Nigeria: Prices High & Rising
One reason why President Buhari has resisted Naira devaluation is the inevitable upward pressure on inflation which will hit the poorest Nigerians the hardest. But the ex-solider is now finding that price dynamics are harder to repress that he may have imagined.
Can the President ignore economic fundamentals indefinitely?The Naira is now trading at up to 400 per USD on the parallel market compared to an official rate of 199. This is feeding through to import prices, especially food, which will intensify over the coming months. Moreover, the tight FX restrictions are exacerbating fuel shortages and driving petrol prices higher.
To some extent the Central Bank of Nigeria saw this coming, hence last month’s decision to raise the policy rate to 12% and tighten reserve requirements. But this is likely to further undermine already sub-par growth while ignoring the true source of the problem which is the overvalued domestic currency. Past Nigerian experience suggests that inflation will climb without an adjustment of the Naira peg. Hopefully, the experiment will be over by Q3.