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Nigeria Inflation At 11-Year High, Puts Central Bank At Crossroads

Nigeria Inflation At 11-Year High, Puts Central Bank At Crossroads

Nigeria’s inflation rose for the tenth straight month in June to 16.5 percent, an 11 years high, reflecting higher prices for electricity, transport and food, data from the National Bureau of Statistics showed on Monday.

The country, Africa’s largest oil producer, has ironically been facing fuel shortage as retailers struggled to get foreign currency to buy product during a 15-month currency peg that was removed last month, Reuters reported.

The jump in inflation has complicated the central bank’s task of guiding the country’s monetary policy through a mine field of a depreciating currency and falling foreign exchange reserves hurt by lower earnings from oil exports.

Analysts expect the Central Bank of Nigeria (CBN) to try and balance interest rates and economic growth at its next policy meeting on July 26. It held the benchmark rate at 12 percent in last meeting in May.

A runaway inflation might requires the regulator to consider rising interest rates which would hurt the economy.

Goldman Sachs, an American multinational banking and investment firm, forecasts that Nigeria’s inflation will rise about 20 percent in 2016, before it retreats.

“Inflation may not necessarily cause monetary policymakers to increase rates, because that will hurt growth. They may choose to use other monetary instruments to tighten liquidity,” Babajide Solanke, an analyst at Lagos-based FSDH Merchant Bank, told Bloomberg.

The West African economy is likely to contract this year for the first time in more than two decades as a fall in oil revenue and electricity shortage weigh on output, the International Monetary Fund said earlier this month.

Nigeria’s Gross domestic product contracted by 0.4 percent in the first quarter of this year as the currency, naira peg and restrictions on trading foreign currency led to a shortage of dollars.

The Naira weakened more than 40 percent to more than 280 per dollar after the CBN allowed the local currency to trade freely without a peg to the U.S. dollar. The naira, which lost more than 22 percent last year, has already lost a huge chunk of its value so far in 2016 on the unofficial (black) market.

Rising tension in the country’s Middle Belt caused by clashes between herdsmen and farmers and attacks on oil pipelines in the delta region, could increase inflationary pressures on President Muhammadu Buhari’s administration to do more to fix the battered economy.