How stakeholders react to weak economy, galloping inflation
With an all year high inflation rate of 18.3% in October, and a month-to-month increment pattern, the Nigerian economy is exhibiting weakness. CHUKA ODITTAH takes a look at this negative trend and how stakeholders are reacting to it.
Nigeria over the last 10 months has grappled consistently with stifling economic challenges from many fronts.Dogged on the one hand by the problem of galloping inflation rate, which climbed to 18.3 percent in October, from 17.9 percent in the previous month, and a crippling recession on the other hand, foreign investment drives, which needed to exit the melt-down have remained at the lowest ebb, just as quality of lives of citizen plummeted.
In particular, the year 2016 witnessed rampant hike in inflation rate, despite hefty financial stimulus plans the Federal Government claimed to have been implemented, especially the 70 percent targeted capital expenditure plans in the 2016 budget.
Responding to the sharp cut in crude production and sale in the international market due to militancy in the Niger Delta, and withdrawal of patronage by the United States over supposed shale oil discovery in the last two years, the base of the Nigerian economy was fatally affected, triggering liquidity problem, currency devaluation, spiraling inflation among other discomforting outcomes.
Nigeria’s foreign reserve as a result has dropped from $26.51b in the 2nd quarter of 2016 to $24.74b in September. The implication of this is that the country’s foreign trade capabilities have been depleted, even as the country continues to oscillate between 1.1 million and 1.7 million bpd crude production, as opposed to 2.2 million projected in the 2016 budget. All of these draw backs have created room for distortions and policy reversals in the bid to remedy the situation, giving rise to inflationary trends across the country.
2016 inflation profile
In January this year, inflation rate stood at a single digit 9.6 percent, before rising in February to 11.4 percent, up by 2.3 percent points. In the month of March, it edged higher to 12.8 percent, up by 1.4 percent points. In April, the rise continued to 13.7 percent, rising by .09 percent points, whereas in May it jumped to 15.6 percent, rising again by as much as 1.9 percent.
Then in June, the rise continued to 16.5 percent, up by 0.9 percent. In July, the story remained the same as the rise kicked up to17.1 percent, up by 0.6 percent. In August, the usual trend held sway, as there was a rise to17.6 percent, up by 0.5 percent than the previous month’s rate. In September the rise continued to 17.9 percent, up by 0.24 percent, and in October, it again headed for the ceiling, standing at 18.3 percent, up by 0.48 percent.
The pertinent question to ask is, why is the rate of inflation soaring high since the beginning of the year, despite lofty plans supposedly deployed by the executive in conjunction with the approving legislature.
The rising inflation scenario appears to corroborate deductions by some economic experts that the Nigerian economy may have been hijacked by non – economists who know little or nothing about getting the economy back on its feet. Otherwise, what arm of government is responsible for arresting the ugly trend and why hasn’t such authority done the needful, rather than sit back and watch the inflation rate climb consistently for 10 months without respite.
The implication of this development is that the country is in urgent need of a bailout, not only in monetary terms, but also in terms of expertise that can end the spiraling inflation and recession.
Although the presidency has argued severally that it has a retinue of well-exposed state actors in the current cabinet capable of reversing the trend, the situation on ground definitely leaves much to be desired.
For instance, spokesman to the Vice President and Chairman of the Economic Management Team, Laolu Akande told The Guardian that the Federal Government has put in tremendous effort to salvage the economy, insisting that the current cabinet also has state actors with requisite experience to remedy the economic melt down, as well as, cut inflation.
He also maintained that the economic difficulties experienced today are the result of poor leadership by the past administration.He explained further that an economic team made up of the Finance Minister, the Budget and Planning Minister, the Central Bank of Nigeria Governor, Special Adviser to the President on Economic Matters meet every week, in addition to also meeting regularly with private sector players, before having another regular meeting with the president.
Akande however accepted that the challenge facing the Federal Government is not the assemblage of experts or ideas, but full implementation of policy programmes.But despite claim by the Federal Government to have the situation under control, experts are warning that unless things are done differently, the inflation rate and current recession will worsen.
Director-General of the West African Institute for Financial and Economic Management (WAIFEM), Prof. Akpan Ekpo told The Guardian that the current inflation rate of 18.3 percent is partly as a result of policy positions of government and capital project releases, saying that government needs to thread cautiously in fighting inflation and reflating the economy
He said unless government takes steps to systematically check the quantum of money it releases into the system under capital expenditure, government would be inadvertently fueling inflation through excessive deployment of cash into the economy. He therefore warned that government should be cautious in handling structural or policy induced inflation. He said although the rise is linked to the current recession and scarce foreign exchange, removal of subsidy and CBN role in operating parallel and interbank forex policy, are also responsible for the spiraling inflation, adding that careful monitoring and balancing of options must be critically considered.
He said: “The rise in the inflation rate is not unexpected, based on what has been happening in the economy.18.3 percent is quite high. Double digits. This has serious implication on the poor. They will now have less purchasing power. The poor are usually the most affected during inflation, while the few rich can afford to fall back on their savings in the interim.
“If you look at the alignment between the interbank rates and the parallel market, you will find that there is a pass through, in terms of the exchange rate. What you see is uncertainties and speculations, which is part of what is driving the inflation higher. There are also structural problems in the economy. Don’t forget that once you take away oil subsidy, you have what is called structural inflation. This is another cause of the inflation rise.
“So, you have structural cause on one hand and on the other monetary. This is because the Central Bank of Nigeria (CBN) was trying to fight inflation because of the exchange rate. But that is not working right now because the inflation they are trying to stem is still rising.
“Don’t also forget that in order for government to get out of recession they will also need to be spending. Government has allocated so much money for capital projects. This also has implications or inflation. So, all these fuel inflation in the country,
“For me, I believe inflation may even go higher, our fear is that it does not become a runaway inflation. This is the complex aspect of economic. Government spending if not checked over a period of time fuels inflation. So the problem is getting compounded. The CBN’s attempt to tag the exchange rate is also fueling inflation. Also the Nigerian elite class is still consuming foreign products that are imported. So, inflation rate may even go higher as government attempts to spend itself out of recession,” Ekpo said.
Ekpo said investors don’t like to invest in an economy with rising inflation. “They will be hesitant to put down their money. Inflation scares investors. They will say there is no stability in such business environment and will not want to invest. They will naturally choose to go to a country where inflation is moderate.”
Ekpo explained that the solution to the inflation challenge is a little complex as of now. This is because the economy is in a recession. He said during inflation, government must sacrifice some levels of inflation for growth to occur. On what to do, he said: “ CBN should manage growth; Federal Government should intensify capital project investment, so that they can create jobs through this medium; and government must fix power, to reduce cost of production.
Ekpo said if all these are put in place, and they have a recovery plan, inflation could start coming down in the 2nd or 3rd quarter of next year. He warned that if the government did not do this now and if there is a sudden shock, the country is in trouble.
Also, the Chairman FCT chapter of the Nigerian Association of Small Scale Industrialists (NASSI), Dike Prince Humphrey, lamented the grave impact of high cost of production fueled by inflation on local manufacture of goods in the country.
According to him, government lacks a genuine inclusive programme, to provide support for small-scale industrialists in the country. He maintained that no nation could survive or develop without its own homegrown industrial base. He traced the growing inflation to neglect of manufacturing business, saying that more inflationary trends await Nigeria unless steps are taken to project small-scale manufacturing.
“The inflation in the country is just starting. Sorry to say. We have not seen anything yet. The members of Nigerian Association of Small Scale Industrialists have been saying the same thing over and over. Nobody seems to be listening or acting in accordance with our observations and recommendations. Nigeria has abandoned industries. We are not producing. We are virtually an import dependent economy. We import all our needs, including food items. How can we develop as a nation by doing so?
The National President, Manufacturers Association of Nigeria (MAN), Dr. Frank Udemba Jacobs, also gave the consortium’s perspective on the new high inflation figures, saying two major factor have been identified by them as key driver of inflationary trend in the country.
According to Udemba, shortage of forex due to fall in price of crude and steady depreciation of the naira are strong factors giving rise to inflation in the economy. In recommending the way out, they called the CBN to directly partner with the association to identify investors who are genuinely into manufacturing with the view to giving them forex directly under special concession. They also called for the establishment of more development banks to support business-oriented engagements.
Udemba said: “The inflation surge and its consequences as alluded to can be checked if industrial/manufacturing production activities are improved upon. However, since the root cause of the rising commodity price level is the shortage of forex that resulted to depreciation in the naira value, the solution should also be approached by improving the availability of forex. While the backward integration efforts of the government and business people gradually metabolizes, the government can borrow to support productivity in the industrial/manufacturing sector.
“As government has adopted the resource-based industrialization policy, which we believe is a very good policy, it should be faithfully implemented, as it will encourage manufacturers to utilize local raw materials and save some forex from less importation of raw materials. Again, government should take steps to shore up the manufacturing sector by ensuring that the concessionary forex allocation to the manufacturing sector is effectively implemented. To this end MAN is proposing that CBN allocate forex directly to manufacturers working with MAN since the commercial banks are frustrating the good policies of CBN.
“Interest rates should be reduced to not more than fivepercent, while more development banks should be established to provide long-term funding for manufacturers and encourage more investment“Non-oil export should be encouraged as a way of boosting forex earning for the country and the review of the Export Expansion Grant (EEG), which has been going on since 2014, should be concluded.“
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