Commentary and Analysis
The recent statistics coming from the country’s National Bureau of Statistics (NBS) recorded an inflation rate of 9 percent in January of the first quarter 2013. The drop from 12 percent inflation rate of December 2012 to the new low at 9 percent is a breakthrough for Central Bank of Nigeria (CBN).
According to NBS, “The relative moderation of the Headline index from 12.0 in December to 9.0 in January could be largely attributed to base effects- These are as a result of higher price levels in the previous year, which imply that the year-on-year changes exhibited this year will be muted. In particular, the Nigerian economy exhibited several shocks in January 2012. The partial repeal of the Premium Motor Spirit (Petrol) subsidy led to increases in transportation costs as well as secondary effects, as the transportation costs affected both food and non-food prices. There were also the civil protests which followed, and the man-made price gouging during the month, as merchants tried to take advantage of temporary shortages. The resulting base effects – the relative lower rise in year-on-year changes exhibited in January 2013- is particularly noticeable in the decline in the Core index, decreasing to 11.3 per cent in January (from 13.7 per cent in December).”
“In January, the composite Food Index increased year-on-year by 10.1 per cent to 142.3 points. The year-on-year change was marginally lower than the 10.2 per cent recorded in December, “ as stated by the record from the NBS. The unrealisable fear was the recent flooding in different parts of the country would have impel a higher increment in the prices of food items, principally those food stuff that are being transported over a long distances from central belt of the country to eastern part and vice versa.
Sanusi and his gang at Central Bank of Nigeria have made it their agenda to lower inflation rate below 10 percent since 2009. But that has been elusive, except in July and August 2011, when the inflation rate registered 9.4 and 9.3 per cent respectively. Since then the inflationary trend has been surging without subsiding. This latest development has been almost four years since the inflation rate was below 10 percent. CBN must be walking on the sky for its latest achievement but this is not the time to beat one’s chest for the fight and struggle against inflation is a ceaseless battle that never ends.
In May 2008 the inflation rate stood at 8.7 per cent, and that was achieved by Soludo’s Central Bank of Nigeria. But this was before the debacle of the country’s financial houses; when the banks failed and there was a credit crunch that hampered liquidity in the economy. To rescue the banks and liquefy the monetary base, the Sanusi’s Central Bank of Nigeria (CBN) introduced a reformed that called for the banking re-capitalization at the tune of N600 billion naira ($3.96 billion).
The recapitalization and massive flow of investments into Nigeria Stock Exchange and non- oil sector of the economy did contribute to the surging of inflationary trends. The monetary policy of the tightened and mopping of the liquidity can go so much and do so much. The reining in of inflation may not necessarily be a success by the application of an aggressive monetary policy coming without consideration of a complimentary fiscal policy from the presidency.
Before President Goodluck Jonathan partially removed the fuel subsidy, Nigeria’s inflation rate was hovering at 10.3 percent in December 2011. Afterward in January 2112 it etched up to 12.6 percent and Sanusi's Central Bank of Nigeria (CBN) predicted that inflation rate would reach up to 14.5 to 15. The impact of the fuel subsidy removal which contracts disposal income with the rising price of the food and fuel products were contributing factors in the upward inflationary trends.
Why the drop?
The dropping of Nigeria’s inflation rate to 9 percent was due to the tinkering with the CPI calculation due to the partial removal of the fuel subsidies. And fuel subsidies were no more part of the CPI calculation . Therefore there was nothing special that CBN did but to rely on the removal of fuel subsidies to do the trick for them.
The partial fuel subsidy “led to increases in transportation costs as well as secondary effects, as the transportation costs affected both food and non- food prices,” as NBS stated in its report. There is no single economic indicator that affects Nigerian economy more than gasoline. The economy is run on petroleuml, from transportation of the people to the delivery of goods and services to the market, petroleum products are engine of development.
With the country’s interest rate at 12 percent, the streaming into the economy of the so-called ‘Hot money’ may not necessarily be so much good for the economy. The pouring, influx and uncontrollable investments in the Nigeria Stock Exchange have the propensity to overheat the economy and trigger higher inflation. The policy makers especially those at the country’s apex bank- Central Bank of Nigeria should be vigilant in monitoring the state of investments in the capital market.
Andrew Bowman, writing in the Financial Times of London made the point ravishingly on the illustration of the ‘hot money’ impact on the country’s growing economy:
“Even as foreign inflows into the country hit a two-year high in January, the central bank said it was not concerned about the risks arising from this potentially volatile influx – though that might change if flows continue to grow at their current pace.
Gross portfolio inflows of $13.4bn in 2012 were nearly triple the 2011 total of $4.51bn, and have pushed up the prices of Nigerian bonds and equities in recent months. Monthly inflows for January 2013 were $2.38bn, a two-year high according to the central bank.
The rush of funds into emerging markets as a result of loose monetary policy in major developed economies has caused many economists; including some in Nigeria, to voice concerns about asset bubbles which could deflate suddenly should flows reverse.”
This is why it is imperative that a close look should oversee a prudent regulation of the monetary policy and not to be slipshod and waited until IMF issue a precaution on the management of the monetary policy by CBN policy makers.
In 2011 after Sanusi's CBN has steadily increased the interest rate by 575basic points to counteract the surging inflationary trends, International Monetary Policy (IMF) cautioned CBN to loosen its hold on its tightening policy. And since then CBN has left interest rate at 12 percent for eight uninterrupted times.
The Central Bank of Nigeria's tightening policy against inflation has a limited effect. It is a shame that even with the waning of the monetary policy; the policy makers have not sought for other viable alternatives to curb inflation. There must be a complimentary action that must come from the presidency and Legislatures to make the monetary policy coming from CBN successful. Fiscal and monetary policies must be synchronized and be complimentary of each other.