fuel subsidies.

Sub-Saharan Africa’s second-biggest economy may grow 6.3 percent this year compared with an earlier estimate of 6.7 percent, weighed down by accelerating inflation and declining consumption, the bank said today in an e-mailed report. That compares with last year’s growth of 7.7 percent, it said.

With higher fuel prices after the government cut subsidies, President Goodluck Jonathan has to overcome “public skepticism and tension” due to “widespread government corruption” in order to carry through his reform plan, according to the report. A combination of inadequate basic services and the demographic pressure of a youthful population is a “key political risk,” it said.

A week-long general strike and street protests ended on Jan. 16 after Jonathan limited an increase in the price of gasoline to 97 naira ($0.61) a liter (0.26 gallon). Prices initially more than doubled from 65 naira a liter when the government scrapped the subsidy on Jan. 1.

Price Effects

Bank of America also raised its inflation forecast for 2012 to an average of 15 percent from an earlier estimate of 13.3 percent with fuel prices higher by about 50 percent and power prices due to increase. Nigeria’s annual inflation rate rose to 12.6 percent in January from 10.3 in December, the National Bureau of Statistics said yesterday.

Grid power prices will rise 25 percent to 88 percent in April for high-income earners as the government tries to attract investors to end daily blackouts, Minister of Power Bart Nnaji said Feb. 12. The government will subsidize costs for low-income households, he said.

The Central Bank of Nigeria  will probably respond to second-round price effects by raising its policy rate by at least 100 basis points in 2012, 50 points both in July and September, according to the report. The bank kept its benchmark interest rate at 12 percent for a second meeting last month, after raising it 6 percentage points since September 2010.

The naira will likely fall to 160 per dollar by the end of the second quarter before recovering to 158 by the end of the year, the bank said. The naira gained more than 0.1 percent against the dollar in the interbank market to 157.36 as of 4:50 p.m. in Lagos, the commercial capital.

While escalating attacks by the Islamist Boko Haram group are fueling a sectarian divide between the mostly Muslim north and the largely Christian south, “the risk of civil war is low mainly because northern politicians (and civilians) have no incentive to secede from the south,” the bank said.

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