Stimulating Economy to Tackle Rising Inflation


Prices of food items are on the rise with galloping inflation

The unabated rising inflation is currently a serious concern for economic analysts and stakeholders, who, however, see hope on the horizon, if the federal government could immediately stimulate economic activities in the country, write Kunle Aderinokun and James Emejo

The country’s economic tribulation was compounded by a further rise in the Consumer Price Index (CPI) (which measures inflation) to 15.6 per cent in May from the previous month’s figures of 13.7 per cent, seemingly defying all measures to tame it.

The galloping inflation further dashed hopes about the possibilities of prices of food and other commodities normalising after more than doubling for over four months since the headline index had been on the upward trajectory.

It also means Nigerians will have to endure higher lending rate from commercial banks because interest rates are usually higher than the inflation rate, a situation that would further constitute real threat to the development of the real sector.

According to the National Bureau of Statistics (NBS), the 1.9 per cent increase in the rates in May largely reflected an overall increase in general price level across the economy as all divisions that contribute to inflation increased at a faster pace in May.

Specifically, it noted that electricity rates as well as other energy prices continued to manifest as key drivers of the core component of the CPI as imported foods as well as a drawdown of inventories across the country continue to push food prices higher.

The CPI figures for May also showed that the highest increase in rates were seen in the Passenger Transport by Road, Liquid Fuel (kerosene), Fuels and Lubricants for Personal Transport Equipment (Premium Motor Spirit) and Vehicle Spare Parts groups while all major food groups that contribute to the Food sub-index increased at a faster pace driven by higher food prices in Fish, Bread and Cereals, and Vegetables groups for the second consecutive month.

It was however, the fourth consecutive month that the headline index would increase relatively strong.

Analysts who spoke to THISDAY painted a gloomy picture for the economy although they also believed that the unfavourable situation could be reversed if government, as a matter of urgency, releases the capital budget to stimulate economic activities across the country.

An economist and former acting Unity Bank Managing Director, Mr. Muhammed Rislanudenn, expressed the hope that the new foreign exchange policy announced by the Central Bank of Nigeria (CBN) might cushion inflation going forward.

He lamented that, “monetary instrument available to CBN to attack inflation is jerking up interest rate and trading off growth. That has not played the magic and the problem gets further accentuated due in large part to CBN demand management forex policy that has for a whole year distorted the market, created a huge gap between parallel and official rates thereby inducing imported inflation.”

“The economy is already one leg in recession with a recorded negative Q1 GDP growth rate. Meanwhile there seem to be no synergy between 2016 expansionary fiscal and monetary policy. Hopefully the new forex policy will help improve liquidity and transparency in the system thereby aligning prices down in the medium to long term. Government need to fast track its capital spending to stimulate the economy and draw it away from recession,” he added.

Also, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola, believed an improvement in current liquidity condition as well as lower cost of funds could moderate inflation in future.

According to him, “The high inflation is a reflection of the current economic realities. With the liquidity squeeze that affect both the public and private sector the cost of production has just become very high which can only be reflected in the price of commodities.

“In addition, the very low purchasing power of customers resulted in the cut in supply (production) hence the disproportionate high demand for the few available supply makes the prices of commodities to be high. However, once there is an improvement in liquidity and the cost of accessing financing is brought down, inflation will also moderate. I need to add that the exchange rate and fuel price are also significant factors that contributed to the high inflation.”

Further commenting on concerns over the rising inflation, an Associate Professor of Finance and Head, Banking & Finance, Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, said food inflation might likely reduce during the harvest season while the proposed execution of capital projects could also cause the core index to decline.

“I do not see any quick fix or magic because the economy is experiencing stagflation which is a situation of rising prices and rising unemployment. Monetary policy tools designed to tame inflation tend to stoke unemployment. This is so as the pass through effect of raising the benchmark rate (MPR), cash reserve and liquidity ratios in order to tackle inflation work to contract the economy,” he posited.

Uwaleke also said:” It would appear that monetary policy tools alone are handicapped especially in view of the fact that the current inflation is cost-push rather than demand-pull related. The National Bureau of Statistics has blamed the rise in Consumer Price Index largely on cost of electricity, fuel, transport and forex scarcity/imported inflation. What is required, in my view, is the use of the right fiscal policies to complement existing monetary policies.”

“For example, subsidies and other incentives to agriculture will go a long way in bringing down food prices. I also see food inflation declining as the harvest season approaches. As for core inflation, the execution of capital projects in the 2016 budget will help to bring down transport and electricity costs and moderate core inflation. So, my prediction is that headline inflation will begin a gradual descent by Q4 of 2016,” he pointed out.

However, in their assessment, analysts at FBNQuest, an investment banking and asset management arm of FBN Holdings Plc, predicted that as things stands, “it is clear that, with or without a more flexible exchange-rate policy, there will be another steep rise in inflation in June.”

The analysts expressed the belief that, “the fx impact is discernible in the fact that the y/y rise in the urban index in May was running over four percentage points ahead of its rural equivalent.”

According to the FBNQuest analysts, “the latest shocking inflation report from the NBS shows an acceleration in the headline rate to 15.6 per cent y/y in May from 13.7 per cent the previous month. This compares with the average forecast of 14.7 per cent y/y in a wire service poll of analysts, and our own contribution, based on positive base effects, of 14.1 per cent. There were sharp increases for both the core and food measures to 15.1 per cent y/y and 14.9 per cent y/y from 13.4 per cent and 13.2 per cent respectively. The m/m headline rate was the highest since January 2012 when the FGN last sought to deregulate fuel prices.

“ The category for housing, water, electricity, gas and other fuels surged by 22.0 per cent y/y in May. We detect another inflationary push in the NBS comment that it saw “a drawdown of inventories across the country.”