Being an Analyst Note issued by Proshare Research on March 22nd, 2023
Further Rate Hikes Likely to Affect Real GDP Growth in 2023 as Economists Mull Unemployment Effects
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) responded to the surge in inflation, after it rose to 21.91% in February, a seventeen-and-a-half-year high, with yet another rate hike. The twelve-member committee decided on Thursday to raise the base lending rate by 50 basis points thus bringing it to 18%. Analysts say that while inflation at 21.91% is a genuine worry, the direct implication of a higher interest rate is slower growth. The IMF gave a 3.3% forecast for the Nigerian economy in 2023, Analysts say such projections would be downwardly reviewed especially if the hawkish tone of the CBN Governor is anything to go by. Private and corporate borrowing would cost more with the upward adjustment in interest rate. Consequently, businesses could downsize and reduce the scale of their operations as well as the rate at which they recruit with implications for the unemployment numbers. Overall, Analysts advise the CBN to address the more fundamental challenges responsible for the rising inflation which include: exchange rate scarcity, inefficient transportation system, and Insecurity (see chart 1 below).
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Chart 1:
Petrol Prices Climb a Carrousel Despite Price Regulation and Subsidy
A combination of high petrol and diesel prices coupled with inflated POS charges kept energy prices high in February. According to the Price Watch of the National Bureau of Statistics (NBS), the average retail price of Premium Motor Spirit, popularly known as petrol, rose by 54.76% Year-on-Year (Y-o-Y) from N170.42 per litre in February 2022 to N263.76 per litre in February 2023, a deviation from the recently approved price of N185 per litre. Comparing the average price with January 2023 price, the average retail price climbed 2.58%. Market reports suggest that petrol prices were much higher across major cities, especially from independent marketers, in February when prices ranged between N220 and N250 per litre and worsened as POS costs nudged by a cash scarcity hurt consumer pockets. While petrol price has risen despite price regulation, Analysts note that petrol price may more than double in the next few months as the government removes subsidy from the retail pump price.
The average retail price of Automotive Gas Oil (Diesel) increased by 168.26% Y-o-Y from N311.98 per litre recorded in February 2022 to a higher cost of N836.91 per litre in February 2023. On a month-on-month basis, the diesel engine fuel increased by 0.98% from N828.82 per litre in January to an average of N836.91 in February 2023. Analysts reckon that the higher diesel price could be attributed to exchange rate shortages, port-related dollar charges, and the high cost of vessel leasing.
Government Borrows N203.36bn More at March Bond Auction as Subscription Remains High
Notwithstanding the negative real return, rising inflation expectations, and monetary tightening, the demand for long-dated government instruments has stayed strong. The bond auction received a subscription of N808.61bn as against N360bn offered, meanwhile DMO sold only N563.36 with the 2037 and 2049 acquiring the extra amount. Compared to the February auction, the marginal rate fell for the APR 2032, APR 2037, and APR 2049 by 101bps, 440bps, and 156bps to 14.90%, 15.20%, and 15.75% respectively while Feb 2028 had a slight increase to 14.00%. Analysts expect the market to turn bearish with the hawkish stance of MPC to fight inflation, as upward adjustment of the recent coupon rate makes old bondholders worse off (see table 1 below).
Table 1:
Top Crypto Leaders and Influencers Counterattack White House’s Anti-Crypto Economic Report
The White House’s Annual Economic Report presented to congress considers crypto assets as speculative investments and harmful to investors. The report also doubts the benefits of crypto including store of value, effective means of payment, and economic benefits of Distributed Ledger Technology (DLT) as an alternative to be adopted in other countries. The report also attacks Bitcoin mining as an energy-guzzling monster that could result in environmental damage such as noise, air, and water pollution. But despite the ongoing banking crisis and economic troubles, there is still a rise in the price of Bitcoin and other altcoins which resulted in analysts’ argument that if the US sees wrong in Bitcoin mining, then the taxes generated so far should be refunded. Analysts believe that the US government may need to re-evaluate its position critically and not be narrowly subjected to the report as other countries are willing to accept the long-term benefit crypto has to offer.