Will Inflationary Pressure Abate?

James Emejo interrogates the variables that had continued to fuel inflation as well as possible policy options to weaken the upward trajectory witnessed in the past consecutive months

No doubt, the economy has continued to groan under inflationary concerns which had thrown a

spanner in the wheels of both monetary and fiscal policy

The impact of the rising headline index cannot be underestimated particularly in macroeconomic analysis.

It is noteworthy that inflation is major culprit behind some of the macroeconomic policy shortfalls witnessed in recent times.

Until recently, rising inflation had made it difficult for the monetary authority to lower the monetary policy rate (MPR) amidst high cost of funds.

Among other things, inflation which is part of the convergence criteria for the ECOWAS single currency programme had also posed significant challenge towards achieving the milestone due to its upward trajectory among countries within the region.

Also, rising inflation particularly during the COVID-19 pandemic as well as impending economic recession further constitute a nightmare for policy makers who have had to contend with stabilising prices and boost output among other pressing decisions.

Yet, the threat of inflation persists in the economy.

According to the National Bureau of Statistics (NBS)

consumer price index (CPI) which measures inflation increased to 12.82 per cent (year-on-year) in July compared to 12.56 per cent in the preceding month, according to the National Bureau of Statistics (NBS), representing the highest rate in 29 months while annual inflation rate rose for the 11th consecutive month in July.

The composite food index increased to 15.48 per cent in July 2020 compared to 15.18 per cent in June in the review period.

The rise in the food index was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, meat, fruits, oils and fats, and fish.

On the other hand, core inflation, which excludes the prices of volatile agricultural produce stood at 10.10 per cent in July, down by 0.03 per cent when compared with 10.13 per cent recorded in June.

Core inflation was fueled by the highest increases in prices of medical services, passenger transport by air, pharmaceutical products, hospital services, passenger transport by road, maintenance and repair of

personal transport equipment, paramedical services and vehicle spare parts.

The uptick is a setback for monetary policy which had only managed to curtail its rise for a few consecutive months before a rebound that had seen inflation again on an upward trajectory in recent times.

The Central Bank of Nigeria (CBN), which has the mandate to stabilise prices, had set an inflation target of about six per cent to nine per cent in its current five-year roadmap.

The MPR, which is the rate at which the apex bank lends to commercial banks is currently at 12.5 per cent, above inflation rate, a situation which economic analysts are not comfortable with.

In his personal statements during the recent Monetary Policy Committee (MPC) meeting in July, CBN Governor, Mr. Godwin Emefiele, noted that the rising inflationary trend had begun in September 2019 due to structural factors aggravated by the pandemic-derived supply shocks.

Emefiele said inflation was partly attributable to the lingering effects of disruptions and challenges around agricultural belts, and infrastructural complications, which were aggravated by COVID-19 setbacks to interstate distribution network.

Emefiele, however, noted that the spill- over effects of these adverse impulses were expected to persist in the short-term and abet inflation inertia for much of 2020.

Also, a member of the MPC, Adamu Lametek, said the depreciation pressure on the naira exchange rate combined with upward trending inflation creates complexity for monetary policy at a time when economic activity requires a boost.

He said: “This complexity calls for a cautious

approach that is underpinned by instrument diversity” adding that the CBN’s interventions in the real sector had remained robust and well-tailored to deliver speed in employment elastic sectors including agriculture, manufacturing and solid minerals.

However, according to a report by SB Morgen Intelligence , the country’s headline index was largely influenced by foreign exchange controls.

It stated: “A major reason for this high inflation is the unending quest to defend the value of the Naira. To control dollar demand following the crash of oil prices, the CBN banned 41 items from accessing foreign exchange in June 2015. Several capital controls were also put in place to prevent foreign exchange leaving the country.

“This widened the gap between the official rate and the parallel market rate, which was nearly 200 Naira at one point in 2017. It also had the effect of driving away investment, and tipped the country into recession. In addition, land borders have been closed since October 2019, further strangling trade, a sector that is the

second largest employer of labour in Nigeria.”

Moreover, in its Monthly Economic Update for July, the Financial Derivatives Company (FDC) associated the current inflationary pressures with the over 20.4 per cent increase in fuel price.

It stated: “Food inflation to inch-up in spite of the harvest. Food inflation is expected to continue its rising trend, albeit at a slower pace of 0.02 per cent to 15.20 per cent. This is because of the impact of the prevailing supply chain disruptions, Third Main-

land Bridge closure and PMS price hike. This will further reduce consumer purchasing power and lower aggregate demand.

“However, the harvest season could slow down the pace of increase in food inflation rate.

Weaker naira and rising import bill to push up core inflation. The depreciation of the naira and its resultant impact on imported inflation will continue to impact on core sub-index (headline inflation less seasonalities).

The report added: “In the last seven months, the naira

has lost approximately 23.79 per cent at the parallel market while commodity prices have increased by over 100 per cent in the last six months. In addition, the price of fuel has ranged from as low as N125/litre to N147.50/liter. Higher PMS pump price will increase transport costs, which will most likely be passed on to the final consumer. Therefore, we are projecting a 0.05 per cent increase in the core inflation to 10.18 per cent in July.”

Nonetheless, analysts have suggested some policy measures to be taken by the authorities to address the rising inflation, urging the government to wrestle the incessant bandit attacks on farming communities as well as aggressively implement the Economic Sustainablity Plan (ESP) to address the impact of rising inflation which peaked at 12.82 per cent in July.

They also called on the monetary and fiscal authorities to respectively deploy all the monetary policy tools in tackling inflationary pressure as well as stimulate the critical sectors of the economy to boost productivity and production as well as urged the apex bank to among other things focus on how to improve liquidity in the forex market particularly through the on-going unification of exchange rates.

Professor of Finance and Capital markets at the Nasarawa State University, Keffi, Prof. Uche Uwaleke, said the rising inflation amidst downturn in economic activities was quite worrisome.

Uwaleke described it as a “stagflation which further complicates monetary policy against the backdrop of forex market illiquidity and rising unemployment similar to the country’s experience during the 2016-2017 recession.”

He said the upward inflationary trend was the pass through to commodity prices of increase in VAT and the pump price of fuel, border closure, COVID-19 impact on supply chains and insecurity in the food belt regions of in the country swell as a reflection of the high exchange rate.

The former Imo State commissioner of finance, said the best way to rein-in the rising inflation was for monetary and fiscal policies to synchronise in addressing the major inflation driver which is the food component that is in excess of 15 per cent.

Also, former Director General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, also blamed the inflationary pressure on forex, low oil price and effects of VAT increase.

He said: “We need to identify the causes of the rise in inflation rate. Top on the list is the exchange rate, which is rising in reaction to demand and supply of foreign currencies.

“Revenue base of the country is threatened by low demand of oil and drop in its price. This has caused the exchange rate to rise. Supply chain of goods and services were also distorted at the period of lockdown.”

According to him, this affected prices of goods and services. “The effect of the VAT increase also had its effect on prices. Inflation rate therefore will continue to rise until all the factors affecting supply and demand are controlled.”

“From the monetary policy perspective, the higher the money in circulation, the higher the price of goods and services. All the monetary policy tools should be used to address this. On the Fiscal policy side, the critical sectors of the economy must be given stimulus packages to stimulate productivity and production.”

However, Head of Research, United Capital, Mr. Wale Olusi, further predicted inflation to rise to 13.06 per cent as a result of the underlying factors.

He said: “For the month of August 2020, we do not see any relief in sight as pressure on the headline inflation is expected to be sustained given that fundamentals remain the same. For food inflation, as land borders remain closed, we expect the resulting food deficit to persist. Similarly, the core-inflation sub-index is foreseen to continue the northward trend.

“Firstly, CBN’s continued suspension of FX sales to BDC and the illiquid status of the Investors and Exporters window remains , which we expect to continue to spur demand at the parallel market, keeping exchange rate high and driving up corporate cost components as well as cost of imported cost.”

Furthermore, an Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onoja, linked the rise in inflation to the effects of the COVID-19 pandemic which had ravaged the economy causing unemployment and poor capacity utilisation.

Onoja said: “With the closure of the borders, ports and major markets in the country the output from the real sectors have dropped including the formal and informal sectors.

“There is need for stimulus in form of increased access to credits to businesses in the country so that they can begin to contribute to real GDP growth again. Foreign exchange regimes need to be guided by the central bank too while fiscal measures like easing the lockdown completely should be considered.”

Nonetheless, Lametek said it was gratifying that the economy had received and will continue to receive substantially higher amounts of credit compared with periods of similar crisis in the past.

He said between June 2019 and June 2020, total credit rose by N3.46 trillion (about 22 per cent), of which new credit in June 2020 alone accounted for N773 billion, up from N412.7 billion in May 2020.

According to him, the surge in new credit and its major destinations including agriculture and manufacturing in recent months, obviously lend credence to the efficacy of extant real sector support (policy) initiatives of the bank – the minimum loan-to deposit ratio (LDR), the differentiated cash reserves requirement (DCRR) and the development finance interventions.