Headlines
Economy in jeopardy as inflation goes haywire
BY EMEKA EJERE
Nigerian businesses and households may have to live with skyrocketing cost of production and eroding purchasing power much longer than expected despite efforts by the monetary authorities to reverse the ugly trend.
The sad reality became even more glaring Thursday when the Consumers Price Index (CPI), report of the National Bureau of Statistics (NBS) showed that inflation rate rose by 0.92 basis points to 20.52 per cent in August from 19.6 per cent in July, the highest since October 2005.
The development represents the seventh consecutive monthly rise in headline inflation since February. Food inflation also rose to 23.12 per cent in August 2022, representing a 1.1 percentage-point increase compared to 22.02 per cent recorded in the previous month.
This is in utter defiance of recent drastic monetary policy steps taken by the Central Bank of Nigeria (CBN), aimed at taming headline inflation, which has now seen close to 3200 basis points rise in just eight months, from the 2022 opening point of 15.6 percent.
The Monetary Policy Committee (MPC), of the apex bank had in May and for the first time since September 2020 jerked up the Monetary Policy Rate (MPR) – the benchmark interest rate that guides all other rates in the money market – by 150 basis points to 13 per cent from 11.5 per cent.
Unable to achieve the expected result, the MPC in July raised the MPR by another 100 basis points to 14 per cent from 13 per cent.
Announcing the decision to further raise the MPR, during a press briefing at the end of the last MPC meeting in Lagos, the CBN governor, Mr. Godwin Emefiele, stated: “The MPC noted that the current upsurge in price levels remains a primary concern to monetary policy as members focused on the optimal policy approach required to address this development while protecting the fragile recovery.”
However, the Bureau in its latest CPI report stated: “In August 2022, on a year-on-year basis, the headline inflation rate was 20.52 per cent. This was 3.52 percentage points higher compared to the rate recorded in August 2021, which was 17.01 per cent.
“This shows that the headline inflation rate increased in the month of August 2022 when compared to the same month in the preceding year (August 2021).
“On a month-on-month basis, the headline inflation rate in August 2022 was 1.77 per cent, this was 0.05 per cent lower than the rate recorded in July 2022 (1.82 per cent).”
On food inflation, NBS further reported: “The food inflation rate in August 2022 was 23.12 percent on a year-on-year basis; which was 2.82 percent higher compared to the rate recorded in August 2021 (20.3 percent).
“This rise in food inflation was caused by increases in prices of bread and cereals, food products, potatoes, yam, and another tuber, fish, meat, oil, and fat. On a month-on-month basis, the food inflation rate in August was 1.98 percent, this was a 0.07 percent decline compared to the rate recorded in July 2022 (2.04 percent). This decline is attributed to a reduction in prices of some food items like yam tubers, garri, local rice, and vegetables.”
Woes for manufacturers
The new inflation rate raises concerns for Nigeria, placing pressure on the apex bank to increase interest rates, in desperate attempts to rein in rising prices. But doing so will further constrain access to credit and increase the cost of borrowing for manufacturers, especially those in the Small and Medium Industry (SMI) cadre.
The manufacturers are already lamenting that the soaring headline inflation has shot up cost of production input with negative trickle down effects on capacity utilisation, inventory and profitability of manufacturing firms, among other unsavoury implications for the sector and the economy.
In a statement, the Director-General of Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, noted that the prevailing inflation rate would have severe impacts on the economy, particularly consumers, as well as the manufacturing sector. He said, for instance, that the inflation rate would force a sharp decline in consumer welfare and excruciating demand crunch for the extreme poor.
According to him, the situation will also leads to reduction in consumption by the middle class occasioned by continuous erosion of disposable income, high incidence of panic buying and hoarding, which may further worsen the inflation trend.
Ajayi-Kadir further said soaring inflation rate would have implications like reduction in demand for manufactured products, leading to poor sales and turnover; lower competitiveness as the high inflation rate further mount pressures on the already very high-cost operating environment.
He listed other implications to include further loss in the value of the naira; increase in the tempo of hoarding dollars; deepening of downward swing of export earnings, which of course, will worsen the forex challenge in the country and closure of more companies, as the capacity to meet obligations to internal and external stakeholders is greatly impaired.
“By reducing purchasing power, high inflation reduces aggregate demand and limits production which eventually results in a fall in employment”, Ajayi-Kadir said.
Disturbingly, Moody’s new report says African banks will respond to the rising inflation and associated higher savings rates with an upward re-pricing of loans.
The response, the report foresees, would weaken borrowers’ capacity to repay existing loans and increase banks’ provisioning for loan loss. It, however, notes that most of the banks “took proactive provisions following the outbreak of the pandemic,” which will limit the extra provisioning required as defaults rise.
“The impact on Nigerian and Kenyan banks’ margins will be muted because their interest rates are already high and some of their deposit rates are index-linked to the policy rate.
“African banks’ sizeable holdings of government debt securities will fall in value as interest rates rise, but these unrealised losses are unlikely to crystallise,” the Moody’s Corporation’s arm states.
In Nigeria, specifically, the report notes that large volumes of the loans are short-term; hence, they will be re-priced higher. This, it adds, could be constrained by already higher lending rates and stiff competition.
Beyond the demand side
Expectedly, experts have, in their reactions to the development, listed other inflationary pressure points, while also proffering solutions.
A professor of Capital Market at the Nasarawa State University, Keffi, Uche Uwaleke said the 20.52 per cent year-on-year inflation increase was expected, adding that steps taken by the CBN on monetary policy tightening stance alone may not assuage the situation.
Uwaleke said the increase in headline inflation above the psychological threshold of 20 per cent did not come as a surprise in view of the rising inflation trend in many economies, partly caused by the Russian-Ukrainian conflict.
“It’s interesting to note that the NBS, in its latest CPI report, provided a clue as to the major factors driving the inflationary pressure in Nigeria, namely supply disruptions and rising cost of production,” he said.
“In the light of this revelation, what becomes clear is that the recent monetary policy tightening stance of the CBN alone may not address the challenge.
“The government needs to formulate and implement complementary fiscal policies aimed at boosting food supply as well as reducing firm’s cost of production.”
On his part, Founder and CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, described the heightened inflationary pressures in the economy as troubling.
Yusuf said: “The reality is that the major inflation drivers have not abated, if anything, some have become even more intense. These factors include high transportation costs, increasing logistics challenges, worsening exchange rate depreciation, forex liquidity issues, hike in energy prices, climate change issues, insecurity in many farming communities and structural bottlenecks to production. These are basically supply side issues.
“The accelerated fiscal deficit financing by CBN is also a significant inflation driver. The financing of fiscal deficit has been elevated to disturbing levels at almost N20 trillion. CBN financing of deficit is high-powered money and very inflationary. It is inflation tax.
“Mounting inflationary pressures weakens purchasing power of citizens as real incomes are eroded. It aggravates pressure on production costs, negatively impacts profitability, erodes shareholders value and undermines investors’ confidence.
“In most cases, increases in production costs cannot be transferred to consumers by industrialists. The implication is that producers are also taking a major hit. This is more pronounced where the demand for the product is elastic. These are products that consumers can readily do without”.
For the Fiscal Policy Partner and Africa Tax Leader at PwC, Taiwo Oyedele, to slow down the rate of inflation, government should improve security to enable farmers return to their farms while addressing the inefficiencies in the energy supply chain.
“There is also a need for relevant fiscal policy measures, such as suspension of the new excise duties on telecommunications services and non-alcoholic beverages, to complement the monetary policy measures aimed at controlling inflation, he said.
“I will advise the MPC not to further increase MPR as doing so will only constrain the ability of businesses to fund their existing capacity and expansion needed to improve the supply side problem, thereby further fueling inflation rather than slowing it down.”
Chief Economic Adviser to the President, Prof. Doyin Salami, noted that the trillions of dollars spent by the global economy was causing a cascade of inflationary pressure and economic lockdown.
Speaking at a Stakeholders Dissemination Workshop on the Fiscal Impacts of COVID-19 Pandemic and Lessons for the Future, in Abuja, Salami pointed out that the development, playing out across the world, resulted from different shocks the world is facing, especially COVID-19 and immediate response from the war in Ukraine.
He, who disclosed that the Federal Government was working to rebase Nigeria’s economy to reflect current realities, explained that the challenges posed by the fallout of the two occurrences have strongly disrupted the global supply chain leading to increasing inflation across economies.
“You cannot spend trillions of dollars expanding economies without expecting inflationary consequences. So, there was always going to be a rebalancing by central banks in particular and by fiscal authorities to the responses to COVID-19.
“So, that is in part what we are now seeing, that the world is now prioritizing inflation, and parts of the world economy are now in recession.”
Meanwhile, President of Nigeria Labour Congress (NLC), Ayuba Wabba, has demanded for payment of cost of living allowance to workers and others to cushion the effects of the rising inflation.
According to him, “the high inflation is a pointer to the fact that the economy is not healthy. It also clearly shows the level of the challenge in the economy.
