Despite Inflation Decline, Economy Faces Potential Risks

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Although the headline index declined in June, the lacklustre improvement in some other key economic determinants still make the economy vulnerable to shocks, writes James Emejo

After a rebound in April and May, the Consumer Price Index (CPI), which gauges inflation, declined to 11.22 per cent year-on-year in June compared to 11.40 per cent in May.

Inflation had dropped in January 2019 when it declined to 11.37 per cent from 11.44 per cent in December in 2018.

The index further reduced to 11.31 per cent in February and 11.25 per cent in March but resorted to the upward trajectory in April when it climbed to 11.37 per cent- and further to 11.40 per cent in May- before falling to 11.22 per cent in June.

According to the National Bureau of Statistics (NBS), in its CPI estimates for June, food inflation reduced to 13.56 per cent in June 20 compared to 13.79 per cent in the preceding month.

Core inflation, which excludes the prices of volatile agricultural produce further dropped to 8.8 per cent in June, down by 0.2 per cent compared with 9.0 per cent recorded in May.

The statistical agency further noted that prices were moderated in all the divisions that determined the headline index, leading to 0.18 per cent reduction in the rate.

Also, the urban inflation rate slowed to 11.61 per cent (year-on-year) in June compared to 11.76 per cent recorded in May, while the rural inflation rate reduced to 10.87 per cent from 11.08 per cent in the preceding month.

According to the NBS, on a month-on-month, the urban index rose by 1.10 per cent, up by 0.05 per cent from 1.15 per cent recorded in May, while the rural index also rose by 1.05 per cent in June, up by 0.02 per cent from 1.07 per cent rate recorded in May.

It noted that the moderation in the food index was caused by muted increases in the prices of bread and cereals, meat, oils and fats, potatoes, yam and other tubers, fish, vegetables and fruits.

“On month-on-month basis, the food sub-index increased by 1.36 percent in June 2019, down by 0.05 per cent points from 1.41 per cent recorded in May 2019.

The average annual rate of change of the food sub-index for the twelve-month period ending June 2019 over the previous twelve-month average was 13.42 per cent, 0.05 percent points higher from the average annual rate of change recorded in May 2019 (13.37) per cent,” the NBS stated.

On month-on-month, the core sub-index increased by 0.85 per cent in June, up by 0.10 per cent when compared with 0.75 per cent recorded in May.

The NBS further explained that the highest increases in the sub-core index were recorded in the prices of medical and hospital services, cleaning, repair and hire of clothing, repair and hire of footwear, repair of household appliances, actual and imputed rentals for housing, major household appliances whether electronic or not and tobacco.

“The average 12-month annual rate of change of the index was 9.64 per cent for the twelve-month period ending June 2019; this is 0.13 per cent points lower than 9.77 per cent recorded in May 2019,” it stated.

However, one of the major concerns around high inflation had been its benign effect on both monetary and fiscal policy and the economy in general.

But the drop in the headline index will excite Nigerians, who had endured increases in the prices of basic commodities in recent times, often compounding the cost of living.

The decline in inflation will even provide greater reprieve for the Central Bank of Nigeria (CBN) which had been struggling to tame inflation in recent times.

The decline in the headline index could signal a positive start of CBN Governor, Mr. Godwin Emefiele’s second term, having vowed to curtail the index.

Speaking recently while unveiling his agenda for the next five years of his second tenure as the apex bank boss, Emefiele had said he would strive to sustain positive interest rate regime to the delight of important stakeholders as well as work to bring down the prices of food items which continued to exert inflationary pressures.

Essentially, he said monetary policy measures will be geared towards containing inflationary pressures and supporting improved productivity in the agricultural and manufacturing sectors.

He said working with other stakeholders, the CBN intended to reduced the cost of food items, which have considerable weight on inflation.

According to the CBN governor, our ultimate objective is to anchor the public’s inflation expectation at single-digit in the medium to long run. “We believe a low and stable inflationary environment is essential to the growth of our economy because it will help support long term planning by individuals and businesses.”

“It will also help to lower interest rates charged by banks to businesses thereby facilitating improved access to credit, and a corresponding growth in output and employment,” he added.

Nonetheless, the consecutive monthly drop in inflation in previous months had allowed for a rare opportunity for the CBN to tinker with the monetary policy rate (interest rate) which was reduced by 50 basis points recently to the excitement of the markets.

The adjustment in MPR finally came after holding the rate at 14 per cent for about two years, largely due to inflation as the former rate cannot go below the latter rate.

There had been increasing expectations that declining rate of inflation could further encourage the apex bank to loosen monetary policy rate, thereby reducing the cost of borrowing to boost growth.

However, experts have expressed their reservations over the drop in the headline index in June, cautioning that emphasis must shift from fighting inflation to addressing other crucial factors which impact the growth of the economy.

Speaking in a chat with THISDAY, economist and former Director-General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, expressed worry that major determinants of inflation rate remained constant.

He also expressed pessimism that a single-digit target in the headline index was feasible in the short term.

He said:”We are already in July 2019. It does not look feasible that inflation rate can drop to 9 per cent before the end of this year.

This is because, the major determinants of the rate are still constant, which are: Interest rate and exchange rate.”

According to him, there are no immediate indicators that oil revenue will rise in the short run. The rate at which non-oil sector is growing cannot in the short-run lead to further drop of the inflation rate.

He explained that usually the lower the exchange rate, the MPR, and interest rate of deposit money banks, the lower the inflation rate in the economy and urged the authorities to address concerns around them.

Also, speaking with THISDAY, Chief Executive, Global Analytics Company, Mr. Tope Fasua emphasised the need to de-emphasise on fighting inflation, and rather direct policies towards achieving double-digit growth rate, stressing that the country could cope with inflation in the meantime.

“I take a contrary view that we should be targeting inflation but targeting double digit growth. This will mean that inflation will be high.

A highly productive economy is also usually a high inflation society. When the African Continental Free Trade Agreement (AfCFTA) kicks in we have to then target inflation and interest rates in order to compete favourably,” he said.

Fasua explained that, “If Nigeria continues to kick the can down the road and grow at this mediocre rate then we may even have a slight deceleration in inflation which may be akin to economic slowdown or may even be due to better inflation targeting but for an unbuilt economy such as ours, we should be more worried about ramping up productivity by using all the resources we have to do the needful.

“That we aren’t doing, and it’s a huge tragedy. We have a maximum of four years to implement a radical strategy otherwise there’ll be bedlam when AfCFTA kicks in fully. I have warned.”