•Current account deposits rise 50%
•Currency outside banks rises 23%
•Analysts project 18.84% inflation for April
By Babajide Komolafe
The increasing demand for cash by members of the public to meet the rising prices of goods and services has caused money supply in the economy to jump by 22.5 per cent Year-on-Year (YoY) to N38 trillion in the first quarter of the year (Q1’21).
Reflecting the rising trend in prices of goods and services, the annual inflation rate rose for the 19 consecutive months to 18.17 percent in March according to data by the National Bureau of Statistics (NBS). This represents the highest inflation rate since January 2017.
The persistent rise in the inflation rate is mostly attributed to increase in food prices. The annual food inflation rate rose steadily to 23 per cent in March this year from 13.28 per cent in October 2018, reflecting the impact of low harvest due to continued farmer-herders’ crises and the volatility in logistics cost as well as the impact of border closure that lasted from August 2019 to December 2020.
Other factors driving the steady increase in prices of goods and services include: naira depreciation, increase pump price of petroleum products and electricity tariff.
However, the persistent increase in inflation means that consumers need more money to purchase the same quantity of goods and services, a situation that usually leads to increased demand for money and hence increase in money supply.
This development is confirmed by Financial Vanguard analysis of data on Credit and Money supply for Q1’21 released by the Central Bank which showed that Broad Money supply (M2) rose by 22.5 per cent, YoY, to N38.03 trillion in Q1’21 from N31.01 trillion in Q1’2020.
Further analysis showed that the increase in Broad Money supply (M2) was driven by 46 per cent YoY increase in Narrow Money supply (M1), which comprises Currency Outside Banks (COB) and Demand Deposits (Current Account deposits of bank customers).
According to the CBN, Narrow Money supply rose by N5.08 trillion to N16.17 trillion in Q1’21 from N11.12 trillion in Q1’2020.
Further analysis showed that the increase in Narrow Money supply (M1) is largely caused by 50 per cent (YoY) upsurge in Demand Deposits, which rose by N4.67 trillion to N13.87 trillion in Q1’21 from N9.22 trillion in Q1’ 2020.
Currency Outside Banks (COB) also grew by N430 billion or 23 per cent, YoY, to N2.33 trillion in Q1’21 from N1.89 trillion in Q1’2020.
Also contributing to the increase in Broad Money supply (M2) is a 9.5 per cent, YoY, rise in Quasi Money, which comprises Savings deposits, Fixed Deposits and Foregn currency deposits of bank customers.
According to the CBN, Quasi money rose by N1.94 trillion to N21.84 billion in Q1’21 from N19.90 trillion in Q12020.
Analysts project April inflation at 18.84%
The above trend in money supply is expected to continue this year following analysts’ projection of continued rise in the inflation rate to 18.84 per cent for April. This represents the average inflation rate projection by three of the nation’s top research and investment firms, who opined that continued increase in prices of food items aggravated by the impact of worsening insecurity across the country, Ramadan and Easter festivities drove up the inflation rate further in April.
The analysts’ projections are ahead of the scheduled release of the inflation rate data for April by the National Bureau of Statistics (NBS) this week.
“ In April, we are estimating a further increase of 0.6% to 18.77%, after 19 months of consecutive increases”, said analysts at Financial Derivatives Company (FDC) Limited.
“All inflation sub-indices except for the month-on-month index are expected to follow a similar trend with the headline inflation.
“The monthly consumer price level is projected to slide by 0.03% to 1.53% (19.95% annualized) in April from 1.56% (20.40% annualized) in March.
“This is largely due to weak aggregate demand, resulting from reduced consumer disposable income.”
Similarly, Mosope Arubayi and Ibukun Omoyeni, analysts at Vetiva Capital Management, projected further increase in inflation rate to 18.92 per cent.
Explaining the basis for their projections, they said: “With respect to energy prices, we recall PMS prices were adjusted downwards in April 2020, in line with deregulation efforts as oil prices plummeted to low levels and consequently created a low base for core prices.
“However, according to recent news reports, the Federal Government could bear the cost of subsidies for the next six months, even as oil prices remain at pre-pandemic levels.
“Despite this clarification, we expect the low-base effect to drive inflation higher in the current month, informing our expectations of 18.92% y/y in April. Thus, we raise our average headline inflation forecast to 19.04% for 2021 (2020: 13.21% y/y).
“Customary with Easter and Ramadan festivities is the rise in inflation expectations. While prices may revert to earlier levels, the seasonal rise in prices could contribute to higher food inflation. “With likely pent-up demand for fruits and vegetables as a result of the Muslim fast, we anticipate a further uptick in food inflation to 23.74% y/y this month.
“This translates to an average food inflation of 23.50% y/y for the current year (2020: 16.11%). While the decision to keep fuel prices flat trumps higher inflation expectations, core inflation could still reel from currency pressures and a relatively higher fuel price (on a y/y basis). “In addition, demand-pull inflation from the ‘Naira 4 Dollar’ policy could also swell inflationary pressures. Tying both together, we expect core inflation to rise to 12.78% y/y this month, amounting to a full year average of 13.04% y/y in 2021 (2020: 10.29%).”
On their part, analysts at United Capital Limited projected 18.83 per cent inflation rate for April, citing unabating pressures on food prices and increase in energy prices’.
They said: “Looking ahead, our outlook for inflation remains grim. Our stance is informed by unabating pressures on food prices resulting from several supply-side constraints. Clearly, food insecurity problems in the country have not subsided, and this continues to be exacerbated by forex scarcity and high costs of importation. “Also, we note that as we enter the planting season, supply shortages are expected to garner pace, which could consequently place further pressure on prices.
“Furthermore, an increase in energy prices is likely in the second half of the year (H2’21). Surely, a rise in gasoline prices will contribute to the index’s inflationary pressures, as it will feed into the transportation and logistical costs on the food index.
“Given these factors, we forecast a 1.58% m/m increase in aggregate price level, translating into a y/y inflation rate estimate of 18.83% in Apr-2021.
“Looking ahead to the second half of the year, we believe that the high base impact from H2’:2020 would only moderate inflation uptick slightly in H2’21, and that, barring another policy reversal, the National Electricity Regulatory Commission’s Multi-Year Tariff Order will come into effect by June 2021, exacerbating inflationary pressures.”