Concerns as government shrugs off key inflation drivers

Rising inflation

By Geoff Iyatse (Assistant Business Editor)

• ‘Interest hike targets only 10 per cent of inflation cause’
• Analysts worry about energy crisis in January as EU sanctions commence
• World Bank: Inflation stems from lack of commitment to reforms
• Food shortage continues to ring alarm bells
• Rigidity undermines effort to rev economies

Economists are worried that key drivers of inflation are being sacrificed for penny-chasing and misplaced policies at a time the economy is tail spinning into chaos on the eve of another year

Central Bank of Nigeria (CBN) has embarked on an aggressive interest rate regime to rein in stubbornly high inflation, raising the Monetary Policy Rate (MPR) by 500 basis points since May to 16.5 per cent.

But experts are worried the resultant ultra-high cost of borrowing would only stifle the already shocked local manufacturing space. The maximum lending rate was over 28 per cent in October, according to data supplied by the CBN.

But manufacturers and other fund users say they pay as much as 30 per cent of the cost of the fund. According to Dr. Muda Yusuf, Nigeria’s foremost private sector advocate, local manufacturers cannot break through the historical funding constraint and compete with their peers in the rest of the world, especially China, which now takes advantage of the low productive capacity to feast on the biggest African market.
   
Previously dovish, the CBN, since May, sees inflation as the most devastating distortion that should be addressed to achieve sustainable growth. Its Governor, Godwin Emefiele, at one of the recent Monetary Policy Committee (MPC) meetings, said the rate-fixing arm would continue to increase the benchmark rate, as long as it is convinced that money supply is a major headache.
   
But some economists have balked at the efficiency of an interest rate hike as a major tool against inflation challenge. They have also argued that the downside of unaffordable interest rates has overwhelming consequences for an economy that relies more on imports. 
   
In eight months, the benchmark interest rate has climbed up by 43 per cent, from 11.5 to 16.5 per cent. But so also are general price levels. Headline inflation was 17.78 per cent when the CBN tampered with the interest rate in May. Since then, it has added one-fifth to close at 21.47 per cent, last month.

    
The inflation rate has become an increasing function of interest rate in recent months, according to Dr. Chiwuike Uba, a development economist, who suggested the war against inflation could not be won through interest-rate-fixing.
  
Uba also argued that the country’s inflation is only 10 per cent driven by money supply, noting that the key factors responsible cannot be addressed with a higher interest rate regime. 
   
Nigeria’s total money supply is currently estimated at N50.6 trillion. Of the value, the Federal Government holds over N20 trillion in accumulated Ways and Means (WM) extended by the CBN.
   
“Inflation in Nigeria has not reached its highest level. There is no question that inflation will continue to increase in 2023 because the engines of inflation have not yet been properly dealt with. Over 70 per cent of inflation is driven by the exchange rate (depreciation of the naira), with diesel and aviation accounting for over 11 per cent and about seven per cent caused by other exogenous shocks,” Uba said in an interview with The Guardian.
    
He continued: “Interestingly, the contribution of the money supply to inflation is below 10 per cent. Yet, the policy direction of the CBN largely focuses on money supply without the effort needed to address Ways and Means and the question of exchange rate. The CBN’s contribution to the Federal Government through Ways and Means is about 40 per cent of the total money supply, which, in turn, contributes to inflation.”

ANALYSTS also worry that with the EU embargoes on Russian sea-borne crude oil coming into force on December 5 and on refined oil products in February, there may be freight volatility from January, in advance of the February ban on Russian long-term diesel, as diesel contracts run out in December.
 
They noted that demand for diesel in Europe will mean less volume coming into West Africa, just as high freight, especially on long range and medium range tankers, are likely to persist through the first half of 2023.

   
In the latest Nigeria Country Economic Memorandum (CEM), the World Bank said the overdue WM is a major contributor to the country’s double-digit inflation, which it described as a key priority to be addressed to improve the macroeconomic outlook.
   
“Despite the urgency, the response from authorities over the last two years has not been adequate, increasing inflation and fueling poverty and food insecurity. Between 2019 and 2021, Nigeria’s high inflation stems from a lack of concerted actions to reform the mix of trade restrictions, exchange rate, monetary and fiscal policies,” the CEM states, noting that inflation has thrown about eight million people into poverty in two years.
   
While inflation has peaked in some developed economies and decelerated in many others, Nigeria’s seems to continue the uptrend. The forthcoming election is also seen as a major alarm bell that could increase liquidity and send prices spiraling, a reason David Adonri, an economist and investment banker, thinks inflation is not yet at its peak.     
  
“Where the policy (interest rate) has worked, the economic structures are internally productive, unlike in Nigeria, which is import dependent amid crippling FX shortage. Unless the root causes of inflation, which are peculiar to Nigeria, are addressed, further deployment of monetary policy tools may be in vain. It does not appear that Nigeria’s inflation will peak soon, considering the continuation of insecurity, food and energy crises with undiminished intensity,” Adonri said.
  
He also noted that the “recent flood disasters across the country have made recovery a difficult task” and complicated efforts to stem food inflation, which rose to 24.13 per cent last month. The food inflation rate is at its highest since the early 2000s. 
   
And there are concerns the situation could worsen as the country transitions into an election year and moves further away from harvest season.

This year, Olam Nigeria Limited, a significant player in the rice value chain, said the ravaging flood that submerged many food-producing states across the country significantly affected its share. Food basket states such as Benue and Nasarawa were seriously affected by the disaster. 
  
“The entire team from the farm worked very hard to prevent the colossal damage that arose from the dam release that broke the dikes of the farm and affected us. To a large extent, we supply about 25 per cent of Nigeria’s rice needs and that has been affected as we have already lost over $20 million,” Olam’s representative said.
   
Ken Ife, a professor of economics with a deep interest in farm value chain investment, said a worst-case scenario could be around the corner if appropriate interventions are not adopted. He said 20 to 30 per cent of rice farmlands might have been affected by the flood, meaning that Nigeria would need to import rice paddy to avoid serious strain during December’s high demand for the staple food. Since the floods subsided, no significant actions have been taken to remedy impacts of the nationwide menace.
  
In the past three months, the price of rice, the commonest staple food, has added about 27 per cent, from an average of N37, 000 per 50kg to N47, 000 as of press time. With Christmas barely a week away, food crisis looms across the country, with some households looking forward to a modest celebration.
  
Sadly, not much is coming from the government to cushion the effect of a rigid operating environment on business and manufacturing. An inefficient power sector, unaffordable alternative power source, untidy fiscal space and many others are major pain points investors look up to the government to address.