Headline inflation in Nigeria dropped to 8.4% in June 2013, a five-year low, driven by lower non-food prices. Core inflation remained in the single digits at 5.5% while food inflation rose to 9.6% due to planting season effects. The Central Bank of Nigeria's Monetary Policy Committee is expected to keep interest rates on hold at 12% at its upcoming July meeting due to pressures on the naira exchange rate from factors like declining oil revenues and global market pressures.

1. CDL Research
1 June 19, 2013 Nigeria Inflation Monitor
Inflation in June 2013 & Pre-MPC Review
Inflation Rate Drops to 5-year low
Overview: Inflation in Nigeria slowed to 8.4% in June 2013 dropping to a five year low from 9% in
the prior month largely driven by the deceleration in non-food prices. Nigeria has recorded single
digit inflation rate in the first half of the year thus surpassing the 2008 feat when the country recorded
five consecutive months of single digit numbers. Overall, prices eased by 0.59% on a month-on-
month basis in June compared to 0.67% in June. The core index which excludes the volatile
agricultural produce remained in single digit region for a fourth month increasing by 5.5% year-on-
year in June compared to 6.2% in May. With the planting season on and the depletion of farm
inventories from last year, the food index rose 9.6% year-on-year and 0.7% on a month-on-month
basis.
§ Outlook for Inflation: From the minutes of the last Monetary Policy Committee (MPC) meeting, the
forward guidance of the Central Bank indicates that the headline inflation will remain in the single
digit range for the second half of the year. This is broadly in line with the 9.7% 2013 forecast of the
Nigerian Bureau of Statistics (vs 9.4% consensus). Risks identified by the committee to this outlook
include fiscal spending and possible pressures on the exchange rate caused by declining revenues as a
result of output leakages. Overall, the Committee is strong that government spending will constitute a
major risk to the inflation and exchange rate outlook, thus advising prudence in monetary policy
action at this time. We also expect the food index to trend higher in the near term as the combined
effects of the Muslim fast and the planting season exert more pressure on food prices.
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
JUL AUG SEP OCT NOV DEC Jan Feb Mar April May June
12 Months Inflation Trend
Headline Inflation Core Inflation Food Inflation
Source: NBS
%
1
750
1,250
1,750
2,250
2,750
32
35
38
41
44
47
50
Millions(USD)
Billions(USD)
CBN Foreign Reserves vs Monthly FX Auctions
Foreign Reserve $ $ Auctions
Sources: CBN, FDHL
2
Headline Index: 8.4%
Month-on-Month
Change: 0.59%
Core Inflation: 5.5%
Month-on-Month
Change: 0.3%
Food Inflation: 9.6%
Month-on-Month
Change: 0.7%
Jimi Ogbobine
jogbobine@cdlnigeria.com
+234 277 8218

2. CDL Research
2 June 19, 2013 Nigeria Inflation Monitor
Pre-MPC Review: The MPC will be meeting for the fourth session this year on July 22- 23. We
anticipate that this may be the most closely watched meeting since the October 2011 session when an
extra-ordinary MPC meeting was called and the Monetary Policy Rate (MPR) was hiked by 275 basis
points to 12%. This session will be crucial to the market for a number of factors. Early 2013, the
benign inflationary outlook had led to dovish expectations of a cut in rates later in the year. However,
as the headwinds against the naira and output leakages increase, the CBN has maintained a more
hawkish posture in recent times. This has also led to an adjustment in the outlook for monetary
policy. Going into this July meeting, we believe the MPC will give material consideration to the
naira.
The naira story: The naira has come under pressure in recent times from two fronts. Firstly the
global emerging market outflows on the back of US tapering effects which also affected the Nigerian
markets. In response the CBN has sought to defend the local currency by increasing its supply of US
dollars to the market. (See Figure 2). This has pushed the foreign reserves position of the CBN back
into the $46 billion range ($46.99 billion, 16th July) for the first time since February. Secondly, the
drop in government revenues owing to the rise in crude oil theft and production stoppages has also
weakened the naira. The minister of Finance recently stated that illegal bunkering of crude oil and the
consequent opportunity costs (production shut-in) may be costing Nigeria as much as 400,000 barrels
daily which is about four times more than current production levels in Ghana. Despite the recent
supply worries of OPEC owing to the fast evolving shale alternative, crude oil has hovered above the
$100 psychological levels but Nigeria’s peculiar output leakages has undermined the government’s
revenue profile. Going forward the naira’s fate will largely be anchored on the price of crude oil.
Swings in the price of the Bonny Light (Nigeria’s variant of crude oil) reflects a high degree of
correlation with the exchange rate of the naira to the US dollar (See Figure 3). Thus the naira is
strongest when the price of crude is on the upward trajectory and vice versa. Overall, the fragility of
the global economy at this time increases the vulnerability of the naira to external threats.
Likely MPC Outcome: Despite the significant pressures on the naira, we do not anticipate a hike in
the benchmark rate at this July session. On the other hand we also believe that the doves within the
committee simply lack the numbers to translate their calls for a rate cut into policy (See Figure 4).
Thus we expect the committee to maintain the MPR at 12% and the corridor at +/-200bp. At the May
meeting, the committee uncharacteristically raised “concerns over the low level of credit growth to
the private sector and traced this to the crowding out effect of high growth in credit to the public
sector”. Raising the benchmark rate now would be counterproductive to this concern since the MPR
has far reaching consequences on market rates. However, we see the MPR exploring other policy
options to increase the stability of the local currency. We believe that if staff forecasts and outlook
turn out to be persuasive enough to warrant further tightening, the committee may tilt towards
adjusting the Cash Reserve Ratio (CRR) which is currently at 12%. We also anticipate that the bank
may be induced to synchronise the midpoint of its +/-3% FX band from the current N155 to the N160
level s of the 2013 FGN fiscal budget assumptions. The mid-point of the local currency was adjusted
downwards from N150 to N155 in September 2010 when the naira faced similar pressures.
Emerging markets
bear the brunt of the
Fed’s tapering effect
Bond Yields of 13 –
13.5% may indicate
good re-entry point
for investors
Nigeria’s stolen
crude is four times
more than the entire
Ghanaian
production
Committee cries out
on crowding out
effect

3. CDL Research
3 June 19, 2013 Nigeria Inflation Monitor
Notes
1. CPI Report: June 2013 – Nigerian Bureau of Statistics
2. Communiqué No. 89 of the Monetary Policy Committee Meeting of Monday and Tuesday,
May 20 and 21, 2013 – Central Bank of Nigeria
3. Nigeria’s macroeconomic performance and outlook: July 12, 2013 – Goldman Sachs
4. Nigeria losing 400,000 barrels of oil daily –Okonjo-Iweala: (Accessed 17th July, 2013) – The
Punch
155
156
157
158
159
160
161
162
163
90
95
100
105
110
115
120
125
130
InterbankRates
Priceperbarrel(USD)
Bonny Light vs The Naira (Month-end value)
Bonny Light $ FX($/N)
Sources: FDHL, CBN
1
2
3
4
5
6
7
8
9
10
Persons
MPC voting pattern
Hold Cut
Source: CBN
3
4

4. CDL Research
4 June 19, 2013 Nigeria Inflation Monitor
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