As Inflation Fears Ease

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Obinna Chima writes on the need for the central bank and the federal government to continue to work towards achieving a single-digit inflation

The cheering news from the National Bureau of Statistics (NBS) at the weekend, was that the Consumer Price Index (CPI), which measures inflation, further decelerated in February 2019.

Specifically, the last CPI report showed that inflation decreased to 11.31 per cent (year-on-year) in February compared to 11.37 per cent in January.

The trend was completely against market expectations as analysts had anticipated that the traditional huge political spending would elevate the CPI.

However, the moderation in inflation was largely driven by the fall in the price of some food items, notably tubers, cereal, fruits and vegetables.

The latest CPI figures was the third consecutive decrease in inflation and reflected the impact of the support of the monetary policy authority to the real sector.

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 redistributes the income of people and brings about weak purchasing power.

That is why the Central Bank of Nigeria (CBN) and other central banks globally, are never comfortable with this ‘evil.’

The CBN had adopted restrictive monetary policy as part of efforts to win the battle against double-digit inflation, just as it has intensified its intervention in the agricultural sector.

For instance, the Governor of the CBN, Mr. Godwin Emefiele, recently revealed that the various initiatives aimed at encouraging domestic production, had resulted in Nigeria’s monthly import bill falling significantly from $665.4 million in January 2015, to $160.4 million as of October 2018.

According to him, many entrepreneurs are now taking advantage of policies aimed at ramping local production to venture into the domestic production of the restricted items with remarkable successes and great positive impact on employment.

“The dramatic decline in our import bill and the increase in domestic production of these items attest to the efficacy of this policy.

“Most evident were the 97.3 percent cumulative reduction in monthly rice import bills, 99.6 percent in fish, 81.3 percent in milk, 63.7 per cent in sugar, and 60.5 percent in wheat.

“We are glad with the accomplishments recorded so far. Accordingly, this policy is expected to continue with vigour until the underlying imbalances within the Nigerian economy have been fully resolved.

“If we continue to support the growth of small holder farmers, as well as help to revive palm oil refineries, rice mills, cassava and tomato processing factories, you can only imagine the amount of wealth and jobs that will be created in the country.

“These could include new set of small holders farmers that will be engaged in productive activities; new logistics companies that will transport raw materials to factories, and finished goods to the market; new storage centres that will be built to store locally produced goods; additional growth for our banks and financial institutions as they will be able to provide financial services to support these new businesses; and finally, the millions of Nigerians that will be employed in factories to support processing of goods,” he disclosed.

Also, a recent report disclosed that Nigeria has overtaken Egypt as the largest rice producer in Africa.

The Director-General, Africa Rice Center, Benin Republic, Dr Harold Roy-Macauley, who disclosed this, said Nigeria is now the largest rice producer at four million tonnes a year. Egypt was producing 4.3 tonnes annually but the country’s production had reduced by almost 40 per cent this year. Africa produces an average of 14.6 million tonnes of rough rice annually, he explained.

The feat disclosed by Roy-Macauley was the outcome of robust collaboration between the CBN and the Federal Ministry of Agriculture, that focused on areas in the agriculture sector where the country has comparative advantage.

In addition, the central bank has left its monetary policy tools, which includes the benchmark monetary policy rate (MPR), the cash reserve requirement (CRR) and liquidity ratio tight in line with its war against inflation.

The Inflation Figures

The NBS report showed that core inflation, which excludes the prices of volatile agricultural produce stood at 9.8 per cent in February, down by 0.1 per cent when compared with 9.9 per cent recorded in January. The urban inflation rate stood at 11.59 per cent (year-on-year) in February from 11.66 per cent recorded in January while the rural inflation rate increased stood at 11.05 per cent in February from 11.11 per cent in the previous month.

On month-on-month, the Headline index increased by 0.73 per cent in February, representing 0.01 per cent rate lower than the 0.74 per cent rate in January.

According to the NBS in its CPI report for February, the percentage change in the average composite CPI for the 12-month period ending February 2019 over the average of the CPI for the previous 12-month period was 11.56 per cent, which indicated 0.24 per cent point from 11.80 per cent recorded in January.

To the Financial Derivatives Company Limited, the moderation in inflation would be cheery news to the doves in the monetary policy committee at their meeting next week, “because, it means that some of the CBN’s policies to contain inflation can be considered to be successful.”

Commenting on its outlook for inflation, the firm stated that the commencement of the planting season in Q2 would reduce output. This in addition to the implementation of the minimum wage could mount pressure on commodity prices, thus, heightening inflationary pressures, it warned.

In their assessment of the moderation in CPI, analysts at Afrinvest West Africa Limited, noted February’s month-on-month inflation translates to an annual inflation rate of 9.1 per cent, which showed that prices are generally stable.

“Indeed, inflation has taken a different turn since reaching a seven-month high of 11.4 per cent in December 2018, despite the election period which is usually associated with elevated prices.
“Single-digit core inflation is a sign that prices are broadly stable, and it creates the room for monetary easing. In the absence of adjustments to prices of electricity and petrol, we expect core inflation to remain stable,” they stated in a report.

In terms of food inflation, the report noted that it has remained sticky, compared with the monthly average of 10 per cent in the five years preceding the 2016 economic recession.

“This is expected as the harvest season which previously supported a moderation in food prices has given way to the planting season. “The planting season typically lasts till early June; thus, we expect food inflation to remain elevated through June 2019.

“This is likely to be worsened by insecurity in the middle-belt and the rest of northern Nigeria, which remains a persistent drag to agriculture output,” it added.

Ahead of the second meeting of the Monetary Policy Committee (MPC) of the CBN which holds next Monday, the investment firm believes that the February inflation numbers should make committee members more comfortable with monetary easing.

“The political environment is relatively calm, there is more clarity on the direction of the economy and interest rate hikes have been put on hold by the central banks of advanced economies.

“However, we do not foresee a reduction in the Monetary Policy Rate (MPR), which has been unchanged at 14 per cent since July 2016.

“Instead, monetary easing would reflect the current stance of the CBN in the debt market, where yields have dropped by 0.4 per cent post-elections and primary auctions are now less aggressive,” it added. 

But analysts at the CSL Stockbrokers Limited argued that inflation would accelerate post-electoral proceedings as the government ramps up spending.

“Global food prices could also come under upward pressure due to climate change especially as 2019, according to the UN meteorological agency, is likely to be an El-Nino year. Developing countries that are dependent upon agriculture and fishing are usually most affected. In previous years, in response to poor harvest, countries banned exports of grains leading to a sharp rise in food prices. This could pass through to consumer prices in the domestic economy and intensify inflationary pressures,” it added.

On their part, analysts at Cowry Assets Management Limited, noted that the February 2019 inflation rate was in line with most business owners’ expectations as they had expected inflation to fall in the next six months.

“Meanwhile, we note the significant decline in non-oil import bills, which if sustained, would help stabilse the naira against the US dollar and further reduce imported inflation,” it added.

The foregoing therefore calls for the strengthening of the interaction between the monetary and fiscal policy authorise so as to achieve single-digit inflation as well as sustainable economic growth.