Nigeria’s inflation: Making sense of the Development

Okonjo-Iweala, Nigeria's Coordinating Minister for the Economy and Minister of Finance

Okonjo-Iweala, Nigeria’s Coordinating Minister for the Economy and Minister of Finance

By Emeka Chiakwelu
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 petroleum, 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.

Emeka Chiakwelu, Principal Policy Strategist at Afripol. Africa Political
& Economic Strategic Center (AFRIPOL) is foremost a public policy center
whose fundamental objective is to broaden the parameters of public policy
debates in Africa. To advocate, promote and encourage free enterprise,
democracy, sustainable green environment, human rights, conflict
resolutions, transparency and probity in Africa.

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