Obinna Chima writes on the need to address the state of insecurity in the country in order to reverse the trend of rising inflation
Inflation in Nigeria has been on a steady rise since last year. Latest figures from the National Bureau of Statistics (NBS) showed that inflation in the country rose in March to 18.17 per cent, the highest since 2017. It was 17.33 per cent in February 2021.
According to the Consumer Price Index (CPI) Report for March 2021, food inflation increased to 22.95 per cent from 21.79 per cent in February.
Equally, core inflation also rose to 12.67 per cent in March from 12.38 per cent in February.
The NBS attributed the rise in the food index to increases in prices of bread and cereals, potatoes, yam and other tubers, meat, vegetable, fish, oils, fats and fruits.
Similarly, core inflation was further fuelled by the highest increases recorded in prices of passenger transport by air, medical services, miscellaneous services relating to the dwelling, passenger transport by road, hospital services, passenger transport by road and pharmaceutical products.
Others are uptick in costs of paramedical services, vehicle spare parts, dental services, motor cars, maintenance and repair of personal transport equipment, hairdressing salons and personal grooming establishment.
The urban inflation rate increased to 18.76 per cent (year-on-year) in March from 17.92 per cent recorded in February while the rural inflation increased to 17.60 per cent from 16.77 per cent in the preceding month.
Indeed, 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. Likewise, rising prices neutralise the money that one earns from investments. That is, inflation is effectively the reverse of compound interest.
That is why central banks globally, are never comfortable with a rising inflation rates usually seen by them as ‘evil.’
The situation is worrying with the level of unemployment put at 33.3 per cent, thereby placing the country’s misery index at 52 per cent, which is a reflection of the weak economic activities in the country.
The current inflationary pressure has been attributed to food supply shortages, arising from the heightened levels of insecurity, hike in electricity tariffs, and increase in petrol prices.
Interestingly, analysts at Cowry Asset Management Limited have predicted that headline inflation would further increase going forward amid worsening insecurity, which has since spread to other peaceful regions, thus further disrupting economic activities, especially farming activities, supply chains and general output level.
This, the Lagos-based firm noted that coupled with the long-standing structural challenges, may result in cost-driven inflation rate hitting 20 per cent level in the near term.
“Meanwhile, we note that the anticipated stronger demand for crude oil should result in higher crude price and impact Nigeria’s economy positively, especially on the exchange rate which has continued to depreciate, further exerting pressure on the inflation rate, amid demand pressures,” it added.
Also, analysts at Cordros Capital, stated that inflationary pressure was still skewed to the upside over the short term, with food prices being the main pressure point amid a low base effect.
“We look for month-month headline inflation of 1.51 per cent for April, cascading to a year-on-year print of 18.75 per cent,” they added.
Commenting on the likely impact of sugar and wheat that were added to the forex restriction list on inflation, the firm stated that, given the stubbornly high inflation level amid shrinking of consumer wallet, “we understand that the consumption of bread and other wheat products are now on the rise as they are considered cheaper and readily available.”
“With the recent policy action of the CBN, we believe importers will source for forex at the parallel market, which will come at a significantly higher rate than previously. Consequently, this will further compound the woes of consumers as they will bear the brunt of the increased import cost,” it added.
To Afrinvest Securities Limited, its short-to-medium term projections for inflation remain negative for two main reasons.
Firstly, it noted that poor weather condition (rain fall) and continued farmer-herder crisis are expected to worsen yield from harvest in 2021. Secondly, the “CBN’s focus on a pro-growth objective will continue to drive increased money supply and escalate inflation rate in the near term. In the light of the above-highlighted downside risk factors, we revised up our average inflation rate projection for 2021 to 15.8 per cent from an earlier projection of 14.1 per cent.”
To the Financial Derivatives Company Limited, the steep rise in inflation would be one of the major considerations at the Monetary Policy Committee meeting next month.
Majority of the committee members are more likely to vote in favour of a tighter monetary policy stance this time. As interest rates rise, the marginal propensity to save is likely to increase, reducing liquidity and tapering inflation, it added.
Taming Nigeria’s Galloping Inflation
In order to tame the tides of high inflation in the country, the Director-General of the Nigeria Employers’ Consultative Association (NECA), Mr. Timothy Olawale, urged the federal government to step up efforts at combating insecurity.
He said: “It is high time the presidency declared a state of emergency on security in the country in order to reverse the trend before it escalated beyond the reach of managers of the economy.
“The security challenges have disrupted the intervention programmes of the Central Bank of Nigeria (CBN), as farmers in the northern region were prevented from engaging in any agricultural ventures in most part of last year.
“However, the security trend is still ongoing during the start of another planting season as well as degenerating downward to the southern part of the country. It is imperative for the federal and state governments, in collaboration with other security apparatus in the country, to address the growing menace and save the Nigerian economy from going the ways of Zimbabwe and Venezuela.
“The current situation suffices to contest the positive GDP growth recorded in the Q4, 2020 report, as most macroeconomic variables are all in the negatives.”
He added that the ripple effect of the skyrocketing inflationary rate on the economy, businesses and individuals are enormous, especially the rising food price inflation.
According to him, the rising food inflation will decrease individual and household’s disposable incomes and force a reduced consumption and saving patterns in the economy.
He said: “With less consumption trend, enterprise goods and services patronage will be dwindled and same goes to taxes and levies remittances, which form the bulk of government revenues apart from oil rents.”
Olawale also called for the provision of balancing fiscal measures that could reduce the burden of inflation on Nigerian consumers.
Olawale’s counterpart in the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, described the current inflationary trend as a troubling phenomenon, especially the food inflation that accelerated to 23 per cent.
Yusuf identified currency depreciation, acute illiquidity in the foreign exchange market, rising transportation costs, agricultural output disruptions caused by growing insecurity, logistics challenges, hike in energy prices, climate change and structural bottlenecks to production as the key drivers of inflation.
He said: “The solution, therefore, would have to be situated in the context of these causal factors. Rising inflationary pressure weakens purchasing power of citizens as real incomes collapse; it accentuates pressure on production costs, negatively impacts profitability and undermines investors’ confidence.
“It is not in all cases that high production and operating costs can be passed on to the consumers. The implication is that producers are also taking a hit. This is more severe where a product or service is faced with high demand elasticity. These are products that consumers can readily do without.”
Yusuf also advised the government to introduce interventions to address the challenges bedeviling the supply side of the economy.
“There is also a need to worry about the growing fiscal deficit, especially the CBN financing of the deficit. It is characterised as inflation tax by a school of thought in economic literature,” he said.
Equally, the Manufacturers Association of Nigeria (MAN) called for proactive actions to curb the country’s rising inflation.
The association noted that the trend is not good enough for a country that is recovering from recession.
Director General of MAN, Segun Ajayi-Kadir, stressed that an 18.17 per cent inflation rate is not healthy for the well-being of the people and the growth aspiration of the economy and should therefore be properly managed before it spirals out of control.
“The current inflationary condition in Nigeria adversely affects the profitability of the manufacturing sector and is partly responsible for its competitiveness. The latter being a major contributor to the low-export penetration of goods manufactured in the country into the international market.” he said.
He stressed the need to achieve price stability before the situation becomes deplorable.
Also, he advised that the Federal Ministry of Finance (FMF) and the CBN should work more closely when designing policies that affect the real sector of the economy to prevent a situation where policies are working at cross purposes.
“For instance, while CBN was creating funding windows at single digit interest rate to encourage production, Government increased VAT from five per cent to 7.5 per cent. Similarly, government increased minimum wage and also allowed increase in electricity tariff, and so on,” he noted.
He said there was need to give priority allocation of forex to manufacturers to import inputs that are not locally available and for which there are no immediate plan or resources to produce locally. Since policies are dynamic, they could change as soon as we develop local capacity.
“Also, there are quite a number of moribund industries in the country. There should be an industrial clinic to engender their resuscitation in order to boost output and ultimately achieve price reduction.
“It is evident that there is a strong relationship between manufacturing sector growth and inflation rate, just like exchange and interest rates. Therefore, in the immediate government should assist manufacturing productivity with credit at competitive price. This could be in the form of enhancing existing special credit windows or creating additional ones for this important sector of Nigerian economy.
“There is need to give effect to these measures immediately as the current security situation and the continued incidence of COVID-19 is negatively impacting businesses and lowering their resilience capacity,” he added.
Therefore, the expectation is that the on-going intervention activities of the central bank, in addition to the reopening of the land borders, as measures to address insecurity increases, would all provide relief to food supply shortages and dampen the pressure from food price inflation in the coming months.
