Published On: Sun, Jul 29th, 2018

Inflation to reverse upward after 17 consecutive slow down


With politics raising the temperature of civil society, a troop of economic analysts calling on their experiences in months leading to major national elections, have reached a consensus that the Central Bank of Nigeria’s (CBN’s) inflation-bashing antics is doomed to suffer a temporary reversal as politics trumps sensible economic policy for a season.

Policy watchers argue that political spending and capital flight from the economy will cause the country’s inflation rate to accelerate after declining for 17 consecutive months, reaching two and a half year low of 11.25 per cent per annum in June.

The Nigerian Bureau of Statistics (NBS) last week released its Consumer Price Index (CPI) revealing that inflation decelerated to 11.23 per cent (year-on-year) in June, 0.37 per cent lower than the 11.61 per cent recorded in the previous month, propelled by the Food Index which eased to 12.98 percent from 13.45 per cent in May 2018. This was higher than the 11.05 percent analyst’s expectations, but was the lowest inflation rate the country has recorded since January 2016.

Urban inflation rate declined to 11.68 percent (year-on-year) last month from 12.08 percent recorded in May 2018, while the rural inflation rate also dropped to 10.83 per cent from 11.20 per cent in the prior month.

A few economy analysts have declared that declining inflation in Nigeria was the result of low consumer spending occasioned by weak disposable income. Indeed, an average salary earner in Nigeria has suffered a loss of 43.46 per cent in the purchasing power in the past three years, argues Johnson Chukwu, Managing Director, Cowry Asset Management Ltd.  According to Chuwkwu, “the decline in inflation rate may likely be reversed in moths ahead due to heavier capital expenditure; increased budget disbursement; and abundant election spending, with a pull back by foreign portfolio investors uncertain of the election outcome,” he explained.

Dr Adi Bongo, economist and faculty member, Lagos Business School believes not much intellectual rigour is required to understand that inflation will soon begin to rise. “We may have a food crisis. The food basket of this nation has been under attack by herdsmen for about one year. People who are supposed to produce food have been murdered or displaced. They are either six foot under or residents of internally displaced persons’ camps all over the country. This is going to impact adversely on food stability in the last quarter of the year and accelerate inflation rate,” he cautioned.

The International Monetary Fund (IMF) has signaled that Nigeria’s inflation rate would rise in the second half of 2018 due to effects dissipate and higher spending and supply constraints in agriculture, which would mount pressure on food prices.

“Under the current policy environment, economic outlook remains challenging. Growth would pick up to about two per cent in 2018, weighed down by lower than expected oil production and relatively weak agriculture growth,” declared Amine Mati, IMF’s Senior resident representative and mission chief for Nigeria.

Nigeria’s Inflation rate will continue to slow down over the next two months as the country enters into harvest season, which would pull down food prices, argues Olusola Ayodele, Chief Economist, Nigerian Employers Consultative Association (NECA). He noted that there has been a reduction in farmer/herdsmen clashes; this may further cause food inflation to go down.

“Yes, towards November, December or January political spending may impact on inflation, but I don’t see it having effect in the next three months. My projection is that by October, we should have a single digit inflation rate,” he observes.

The Central Bank has set a 6 to 9 per cent inflation band for 2018 and believes that this will met by October. However, the regulator has serially missed its inflation rate targets over the last three years.

The Monetary Policy Committee (MPC) during its meeting last week also expressed worries over expected reversal inflation trend. It noted, “Inflation forecast for the near term points to further moderation in price level in the short term. However, the downside risks to inflation include: the impact of excessliquidity that could arise from the implementation of the approved N9.12 trillion 2018FGN budget; pre-election spending; anticipated review of salaries and wages; security challenges; and monthly FAAC injections. Although these could boost aggregate demand, it would equally exert upward pressure on domestic prices for the rest of theyear. The Committee, therefore, called for a co-ordinated fiscal, monetary andexchange rate policies to stem the upward build-up in price pressures.”

During the past Ekiti governorship election, political parties were seen openly exchanging money for votes and there are fears that this may be replicated during the 2019 general election, which would worsen inflationary pressure.

This formed part of reasoned the MPC decided to retained interest rate at 14 per cent, the rate it has set since July 2016, despite calls from organized private sector for rates cut. The committee argued tampering with rates may adversely impact the fragile recovery the economy has made since it exited recession in June 2017.

And to tackle higher inflation rate, CBN would likely to stick to open market operations (OMO) as the key liquidity management tool-and specifically by way of issuance of CBN bills-with a sustained nose-up issuance trajectory, EcobankResearch projected, adding that already in H1’18, issuance has been strong.

Meanwhile, Professor Leo Ukpong, Financial Economist and Dean, School of Business, University of Uyo, opined that inflation should be of lesser concern to the CBN; it ought to focus on job creation. He reasoned that after addressing the country’s unemployment challenge, it could then take on inflation.

“They are not helping liquidity in the system. There should be more liquidity in the system.

I am more worried about the broad-based economy. Whatever they are doing with their numbers is not helping the average low and middle income Nigerian,” Prof. Ukpong observed.

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