With Inflation at 12.3%, Analysts Link Uptick to Border Closure

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• CPI hits 21-month high

James Emejo in Abuja

Analysts yesterday linked the sustained rise in inflation, which at 12.13% hit a 21-month high in the latest data, to border closure and called on the federal government to consider a timeline for reopening the country’s land borders. The federal government shut the nation’s land borders last August to check the activities of economic saboteurs, particularly smugglers.

According to data released yesterday by the National Bureau of Statistics (NBS), the Consumer Price Index (CPI), which measures inflation, increased to 12.13 per cent (year-on-year) in January compared to 11.98 per cent in the preceding month.

The composite food index rose to 14.85 per cent in January compared to 14.67 per cent in December 2019 while core inflation, which excludes the prices of volatile agricultural produce, also increased to 9.35 per cent during the review period; up by 0.02 per cent when compared with 9.33 per cent recorded in December.

According to the CPI report for December, the rise in the food index was caused by increases in prices of bread and cereals, meat, oils and fats, potatoes, yam and other tubers and fish.

In the core sub index, the highest increases were recorded in prices of hospital services, vehicle spare parts, cleaning, repair and hire of clothing, shoes and other footwear, glassware, tableware and household utensils, hairdressing salons and personal grooming establishments, repair and hire of footwear, garments and passenger transport by air.

The urban inflation rate increased to 12.78 per cent (year-on-year) in January from 12.62 per cent in December 2019, while the rural index also rose to 11.54 per cent in January from 11.41 per cent in the preceding month.

But reacting to the data, the analysts said the continued closure of the borders without a predetermined date of possible reopening had been responsible for the recent rise in inflation in consecutive months.

They expressed concerns that the monetary authority may be left with no other option than to raise the Monetary Policy Rate (MPR) otherwise known as interest rate to respond to inflation rate, which is gradually catching up with the former.
They said allowing the headline index to match MPR, which is currently at 13.5 per cent, could be negative for the economy.

The analysts who spoke in separate interviews with THISDAY linked the rising inflation to the recent increase in value added Tax (VAT) and minimum wage increase.
A renowned economist, Dr. Chijioke Ekechukwu, raised concern that the monetary authorities may have reached their limits with regards to the available tools to curtail inflation.

“It is not surprising that inflation rate rose to 12.13 per cent as of December 2019. This is as a result of a number of factors. Firstly, the anticipated VAT increase to 7.5 per cent, the land border closure, insecurity in the farmlands and in the country that affected agricultural output, increase in electricity tariff.

“The implications for our economy is that the Monetary Policy Committee (MPC) cannot reduce MPR any further to support their efforts of reducing deposit and lending rates, which they have recently achieved. If the inflation rate meets the MPR, CBN may be compelled to increase MPR against their wish.”

Also, another economist, Prof. Ken Ife, said an imminent food scarcity occasioned by the poor harvests from the planting season and the need to bridge the supply gap from neighbouring countries could worsen inflation going forward.
“We are heading into planting season of food scarcity and imported food from neighbouring countries, which will increase food basket sub-index and hence push up the Composite Price Index.

“As you would see headline inflation which excludes food sub-index is still in single digit. However the last Monetary Policy Committee meeting allowed a steep rise on CRR from 22.5 per cent to 27.5 per cent to curb bank liquidity. Obviously lower inflation helps the case for lowering MPR and interest rates and attracts investors,” he added.

A foremost economist, Dr. Muhammad Rislanudeen, also told THISDAY that raising the MPR is a most likely option available to monetary authority in order to protect Foreign Direct Investment (FDIs) and indirectly support the foreign exchange market and by extension boost the reserves.
But he added that “it is going to be a very strong option for the MPC raising rates” and urged the CBN to address the root cause of inflation rather than dwelling on the symptoms.

Rislanudeen said the solution to current inflationary pressures was to “address the key areas that are pushing the inflation rate northwards.”

He said there should be a timeline for reopening the borders and urged the government to further promote the ease of doing business by supporting local production.

He said: “As soon as inflation rate equals to the MPR, it means there’s disincentive to investment and savings because you are going to be having a negative interest rate.

“And even as it is now, it is already manifesting in the sense that the MPR is just a base rate, it’s MPR plus- banks accept deposits and lend at MPR plus.

“If MPR is 13.5 per cent and MPR is inching close to 13.5 per cent, it means interest rate is getting into a negative situation and if it gets into a negative situation, there would be a disincentive to investment, especially foreign direct investment and portfolio investment, but particularly FDI, which has always been supportive of our foreign reserves.”

“What is going to happen is that there may be a capital flight. Already, there is a lot of pressure in the foreign exchange market. The CBN has been struggling to keep the naira at the present exchange rate even at the risk of erosion of reserves.
“So, the MPC will be vested with dual challenges: on the one hand, if they decide to keep the base rate as it is now at 13.5 per cent, there will be disincentive to FDI and disincentive to investment generally and so there may be liquidity problem.

“If they decide to reduce it and support growth, that is not even an option because reducing it is already compounding the negative situation.”

On his part, however, the West African Regional Representative of the African Association of Agricultural Economists (AAAE), Dr. Anthony Onoja, said the impact of the Coronavirus in China, which has affected imports of essential goods and commodities from the country, might have contributed to inflationary pressures on Nigeria.

He urged the CBN to grant new export licences to importers from other countries beside China to temporarily reduce the inflation, adding that on the long run, investments in production of those imported items from China should be pursued by attracting FDI into the country while the federal government must also reconsider reopening the closed borders temporarily.

Onoja said: “The January inflation increase to 12.13 per cent is a two-year high record breaking figure and it is worrisome. This perturbing trend may be associated with border closure since last year especially against food stuff.

“A second possible reason for this can be attributed to the outbreak of Novel Coronavirus pandemic outbreak, which started in China, killing thousands of people and have since led to closure of firms exporting various commodities to different parts of the world including Nigeria from China.

“Nigeria exports from China was $1.04 billion during 2018, according to the United Nations COMTRADE database on international trade cited by Trading Economics. Nigeria exports from China – data, historical chart and statistics updated on February 2020 on their database indicated that Nigeria has a highly diversified import portfolio from China ranging from food commodities, fruits, seeds, oil seeds, animal vegetable fats and oils, communications systems, rubber, raw hides, skin and leather to mining products.

With the temporary stoppage of exports or drastic reductions in these commodities exports to Nigeria, it is most likely that a cost push inflation will happen in Nigeria as she depends on these commodities for her industries.”

The headline index has continued to defy monetary policy measures to limit it to single digit.
The uptick is a setback for monetary policy, which has only managed to curtail its rise for a few consecutive months before a rebound that has seen inflation again on an upward trajectory in recent times.
The Central Bank of Nigeria (CBN), which has the mandate to stabilise prices, has set an inflation target of about six per cent to nine per cent in its current five-year roadmap.