J.P. Morgan Predicts Nigeria’s Inflation to Rise, Advocates Sustained Reforms

J.P. Morgan, the prominent American investment bank, has projected that Nigeria’s headline inflation will maintain an upward trajectory due to the effects of ongoing policy reforms. The bank’s research report titled “Reform pause rather than fatigue” highlights that the headline inflation could potentially escalate to 28% by the end of the year. This forecast comes in the wake of a recent high inflation reading for July, which is seen as an early indicator of the impact stemming from fiscal and foreign exchange (FX) reforms.

The bank emphasizes that the influence of these reforms will persist in the months ahead, continuing to drive up headline inflation. It also points out that recent fluctuations in the parallel market rates are likely to exert an impact on August’s inflation data, with the most significant effects expected in food and core prices.

J.P. Morgan’s report suggests that the Central Bank of Nigeria (CBN) should focus on alternative liquidity tools and maintain the current monetary policy rate (MPR) at 18.75% throughout the remainder of the year. This stance contrasts with the Monetary Policy Committee’s recent decision to raise the benchmark interest rate, indicating a potential shift away from aggressive tightening.

The report acknowledges the government’s commitment to economic reforms, though it raises concerns about the pace of progress, particularly in areas like fiscal adjustments and the FX market. It also addresses the possibility of subsidy payments resurfacing due to the government’s intention to freeze fuel prices. However, the report clarifies that the current fuel price freeze is not considered a reversal of subsidy reforms.

J.P. Morgan’s analysis delves into recent ministerial appointments and draws parallels to previous administrative approaches, including the President’s self-appointment as Minister of Petroleum and Gas Resources.

The report extensively examines FX reforms and suggests strategies for attracting foreign capital to address the FX backlog. It emphasizes the need to sustain reforms to bolster FX flows, citing high debt-servicing requirements and relatively lower net FX positions. Notably, the report expresses concerns about Nigeria’s substantial Eurobond debt-servicing obligations, which are slated to begin from 2025 onward.

Given the present circumstances of lower FX reserves, the report indicates reservations about the feasibility of introducing a flexible exchange rate regime in the near future.