1) Inflation in Nigeria is projected to increase slightly to 9.5% in December 2015, which would be the highest rate since 2013. Inflation rose in 9 of the past 12 months due to factors like currency depreciation, fuel scarcity, and policy uncertainty. 2) Inflation is forecasted to continue rising in the first quarter of 2016 to a range of 11-12% by year's end, driven by government spending, fiscal bailouts, and expectations around social programs and electricity tariff hikes. 3) Other countries in Sub-Saharan Africa are also experiencing rising inflation due to factors like currency depreciation, food and beverage price hikes, and

1. The Spectre of High Inflation Haunts Nigeria
FDC Economic Bulletin
Financial Derivatives Company Ltd.
: 01-7739889  www.fdcng.com
January 5, 2016
CPI to nudge further to 9.5%
FDC is projecting a headline inflation of 9.5% for December 2015, marginally higher than the 9.4%
recorded in November. This will rank Nigeria as the country with the 12th highest inflation rate in Africa.
The 0.1% increase estimated in the consumer price index is consistent with the moderate uptick recorded
between November and December in both 2013 and 2014. It will be the highest level since February 2013.
Inflation rate increased 9 times out of the 12 months in 2015. Is this rising inflationary trend transient or
structural? Though the inflation rate may not be totally transient, a consistent but transient trend becomes
self-fulfilling over time.
The major factors contributing towards the rising price level in 2015 are cost-push in nature. These factors
include exchange rate pressure, intermittent fuel scarcity, policy uncertainty and trade restrictions. In
December, the naira depreciated significantly in the parallel market to an all time low of N280/$, further
compounding shortages of imported products. Increased demand due to seasonal festivities resulted in
higher food prices. Furthermore, the fuel scarcity that spilled over from November led to a spike in
transport fares. The full effect of the cost-push factors has been muted by the decrease in money supply
growth (annualized) of -5% and a reduction in the price of diesel to N107.
Inflation outlook for 2016
With government spending expected to increase in January/February, money supply will also expand.
Consumption pattern in January would most likely be driven by market anticipation. Inflation
expectations in Q1 will be a function of:
1. Disbursement by the FGN and states for the 2016 budget outlay
2. The fiscal bail out for the states
3. Expectation of social intervention of feeding and school programmes

3. 4. Impact of the increase in electricity tariffs by an average of N12kwH
5. Fuel subsidy removal
These factors may result in a marginal but significant increase in inflation in Q1, with year end inflation
rate inching towards a level of 11-12%. The good news is that the price inflation range of 20% (11-9.5) will
be lower than the GDP growth range of 40% (4-2.8). In other words, output growth will be higher than
consumer price increases. As the CPI is much slower than the rate of growth in GDP, inflation will bottom
out and decline in the long term.
Urban prices decelerated in December
The FDC Lagos urban inflation index increased marginally to 12.36% in December, up 0.06% from 12.36%
in November.
The year-on-year (YoY) food index increased to 16.12% from 15.09%, while the YoY non-food index
decreased to 10.45%, from 10.89% in November. The increase in urban inflation was driven by the rise in
food prices due to preparations for the Christmas celebration as well as logistic challenges due to fuel
scarcity.
FDC Economic Bulletin Page 3
Financial Derivatives Company Ltd.
: 01-7739889  www.fdcng.com
Source : NBS, FDC Research
Chart 1: Headline Inflation Rate

5. Inflationary pressures across Sub-Saharan Africa (SSA)
There is a rising inflationary trend across SSA. Angola, the second largest African oil producer, had a
significant increase from 12.40% in October to 13.29% in November. This increase was fuelled by a reduction
in the country’s foreign exchange earnings and the depreciating kwanza. Kenya also witnessed a steep rise
in its inflation rate in December to 8.01% from 7.32% in November; driven by the increase in the prices of
food and non-alcoholic beverages, alcoholic beverages as well as the increase in excise duties on cigarettes.
Furthermore, South Africa also witnessed an uptick in consumer prices from 4.7% in October to 4.85% in
November. This rise was driven by higher costs of household items. Uganda and Zambia both had increases
in inflation rate for December. Uganda’s inflation rate rose from 9.1% in November to 9.3% in December,
driven mainly by an increase in core inflation and energy prices. Zambia’s inflation rate jumped from 19.5%
in November to 21.1% in December, driven mainly by a weaker currency and higher electricity cost.
The respective monetary policy committees of these countries have responded to the rising inflationary
trend mainly by increasing their interest rates or maintaining status quo. Countries that maintained their
interest rates include Kenya and Uganda. Angola raised its interest rates from 10.5% p.a to 11% p.a in
December, South Africa raised its rates to 6.25% p.a in December, and Zambia raised its rates by 300 bps to
15.5% p.a in November.
FDC Economic Bulletin Page 5
Financial Derivatives Company Ltd.
: 01-7739889  www.fdcng.com
Chart 2: FDC Urban Index
Source : FDC Research

6. Upcoming MPC meeting
The next MPC meeting is in two weeks, at a time when there are mixed signals on the direction of monetary
policy in Nigeria. The CBN is expected to announce a new forex policy which will give it the flexibility to
bring the external and domestic economic variables into equilibrium. This may include the announcement of
a new exchange rate band, with a floor of N185 and a ceiling of N220 during Q1 2016.
Likely Market Response
Interest Rates
Money market rates are already at an all time low. We expect to see a creeping up of rates as the level of
government borrowing increases.
External Reserves
Nigeria’s external reserves are below $29bn. The anticipated adjustment in the exchange rate band is
expected to slowdown the rate of depletion, as the demand pressure eases. However with oil prices still soft
at $37pb, the likelihood of an accretion is slim.
Stock Market
While the increasing inflationary trends will have investors worry about their returns, the major drivers of
stock market activities will be macroeconomic uncertainties and likely further increases in US interest rates.
Furthermore, expected Q4 earnings is will be another determinant of stock market performance. The bearish
trend in the stock market is expected to continue in the near term.
FDC Economic Bulletin Page 6
Financial Derivatives Company Ltd.
: 01-7739889  www.fdcng.com
Important Notice
This document is issued by Financial Derivatives Company. It is for information purposes only. It does not constitute any offer, recommendation or
solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of
likely future movements in rates or prices or any representation that any such future movements will not exceed those shown in any illustration. All
rates and figures appearing are for illustrative purposes. You are advised to make your own independent judgment with respect to any matter con-
tained herein.