Analysts at BGL have warned that the continuous decline in the prices of crude oil in the international market will trigger a double-digit inflation in Nigeria in the first half of 2015, among other negative consequences.
The analysts, in the2015 Economic Outlook, are of the view that the recent slump in oil price and the consequent fiscal and monetary policy actions, which are largely tightening, represent potential drags on Nigeria’s output growth.
“The unfolding oil price scenario and the consequent exchange rate depreciation, official and unofficial by about 20 per cent on the average, could translate to a higher inflation scenario in 2015,” analysts at BGLResearch declared in the Economic Review and Outlook for 2015.
According to the analysts, major areas that will be impacted by the decline in crude oil prices include imported price inflation which constitutes 13 per cent of consumer basket in Nigeria. They added that non-food import content of Nigerians could also be higher than 30 per cent and would be immediately affected by the exchange rate pass through effect of the depreciation.
“The combined austerity measure of the government and tighter monetary policy would put additional pressure on consumer prices. Therefore, we expect inflation rate to cross the double digit level in the first half of 2015. We forecast inflation between 9.5 per cent and 11 per cent in 2015,” the analysts said.
The BGL experts explained that the depression of the oil prices is a combination of fundamental and financial market reactions. They noted that on the supply side, the strong oil prices supported increased shale oil production in the United State, US, where the market prices of oil were well above break-even for producers.
They said, “The estimated average break-even price of shale oil producers in the US is $60 per barrel. Recent estimates suggest that the US may soon surpass Saudi Arabia as the world’s largest producer of petroleum and associated liquids.
“On the demand side, China and a number of other large oil consumers are buying less as their economies slow. The effect is a situation where the global supply of oil has become greater than the demand.”
The analysts projected a non-accommodating monetary policy in 2015, dictated by the eventual trend of the oil price and the consequent effect on government’s primary balances, foreign exchange rate volatility and the foreign reserves.
They predicted a deterioration of Nigeria’s external reserves to below $30 billion before the end of the second quarter if oil prices continued to trade below $65 per barrel.
They said, “At that level, no monetary policy reversal is expected regardless of the pro-growth and pro employment stance of the Governor of the Central Bank of Nigeria, CBN.
“Interest rate will therefore remain high for most part of 2015 with a potential for increase in Monetary Policy Rate, MPR, if macroeconomic stability is threatened. A further increase to 14 per cent in late 2015 is plausible.
Also, Financial Derivatives Company boss, Mr. Bismarck Rewane, in his forecast, said that Nigeria’s inflation, triggered by the crude oil price decline will trend between 10 and 12 per cent, while the naira would cross the N200 to a dollar limit.
According to him, Nigeria’s external reserves will deplete to $30 billion in 2015, adding, however, that despite the weak economic growth expected in 2015, Nigeria’s economic outlook remains positive.
