Thursday, 28th March 2024
To guardian.ng
Search
Breaking News:

Rampaging inflation: The rise and rise of poverty

By Chijioke Nelson
24 July 2016   |   2:43 am
If renowned economist, Prof. Phillip, famed for illustrating and seeking an acceptable level of inflation (Phillip Curve) using a graph, were to draw one for Nigeria, he would surely...
Pensioners protesting 42-month unpaid arrears

Pensioners protesting 42-month unpaid arrears

If renowned economist, Prof. Phillip, famed for illustrating and seeking an acceptable level of inflation (Phillip Curve) using a graph, were to draw one for Nigeria, he would surely be concerned about the unbending line now, more than the number.

This is because the more than six-month upward trajectory of the nation’s inflation figures is beyond coincidence. It is a sign of an economy that is really challenged.

For some Nigerians, anxiety is the order of the day as they continually wonder where and when the spiraling numbers that are currently wiping out values and impoverishing many in real terms would end.

Of course, the resulting ugly trend, which started noticeable movement from the third quarter of 2015, increased in intensity each month, but recorded a dramatic turn from December, riding on the back of petroleum product scarcity.

It was almost a controversy in November 2015, when the Central Bank of Nigeria (CBN) embarked on an expansionary policy to accommodate real sector players, through expected increase in system liquidity and reduced interest. That development stemmed from the fact that inflation had just begun its double-digit record, but below the new interest rate, which analysts said would trigger the inflation.

Surely, the inflation did come, but it was not the result of excess money in circulation. Rather, it was cost push factors, which were related to lingering petroleum scarcity and its multiplier effects on consumer items, as well as pass through costs from imported goods due to foreign exchange crisis.

From November 2015 that the CBN took the expansionary policy decision, till March 2016, when it was reversed, banks never supported it. Reluctantly, some were lending. Even the apex bank affirmed that the policy was defeated by huge excuses from banks, as they deepened their complaints against macroeconomic developments and structural challenges, calling on government to de-risk the business environment before they could lend.

Consequently, the resulting increased money supply in banks were channeled to fixed income and securities portfolios; they returned some to the Standing Lending Facility of CBN; increased their investments in government’s non-risk bonds; and kept the rest for their operations.

The development never settled as the inflation tragedy was galloping, worsened by aggravated petroleum product scarcity that led to increased cost of transportation and that of food items. A further fall in crude oil prices and negative outlook in foreign exchange earnings, with backlogs of unmet demands added support to costs and inflation.

For the past six months, there has been an average of about 1.1 per cent rise in inflation rate monthly, culminating to 16.5 per cent in June.

Unlike in May, headline inflation increased by 0.9 per cent, which is a much slower pace compared to the growth of 1.9 per cent it added in May data. Also, both the core and the food sub-index all recorded gains albeit at a smaller pace.

Compared to the month-on-month growth rate of 1.6 per cent seen in May, food index rose month-on-month by 15.3 per cent, which is a difference of mere 0.4 per cent compared to the 14.9 per cent recorded in May. Core inflation also followed a similar trend, moving up by the rate of 1.2 per cent compared to the previous 1.7 per cent to advance by 16.2 per cent from the 15.1 per cent seen in the preceding month.

Just like the past six months, the 16.5 per cent inflation was driven by higher food prices, increased energy costs and rising costs of imported goods due to the weakened naira exchange rate at both the official and the parallel market segments. “This is Nigeria’s worst inflation reading since October 2005,” an economist and President of Time Economics, Dr. Ogho Okiti, said.

“Having almost doubled since June 2015, we anticipated a gradual reduction in the growth rate of price increases. The factors driving inflationary pressures in Nigeria are more of structural and cost-shock than demand related.

“Over the last few months, we have seen prolonged fuel scarcity leading to the eventual removal of subsidies on petroleum products, an increase in electricity tariffs by over 40 per cent and a sharp depreciation in the naira exchange rate across the official/inter-bank market and the parallel markets.

“These were further compounded by an economic slowdown and the inability of the business community to access foreign exchange, in adequate quantity, for the importation of raw materials and machineries needed for smooth production of goods and services. Thus, current inflationary pressures arose from these structural shocks,” he stated.

Okiti continued, “However, cost driven inflations typically tend to be transitory in nature due to inbuilt adjustments mechanisms in the economy. With the fuel scarcity challenge out of the way, the economy appears to have largely adjusted to the increase in the pump price of PMS, the higher energy costs and the weakened naira exchange rate.

“Thus, in the absence of any new major shock to the system, we expect growth in the headline inflation to moderate at the current levels in the months ahead,” he said.

For the Monetary Policy Committee of CBN, it is more like a double trouble. To increase rates will stifle lending and productive activities, and analysts do not see them tow that line when the policy makers meet tomorrow.

On the other hand, reducing interest rate will be out of economic principle as the inflation will be far ahead of the rate. It is a disincentive for investment and may even repel any possible foreign investment. It is also against plans to keep the new foreign exchange policy against speculative attack through excess money in circulation. Indeed, there are heavy tasks at hand.

“Having left rates unchanged in her last policy meeting in May and followed up with the introduction of a flexible exchange rate regime on June 23rd, we think the committee will likely see through short term inflationary pressures and focus more on growth. Efforts will be directed towards combating recession and returning the economy to a positive growth trajectory.

“Secondly, even as we expect benchmark interest rates to remain unchanged in the face of rising inflation, we do not think the decision hurt banks’ earnings very significantly since, typically, lending rates being charged by the banks tend to be inflation adjusted,” he added.
As part of the fallout of the inflation, the country “will sneeze”, sort of, this year and the rest of Africa will again catch cold. This is the summary of the latest assessment by the International Monetary Fund (IMF) in its World Economic Outlook for the country.

Specifically, the country’ economy will contract by 1.8 per cent by the end of the year, consequently curbing growth projections in the entire region by aggregate figure and multiplier (pass through) effect.

The multilateral institution, after cutting its 2016 growth forecast for Nigeria from 2.3 per cent it earlier projected, remained doubtful over activities in the country since April, and now arrived at new statistics of 1.8 per cent.

IMF’s downward projection was not over for this year, as the poor performance now serves as a platform for next year’s below average forecast to 1.1 per cent from 3.5 percent. This represents a whooping 2.4 per cent downgrade of economic performance.

Key among IMF’s sources of data for the verdict, which the country has never had in the last two decades, is the lingering foreign exchange crisis. Currently, besides the clearing of the $4 billion backlog at new Forex Futures Market, supply of the currencies has remained tight.

The economy, the global institution said, will contract for the first time in more than two decades as it “adjusts to foreign-currency shortages as a result of lower oil receipts, lower power generation and weaker investor confidence.”
The nation’s Gross Domestic Product (GDP) contracted by 0.4 per cent in the first three months of the year, as oil output and prices slumped, while the national fiscal plan remained under controversy till May and disbursements for capital projects continue to lag.

A currency peg and foreign-exchange trading restrictions, which were removed last month after 16 months, have been blamed for shortages of goods ranging from gasoline to consumables and contributed to the contraction in the first quarter and possible second quarter.

Already, a Bloomberg report says forecasts from six of nine analysts it surveyed, are of the view that borrowing costs (interest rate) will stay unchanged as the Central Bank of Nigeria convenes its Monetary Policy Committee meetings next week.

The IMF almost halved its 2016 growth forecast for sub-Saharan Africa to 1.6 per cent and cut its 2017 projection to 3.3 per cent from three per cent due to Nigeria’s struggling economy.
South Africa’s economy will expand 0.1 per cent this year and one per cent next year, the lender said.

Earlier in the month, CBN’s monthly Purchasing Managers Index (PMI), revealed a worrisome development in the economic activities of the country.

The real sector performance in terms of production dipped further, with sub-sectorial output declining at faster rate in the build up to the decisive moments for the country’s economy-second quarter GDP.

The PMI’s record of economic activities for manufacturing and non-manufacturing organisations, recorded a sixth monthly negative production levels; new orders; employment; inventories; and general business operations.

The manufacturing index dropped to 41.9 index points in June 2016, compared to a negative position of 45.8 in the preceding month, implying that the sector declined at a faster rate during the review period.

Of the 16 manufacturing sub‐sectors, 14 recorded decline in the review month, among which are fabricated metal products; chemical and pharmaceutical products; printing and related support activities; food, beverage and tobacco products; cement; plastics and rubber products; and textile, apparel, leather and footwear.

0 Comments