Inflation: Experts Weigh Options Before Nigeria’s Economic Managers
Festus Akanbi and Gboyega Akinsanmi capture the views of some leading economic and financial analysts, including Chief Executive Officer, Economic Associates, Ayo Teriba, Group Executive Director, Cordros Capital Limited, Olufemi Ademola, and Managing Director, Chief Economist, Africa and the Middle East, Standard Chartered Bank, Razia Khan, amidst the on-going efforts to tame inflation in Nigeria
Teriba: Failure to Stabilise Naira will Compound Consumer Price Index
Now, we are discussing inflation in August. But the story in June and July was about the exchange rate. In June, the exchange rate went above N600. In July, it went above N710. This is just the shadow of that movement. The problem that Nigeria needs to solve now is to stabilise the Naira. If we do not stabilise the Naira and we still have devaluation happening in the parallel market, it will compound the consumer price index. Except we stabilise the Naira, there is nothing we can do about it
Government, therefore, needs to boost the competency of the Central Bank of Nigeria (CBN) to manage foreign exchange stability. Also, it needs to boost the capacity of the CBN to manage foreign exchange supply rather than manage foreign exchange demand alone. A competent central bank will generate foreign exchange supply independent of oil exports. Central banks do it all over the world. If you fail at that level, there is nothing we can do. It will spill over to consumer prices and it will become a double loss for the populace. They will suffer from the devaluation. And then, they will suffer from inflation.
The global environment is not very friendly now. Prices of food and energy are high given the disruption caused by the Russia-Ukraine war. But Nigeria gets extra-dose because we fail to stabilise the Naira. Now, the government must look at what they can do to boost the foreign exchange supply. The options before are so rich. There is no reason we could not have done it eight years ago. If we can muster the will right now, there are easy ways to boost our foreign exchange supply or they will remain in the foreseeable future. That is the key thing because we need to boost the foreign exchange supply for us to stabilise Nigeria.
Even if we want to ameliorate the pains inflicted on the people by high inflation high-interest rest rate, it comes down to money. We need money to give palliatives. We are talking of a government whose debt cost alone is more than its revenue.
That government is in no position to give palliatives. The solution is to unlock new foreign exchange supplies and new revenues from national assets.
With this, we will be able to prevent the recurrence of devaluation we see. We will also be able to give palliatives to maintain the country’s socio-political harmony. We should be thinking about how to solve the problem.
We should not be talking about what happens if the problem gets out of hand and people continue to troop to the streets. God forbid that such happens. If that happens, nobody will be spared. Nobody will be safe whether you are in government or you are not in government. The troops that will move to the streets have common interests. And the common interest is to descend on anybody who falls above average. You and I will fall into that category. Fire does not respect the person that ignited.
So, we should refrain from making comments that can incite the populace to embark upon a mass uprising. The people who start the reign of terror will also be consumed by the reign of terror.
Let us encourage our government to act now. It is better late than never. Nigeria has rich assets from which we can unlock foreign exchange. Nigeria has rich assets from which we can unlock fiscal liquidity even if we do not sell a barrel of crude oil or collect any tax from the populace. Nigeria has so many idle assets that we can generate sufficient liquidity, both in Dollar and Naira. The earlier we start doing it the better for us.
Ademola: Tackling Inflation, Beyond Monetary Authorities
The multiple problems of higher inflation, volatile exchange rate, high-interest rate, and unending security challenges have worsened the Nigerian economic situation.
While inflation is a global problem at the moment with the attendant hike in interest rate, the exchange rate problem is homegrown and may have been exacerbated by security issues.
The insecurity in Northern Nigeria is negatively affecting farming and reducing the potential to export agricultural produce. The oil theft in the Delta areas is also affecting the country’s foreign earnings from the export of crude.
These two have the most impact on the foreign exchange volatilities at the moment. In addition, the potential inflow of foreign investments is being held back due to the exchange rate instability, obviously worsened by insecurity. Hence, not dealing with the security challenges is precarious to Nigeria’s economy.
Inflation is an expected phenomenon, caused by the global responses to the Covid-19 pandemic. The decline in productive activities and the cash transfers and allowances given to people without attendant production were going to lead to inflation. The Russian-Ukrainian war added more to the rising inflation due to the increase in gas prices and other complementary goods. Most advanced economies are recording the highest inflation levels in over 40 years while many African countries are recording double and triple digits inflation. Once again in Nigeria, insecurity is adding to the severity of inflation due to the decline of farming activities and food production (food accounts for the largest weight in computing inflation).
Tackling inflation in Nigeria is beyond the monetary authorities. While managing the prices is the duty of the Central Bank, the fundamental cause of the problem will require a response from the fiscal authority, both politically and otherwise. The will to curb oil theft and other insecurity issues should be unambiguous while implementable tasks should be developed and actioned immediately. Increasing interest rate which is usually the response of monetary authorities to high inflation may be counter-productive in the current time. Further monetary tightening could further lead to higher cost-push inflation.
Khan: Rising Inflation Risks Exacerbating Social Concerns
Headline CPI accelerated to 19.65% y/y, more-or-less in line with our expectation – with food inflation accelerating to 22.02% y/y, (from 20.6% previously). Global food and fertiliser pressures, the fact that diesel prices are not subsidised and the rapid passthrough into inflation from any parallel market depreciation, likely explain the trend.
While the outcome is not surprising, the concern is that Nigeria may have few tools with which to meaningfully influence inflation outcomes. Despite a step up in the pace of Central Bank of Nigeria policy tightening, the action remains overshadowed by greater reliance on CBN financing of government. Moreover, until official FX markets see greater turnover, the difficult-to-regulate parallel market, itself prone to overshooting, will continue to play a disproportionate role in price-setting behaviour.
Rising inflation at a time of weak growth also risks exacerbating social concerns – with Nigeria’s policy settings making it more difficult to tackle near-term pressures.
While inflation is pressured globally, Nigeria’s macro challenges leave it more vulnerable to inflation expectations becoming entrenched. Stabilising prices may be even more costly than elsewhere.