Supplementary Budget, Wage Increase May Worsen Inflation in Nigeria, Agusto & Co

Samuel Mobolaji

Agusto & Co, a leading credit rating agency, has warned that Nigeria’s inflation, which recently showed signs of moderating, may continue to rise due to upcoming fiscal measures.

According to Agusto & Co, the proposed supplementary budget, increased Federation Account Allocation Committee (FAAC) disbursements, and the planned increase in the minimum wage could reignite inflationary pressures.

In its monthly newsletter published on Friday, Agusto & Co stated: “The risk of a renewed inflationary surge is heightened by several factors, including the proposed supplementary budget of N6.6 trillion, increased liquidity from monthly disbursements to the three tiers of government, and the impending implementation of the N70,000 minimum wage. These factors could potentially offset the positive impact of recent policy measures and prolong the disinflationary process.”

These elements, coupled with ongoing economic challenges such as food supply disruptions and the high cost of fuel, create a complex environment for the Central Bank of Nigeria’s (CBN) monetary policy efforts.

Agusto & Co also noted that the CBN is expected to maintain the current policy rate at its upcoming Monetary Policy Committee (MPC) meeting in September 2024. This decision will be informed by recent inflation data that supports the CBN’s tightening stance.

The steady month-on-month decline in inflation since March, along with a slower year-on-year increase in the latter half of the first half of 2024, suggests that the CBN’s contractionary measures are proving effective. With GDP growth in the first quarter of 2024 showing signs of strain due to rising borrowing costs, the CBN may adopt a “wait and see” approach, holding the policy rate stable to monitor inflation trends, exchange rates, and upcoming second-quarter GDP data before deciding on further policy adjustments.

The newsletter continued: “The latest inflation data vindicates the CBN’s tightening monetary policy stance. The consistent moderation in month-on-month inflation since March, coupled with a slower pace of year-on-year increases in the latter half of H1 2024, reinforces the CBN’s conviction that the contractionary monetary measures are yielding positive results.”

“At the last MPC meeting in July 2024, the CBN re-emphasised its commitment to staying on course with the tightening cycle in view of the urgent need to address inflationary pressures and consolidate on the gains thus far achieved. While acknowledging recent progress, Governor Cardoso hinted at potential rate cuts in the future if inflationary pressures continue to ease.”

“Given tepid GDP growth numbers in Q1 2024 amid a constrained business environment, worsened by rising borrowing costs, the CBN could decide to ‘wait and see’ and hold the policy rate stable at its next meeting in September. This strategic pause would allow it to observe the trend of inflation and the exchange rate in the coming months, as well as the Q2 2024 GDP growth numbers, before making further adjustments to its monetary policy stance.”

However, Agusto & Co noted that while most inflation sub-indices have aligned with the headline index, the persistent structural issues reflected in core inflation indicate that the risk of inflationary pressures resurging remains significant. The agency added that the underlying factors contributing to inflation, particularly those linked to structural elements, continue to pose a threat, making the possibility of further increases in inflation a real concern.