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FX crisis takes toll on food prices

By on March 12, 2015

Despite the marginal recovery in the crude oil price from its January lows, Nigeria has continued to feel the downside impact of a weaker oil-price environment as prices of staples increased significantly in February.

Specifically, the price of staples, as measured by the Standard Chartered Premise Consumer Price Tracker (SC-PCPT), increased 0.4 per cent month-on-month (m/m) in February.

Analysis of the tracker showed that grain and meat prices went up by 27 per cent and 30 per cent respectively. Together, they made up 57 per cent of the index.

According to Standard Chartered, food prices, reflecting downward seasonal influences, have kept Nigerian inflation relatively contained.

“Since August 1, 2014, when we first started capturing the prices of Nigerian food staples, the SC-PCPT has fallen 0.92 per cent. This is less pronounced that the 1.3 per cent fall observed through end-January, suggesting that price increases are now more prominent. Our tracker is unique in that it uses crowdsourcing technology to measure price trends in real time. We expect to see more pronounced price increases in the coming weeks, reflecting pass-through from the cancellation of RDAS auctions and temporary bottlenecks in fuel availability, “they stated.

They added that the 0.4 per cent m/m increase in the SC-PCPT marks the start of a more pronounced inflationary trend.

The bank said: “Seasonal influences on food prices have contained headline inflation so far, despite increased FX pressure on the Nigerian naira (NGN) and 25 per cent depreciation in interbank FX rates since early 2014. The single-digit consumer price inflation recorded in the past year may be about to change. As we move further away from Nigeria’s harvest season, food-price trends are likely to be less benign. The transmission of NGN weakness to Nigerian prices – which has been slow to date – should also pressure prices higher.”

The bank added that the cancellation of Nigeria’s official Retail Dutch Auction System (RDAS) auctions in February was a necessary response to pressure on FX reserves.

“However, the move to a single interbank market initially triggered localised shortages of fuel products. These were resolved only after the authorities provided a support package for the oil-marketing sector, partially compensating oil marketers for FX volatility and directing banks to make letters of credit available to the sector so that fuel-product imports could resume. These more recent developments may offset the effect on transport prices of the 10 per cent decline in fuel prices earlier in the year.

“At current oil prices, we believe that Nigeria’s FX reserves will remain pressured ahead of the election, limiting the extent of the CBN’s FX sales to the interbank market. Food prices are already under increased upward pressure, as our indicator suggests. The evidence on the pace of FX pass-through to Nigerian prices is mixed. Weaker demand has curbed the ability of some retailers to pass on price increases, with retail margins suffering instead.
However, such benign influences on inflation are likely to be short-term in nature, “they stressed.

 

[ThisDay]