.Says inflation rate may rise in July
By Ndubuisi Francis
Former Imo State Commissioner for Finance, and the National President of Capital Market Academics of Nigeria, Professor Uche Uwaleke, has called for a strong collaboration between fiscal and monetary authorities to stem the spiraling prices of food and other commodities in the country.
He argued that given the major drivers of inflation in Nigeria, the federal government has a major role to play in line with the fiscal theory of the price level, noting that: “This calls for a strong handshake between the fiscal and monetary authorities.”
President Muhammadu Buhari had last Monday blamed rising food prices on the destruction caused to rice farms by floods and exploitation.
In an essay: ‘Near-term Inflation Outlook: Bleak Prognosis’, which he made available to THISDAY, Uwaleke also stated that inflation outlook in the near-term is bleak, adding that the 2021 budget projects inflation rate at 11.95 per cent by December 2021.
This projection, he argued, was most unlikely and could possibly come to fruition sometime in 2022.
He said: “The public holidays provide an opportunity to reflect on the capital market and economy in general. One macroeconomic indicator that readily comes to mind is the inflation rate, which is one of the most closely watched economic metric by investors.
“A few days ago, the National Bureau of Statistics (NBS) reported a slowdown in headline inflation for the third consecutive month with June inflation rate at 17.75 percent.
“Although still elevated and higher than the Central Bank of Nigeria (CBN) upper band of 9 percent, it was a continuation of the slowdown in headline inflation which began in April 2021.”
He, however, observed that downside risks to inflation outlook suggested an end to the current disinflation soon, adding that a reversal may kick in as early as July.
According to him, barring base effects, which apparently played a major role in the downward trend in view of successive high inflation rates of 2020, factors likely to cause a spike in inflation rate for July include increased demand witnessed during the festive period, and the devastating impact of flooding reported in some parts of the country.
The former commissioner also cited the N733 billion increased Federation Account Allocation Committee (FAAC) June distribution to the different tiers of government, as well as high exchange rate.
Uwaleke, a former Head of Department in the Nasarawa State University, stated that all these, in addition to legacy issues such as insecurity, transportation bottlenecks, high fuel and electricity tariffs, would weigh on commodity prices, especially food, in July.
He stated that it is easy to predict the direction of prices (inflation, interest rates and exchange rates) in the coming months given the already known exogenous and endogenous factors.
For example, the economy expert observed that the Organisation of Petroleum Exporting Countries (OPEC) ministers agreed to increase oil supply with effect from August in addition to new output quota, stating that expectedly, basket crude oil prices fell last Monday by $2 on the average.
The financial expert pointed out that across the globe, there are concerns over demand outlook amid the spread of COVID-19 Delta-variant.
Uwaleke said: “In the United States, vaccination progress at nearly 65 percent of the population is emboldening the Federal Reserve along the path of interest rates normalisation.
“All these have grave implications for capital flows, exchange rates and by extension inflation in Nigeria.”
Uwaleke noted that the passage of the Petroleum Industry Bill and consent of the National Economic Council (NEC) for full deregulation of the downstream petroleum sector; fiscal surprises expected from the increase in FAAC distribution on account of naira devaluation and strong revenues, especially from Petroleum Income Tax, will all combine to influence inflation trajectory in the months to come.
Other factors include the approval of supplementary budget of nearly N1 trillion by the National Assembly chiefly for defence spending; the increase in government borrowing threshold by the Debt Management Office (DMO) from 25 percent to 40 percent in relation to Debt to GDP as well as the fast depletion in foreign reserves and its consequences for exchange rates stability.
