By Obinna Chima
Inflation in Nigeria, which has been on a steady rise since last year, breached the Central Bank of Nigeria’s (CBN) target band of between 6 – 9 per cent in the February figures released last week. The development has been a source of concern among investors, consumers as well as regulators in the country.
Precisely, the Consumer Price Index (CPI), which measures inflation, rose significantly to 11.4 per cent in February compared to 9.6 per cent the previous month, according to the National Bureau of Statistics (NBS).
The bureau attributed the 1.76 per cent rise in the headline index to the faster pace of increase across almost all major divisions that contribute to the index with the exception of the restaurants and hotels division, which also rose, albeit, at a slower pace.
The inflation figures, which came in few days after the NBS released data showing a sharp decline in Nigeria’s Gross Domestic Product (GDP) growth to 2.11 per cent year-on-year in the final quarter of 2015, was a reflection of the weakness in macro environment.
According to the NBS, the pace of increase of food prices as recorded by the food sub-index increased at a faster pace in February, with the food index rising by 11.3 per cent, up by 0.71 per cent from what was recorded in January.
The NBS stated that “during the month (February), all major food groups, which contribute to the food sub-index increased at a faster pace during the month with the exception of potatoes, yams and other tubers group and sugar, jam, honey, chocolate and confectionery groups”.
The urban index rose by 12.3 per cent (year-on-year) from 9.7 per cent in January, while the rural index also rose to 10.7 per cent in February from 9.5 per cent the month before.
Indeed, inflation means different thing to different people. To the lay-man, inflation occurs when he is spending more money to purchase the same quantity of goods. On the other hand, to an economist, it is the general increase in price level over a period of time. Clearly, high inflation distorts consumer behaviour. It can also destabilise markets by creating unnecessary shortages. Similarly, high inflation, which is not the desire of any economy, leads to income redistribution and brings about weak purchasing power.
That is why central banks globally, are never comfortable with a rising inflation rates usually seen by them as ‘evil.’
The presidency and the CBN are of the opinion that devaluing the currency would result in import-induced inflation. However, the currency curbs it put in place since last year to conserve foreign reserves and prop up the naira, have led to sharp spikes in the prices of goods and services in a slowing Nigerian economy.
The CBN Governor, Mr. Godwin Ifeanyi Emefiele, had told THISDAY in an interview that although the rate of inflation has risen beyond the upper limit of the band that was fixed by the central bank, the regulatory body would continue to work hard to ensure that price stability is maintained.
Analysts blamed the situation on the forex restrictions, noting that the different currency curbs made it difficult for local businesses to import and created a riskier environment for foreign investments- thus creating scarcity of goods and services, which resulted to higher prices and slowdown in economic activities.
CSL Stockbrokers Limited, in a report stated that while they were expecting a rise with all that was going on in the economy – and particularly with the weakness in the parallel market exchange rate – the magnitude of the increase in the CPI for February, came as something of a surprise.
“The cause of this massive surge is controversial and may yet be short-lived. At the beginning of February, the Nigerian Electricity Regulatory Commission (NERC), reportedly acting on a directive of the Minister of Power, Works and Housing, Babatunde Fashola, implemented steep increases in tariffs.
“In response to a public outcry, the Senate ordered the increases to not be implemented. However, this data suggest that electricity increases were applied for February at least. Indeed, the head of the Nigeria Bureau of Statistics, Dr. Yemi Kale told CSL that his team did incorporate the increases into the CPI data for February.
“It remains to be seen whether these increases will remain in place indefinitely, however, as it is unclear whether the Senate has the power to reverse NERC’s decision. If the tariff increases are reversed, we would expect to see the year-on-year headline inflation number head back towards 10 per cent in March and then rise to just above 11 per cent by the end of 2016,” the CSL stated.
They argued that if higher tariffs are maintained, the nation should expect to see second round effects in locally-produced goods as manufacturing businesses deal with higher production costs. As such, they predicted that inflation to continue rising steadily to above 12.5 per cent at the end of 2016.
Also, Cowry Assets Management Limited, stated that the rising cost-push inflation effect merely reflects the difficulty of Nigeria’s undiversified export base and foreign exchange reserves to adequately support an import-dependent consumption behaviour as well as settlement of obligations to external creditors.
Nevertheless, there appear to be more trouble for the country as Standards & Poor’s (S&P) last week revised its sovereign credit outlook to negative, from the stable it was previously. Nigeria currently has a B+ rating by the agency. However, in a note, S&P stated that Nigeria’s foreign exchange policy was creating dislocations in product and financial markets. It stated that the negative outlook it assigned to Nigeria reflected the possibility of downgrade in coming 12 months, “if there is deterioration of Nigeria’s fiscal or external accounts.”
Furthermore, it stated that the decline in oil prices has continued to hurt the Nigerian economy.
It added: “Nigeria’s monetary policy has also weakened the country’s credit profile, in our view.”
The Manufacturers’ Association of Nigeria proposed to the central bank in February that it sell dollars directly to the industry group’s members at weekly auctions, bypassing commercial lenders.
The plan is an attempt to counter a shortage of foreign exchange and to save jobs, vice president of the association, Ali Madugu said recently.
Nigeria derives about two-thirds of government revenue from oil, which slumped to a 12-year-low this year. Authorities have rationed dollars and brought interbank foreign-exchange trading to a halt since February last year in a bid to prevent the naira falling. The measures have all but pegged the currency at N197-N199 per dollar. As dollars have become scarce; the black-market exchange rate which stood at about N325 at the weekend has been the major source of supply for most firms.
But there were indications last week that the Trade and Investment Minister Okechukwu Enelamah and Emefiele are discussing ways to ensure supplies of foreign exchange to manufacturers in the West African nation as the plunge in oil prices constricts dollar inflows.
“My minister is engaging with the central bank governor and other key stakeholders to ensure that the interests of manufacturers are taken care of” in the provision of foreign exchange, director of trade at the ministry of industry, trade and investment, Omotara Awobokun said during the week.
Companies have written to the ministry, expressing the difficulty they face obtaining dollars, Awobokun added.
“Manufacturing is the alternative to the dwindling oil sector” and to be able to support efforts to diversify the economy, producers need foreign exchange to import equipment, she said.
The CBN’s Monetary Policy Committee is expected to meet from today and are expected to make key monetary policy decisions.