CBN, economic experts at variance on way out of rising inflation

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While the nation awaits the release of January 2024 inflation rate, the Central Bank of Nigeria says it is targeting a reduction in rate to 21% before year end. However, analysts and operators seem to be saying the opposite. FESTUS OKOROMADU unveils the many perspectives to the issue.

As financial experts, analysts, economists, industrialists and other stakeholders await the National Bureau of Statistics to release the January 2024 inflation report this week, the likelihood of a spike in headline inflation for the period is high.

While opinion as to the expected growth rate of inflation for the year is at variance depending on who is speaking, the negative implication of soaring inflation rate on the economy is generally accepted as inimical to economic development and growth.

The debate as to the true status of the nation’s inflation rate or reality has become somewhat that of the economy managers (government and its agencies versus operators and experts).

While the government thinks it is doing everything right to reduce inflation rate, operators and economic pundits believe otherwise.

For instance, the Governor of the Central Bank of Nigeria, Yemi Cardoso, while addressing members of the House of Representatives last Tuesday, said Nigeria’s inflationary pressure will drop from 28.92 percent reported by NBS in December 2023 to 21.4 percent in 2024.

Cardoso anchored his projected decline in the country’s inflation rate to what he termed, “inflation-targeting policies of the Federal Government.”

He argued that improvements in agricultural productivity and easing global supply chain pressures would also contribute to reining in inflation.

“Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, aiming to rein in inflation to 21.4 percent.

“This will be aided by improved agricultural productivity and easing global supply chain pressures.

“The CBN’s inflation-targeting framework involves clear communication and collaboration with fiscal authorities to achieve price stability, potentially leading to lowered policy rates, stimulating investment, and creating job opportunities,” he said.

Aware of the nation’s dependency on importation vis-à-vis the foreign exchange market and its contribution to inflationary growth, Cardoso told the law makers that the Nigerian foreign exchange market was currently facing increased demand pressures, causing a continuous decline in the value of the Naira.

He attributed factors contributing to the crisis to speculative forex demand, inadequate forex supply due to non-remittance of crude oil earnings to the CBN, increased capital outflows, and excess liquidity from fiscal activities.

“The foremost inflation culprit in Nigeria today is the weakened currency. In January alone, the Naira lost 21 percent, touching a record low of N1,530/$”

Cardoso however noted that the shift to a market-driven exchange rate was intended to create a stable macroeconomic environment and discourage currency hoarding.

“However, short-term volatilities are attributed to arbitrage and speculation.

“To address exchange rate volatility, a comprehensive strategy has been initiated to enhance liquidity in the FX markets.

“This includes unifying FX market segments, clearing outstanding FX obligations, introducing new operational mechanisms for Bureaux De Change, enforcing the Net Open Position limit, and adjusting the remunerable Standing Deposit Facility cap,” Cardoso disclosed.

The CBN boss admitted that the steps taken so far to address the forex issues are having a huge economic impact on the citizenry.

“These costs are temporary, and our decisions will address a lot of fundamental issues bothering Nigeria’s macroeconomic landscape.

“These measures, aimed at ensuring a more market-oriented mechanism for exchange rate determination, will boost foreign exchange inflows, stabilise the exchange rate, and minimise its pass-through to domestic inflation,” he assured.

But in response to the CBN Governor’s views, an economic expert from Pan-African Credit Rating Agency Agusto & Co, said a lot of factors affect inflation and the projection, stressing that the CBN’s target can only be realized if all the countervailing variables have been addressed.

Speaking at the bi-monthly forum of the Finance Correspondents Association of Nigeria in Lagos on Thursday, the Head, Financial Institutions Ratings of Agusto Ayokunle Olubunmi identified insecurity as a major cause of inflation in Nigeria.

“Insecurity is one of the major drivers for inflation. Unfortunately, insurgency, kidnapping and general insecurity are rife in the middle belt where they produce a lot of things that we consume,” he said.

Apart from insecurity, Olubunmi also noted that the increase in exchange rate affects inflation. Stressing that because Nigeria is an important dependent country, rising cost of importation will have an effect on the inflationary situation.

While opposing the CBN Governor’s projection of a 21 percent inflation rate for the year 2024, Olubunmi suggested a range of 26.1 percent to 28.2 percent.

He noted that the country’s main source of foreign exchange earnings is crude oil, adding that the price of crude oil which averaged $80pbl in 2023 will likely settle around $70 to $75pbl in 2024 and that Nigeria’s crude oil production cannot exceed 1.5 barrels per day in 2024.

On its part, economists at the Financial Derivatives Company Limited said they expect the inflation rate for the month of January to climb to 29.73 percent.

FDC in a publication titled, ‘Pre-Inflation Report’, released at the weekend said its market survey and econometric model shows that headline inflation is likely to spike further to 29.73 percent from December’s figure of 28.92 percent.

“If our projection is accurate (likely to be within a margin of error of ±0.5 percent), it will be the thirteenth consecutive monthly increase and a record high.”

Expatiating on the projection, the report said, “Notably, all inflation sub-indices are likely to move in tandem with headline inflation. Whilst food inflation is expected to rise by 1.12 percent to 35.05 percent, core inflation is estimated to climb by 1.04 percent to 24.1 percent, and month-on-month inflation is projected to increase by 0.39 percent to 2.5 percent (34.5 percent annualized).”

The FDC report also alluded to the fact that the devaluation of the Naira is the greatest factor attributing to rise in inflation.

“The foremost inflation culprit in Nigeria today is the weakened currency. In January alone, the Naira lost 21 percent, touching a record low of N1, 530/$. This is largely because of the lingering disequilibrium in the forex market as dollar demand continues to outpace supply.

“This persistent currency depreciation has led to increased costs of imported goods such as wheat, subsequently pushing up the prices of wheat-related products like Noodles, Semovita, and Bread by 20.4 percent, 35.8 percent, and 14.3 percent, respectively.

“Also, the prices of locally produced agric commodities such as garri, tomatoes, and pepper are on the rise, largely because of higher logistics costs and reduced supply (planting season effect).”

The report listed other inflation stoking factors to include money supply growth (51 percent) and heightened insecurity, especially in the nation’s food belts.

Speaking to the implication on the economy, the report said, “The unrelenting rise in inflation is taking a huge toll on the purchasing power of consumers (it gets to a point where it affects both disposable and discretionary income), and increasing the cost of operation for businesses.”

According to the World Bank, the number of poor people rose from 79 million in 2018 to 104 million in 2023.

As key players in the Nigerian economy, the Lagos Chamber of Commerce and Industry has also expressed worries over the acceleration of inflation. To this end, it has charged the CBN to intensify its battle to curb it.

The LCCI in a recent statement said it is concerned about the continued uptick in inflation and particularly notes that it offers investment disincentives to businesses, squeezes consumers’ income and spending, and constrains manufacturing productivity in the country.

“We anticipate economic agents, including households and businesses, to continue to deploy strategies that will mitigate inflationary pressures,” it urged.

On why the focus should be on the apex bank and its regulatory policies in curbing inflation, the LCCI said, “CBN is responsible for formulating and implementing monetary policies that foster currency stability. This involves a delicate balance between managing inflation, ensuring a competitive exchange rate, and promoting economic growth. Therefore, the CBN needs to adopt a well-calibrated policy mix that addresses the unique challenges facing the Nigerian economy.

“By promoting economic diversification, implementing effective interest rate policies, managing the exchange rate judiciously, and embracing inflation targeting, the CBN can contribute significantly to ensuring the stability of the Naira and fostering a robust and resilient economy.

“Further, we implore the government to address the challenges inhibiting domestic production and ease the bottlenecks to the distribution of goods within the country. Finally, we urge the government to continue to address the problems of insecurity and other factors affecting agricultural productivity in the country to improve food supply.”

Other perspectives to curbing inflation rate

According to the Chief Executive Officer of the Centre for the Promotion of Private Enterprise, Muda Yusuf, the major cause of inflation in the country is the energy crisis.

Speaking to our reporter on the prospect of declining inflation rate, he said, “Evidently, we are yet to see abatement to the key factors fueling inflation, rather the inflationary pressures have intensified in recent time.”

According to him, the depreciating exchange rate, spike in energy prices, rising transportation costs, logistics challenges, forex market illiquidity, hike in diesel cost, insecurity in many farming communities and structural bottlenecks impeding productivity are all factors fueling inflation. “These are largely supply side and policy concerns. But the petrol price increase following the fuel subsidy removal and the sharp depreciation in the exchange rate were dominant factors,” he stated.

He emphasized that tackling inflation requires urgent government intervention to address the challenges bedeviling the supply side of the economy.

“It is imperative to urgently fix production and productivity constraints, stabilize the exchange rate by ensuring liquidity in the forex market, tackle insecurity, and accelerate efforts to ensure domestic refining of petroleum products and fast-tracking tax and fiscal reforms to curb escalating deficit spending.

“To give producers and citizens some relief, the government should tweak the tariff policies by granting concessionary import duty on intermediate products for industrialists, especially those in the food processing segments of the agriculture value chain.”

Fighting inflation via monetary policy

Economists are of the opinion that interest rate is a good instrument to use by monetary policy authorities to monitor and fight inflation as well as exchange rates. To this end all eyes are on the CBN’s monetary policy committee as members prepare to hold their first meeting in 2024 on February 26, six months after its last meeting.

Speaking of expected outcome of the MPC meeting in view of efforts to further curb inflation, Olubunmi said, “Everything in Nigeria today is pointing towards higher interest rates because one of the reasons why there is a lot of pressure on the Naira is that there is a low-interest rate environment, stressing that high rates moderate economic activities.”

“To this end, the MPC is expected to increase interest rate by about 500 basis points at the forthcoming MPC meeting this month,” he said.

Olubunmi, however, cautioned that the Nigerian government is borrowing massively, stressing that if interest rate is high, the cost of debt servicing for the government will also be high.

“This might discourage the MPC from raising the rates too high,” adding that the average interest rate for the year might hover around 18 percent and 16 percent while it is expected that interest rate will not decrease below 15 percent.

“Evidently, we are yet to see abatement to the key factors fueling inflation, rather the inflationary pressures have intensified in recent time”

But for economists at FDL, the concern is that with the unrelenting rise in inflation and persistent Naira depreciation, the committee is likely to tilt more towards a more restrictive monetary policy stance.

“Most analysts expect the committee to hike the monetary policy rate by at least 200bps to 20.75%p.a. In a positive move, the 364-day treasury bill rate climbed by 7.46% to 19%p.a. at the last auction,” they stated.

Meanwhile, the Chairman Tekedia Capital, Prof. Ndubuisi Ekekwe said, “Nigeria must develop a new playbook on how we fight inflation in the country,” insisting that the current use of interest rate is suboptimal because it is not working.

According to him, interest rate changes do not affect consumer demand that much in Nigeria since we have a limited consumer lending system.

In other words, “when we change rates, we are merely affecting companies as they’re really the entities which actually borrow from banks. Yes, the irony is that only companies can actually drive production (which boosts Supply) and that is why using the increase of rates to fight inflation in Nigeria has not been effective.

“Contrast this with say the United States where consumer lending is massive via credit cards, there when rates go up, you influence demand significantly, making it possible to cool down inflation. Our strategy cannot mirror the US with developed consumer lending because higher rates punish those who are to boost supply which is vital for us to reduce inflation.

“What we do doesn’t make sense. Think of it – we increase the interest rate which is designed to cool down the economy by making capital more expensive, only for the same apex bank to release trillions of Naira to the federal government through ‘Ways and Means’ to flood the economy with cash. In the end, the ‘Ways and Means’ (like the new N7.3 trillion) will cancel the impact of the interest rate hike. This has been going on for ages.”

As it is, Cardoso seems to be running on a different line from where financial experts are operating from.

Nonetheless, the recent cry for hunger from the region believed to be the food basket of the nation and a state governor’s ban on sales of food items to buyers from outside the state as well as the Federal Government’s release of 102,000 metric tonnes of grains from its reserves may not solve the challenge of inflation driven by multiple factors. The government must be prepared to resolve the challenges posed by insecurity, energy and shortage of foreign exchange in order to meet the 21 percent inflation rate target for the year.