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Inflation in Nigeria hits 17-year high

Annual inflation in Nigeria, Africa’s largest economy, rose sharply in July due to rising energy, transportation and food costs, along with a decline in the value of the naira currency.

The National Bureau of Statistics said inflation rose to 19.6 percent in July for the sixth straight month this year, from 18.6 percent in June and the highest level since September 2005.

The latest increase means inflation is now double the Central Bank of Nigeria’s target of 9 percent and raises the prospect of another rate hike next month.

The statistics office pointed to an increase in the price of gas and fuel, as well as air and road transport costs, along with food prices. Food inflation rose to 22 percent, driven by an increase in the cost of bread and cereals, as well as other food products such as potatoes, yam, meat, fish, oil and fat.

In a sign that price pressures are broadening, core inflation, which excludes changes in volatile food and energy products, has accelerated to 16.3 percent.

The central bank has raised interest rates by 250 basis points to 14 percent since May. Policy makers will meet on September 26.

Razia Khan, chief economist for Africa and the Middle East at Standard Chartered bank, said Nigeria may have fewer tools to fight rising inflation than other countries.

“The action [tightening of monetary policy] continues to be overshadowed by increased reliance on government funding from the central bank,” Khan said, referring to the Nigerian government’s announcement earlier this month that it owed $47 billion to its central bank, according to an report by the country’s budget department.

The money is owed to the central bank as part of the so-called Ways and Means Advance, a law contained in the central bank law that allows the monetary guardian to fund the government when it experiences a shortfall in revenue.

Nigeria’s official oil revenues have not risen despite the surge in oil prices following the Russian invasion of Ukraine. Theft, pipeline vandalism, years of underinvestment in infrastructure and the rising cost of petroleum subsidies have prevented the country from benefiting.

Nigeria’s economy is import dependent and relies heavily on the US dollar. But importers are struggling to access dollars due to strict restrictions.

The central bank stopped selling dollars to retail forex traders in July 2021 to ease pressure on its dollar reserves and support artificially low exchange rates. The naira is reported to be between 10 and 20 percent overvalued against the dollar. The central bank’s lack of dollar money has increased the cost of importing goods, forcing companies to raise prices.

“Until the official forex markets see increased turnover, the difficult-to-regulate parallel market, itself prone to overruns, will continue to play a disproportionate role in pricing behavior,” Khan said.

Most importers have access to dollars on the black market, where the currency is traded freely. Due to high demand and limited supply, the naira has fallen to historic lows against the greenback in recent months. The central bank says the demand from manufacturers is high and because Nigerians want to pay school and hospital costs abroad.

Inflation is expected to climb to more than 20 percent next month, according to Michael Famoroti, head of intelligence at Lagos-based company Stears.

The economy and rising insecurity will be key campaign themes when presidential candidates officially begin balloting in September to replace term-bound Muhammadu Buhari as Nigeria’s president. Elections will be held in February.

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