The latest report released by the National Bureau of Statistics (NBS) revealed that the Consumer Price Index (CPI) which is basically seen as the inflation rate has yet again increased from the 17.1 percent recorded in July to 17.6 percent in August. This is the sixth consecutive time this year, the consumer price index (CPI) has been on an upward streak since the beginning of this year as it rose by 0.9 per cent to 11-year high of 16.6 per cent in June compared to 15.58 per cent in May.
The report stated that increases were recorded in all Classification of Individual Consumption by Purpose (COICOP) divisions which contributed to the Headline index reflecting higher prices across the economy.
According to NBS, “the pace of the increase in the headline index was however weighed upon by a slower increase in three divisions – Health, Transport, and Recreation and Culture. The onset of the harvest season is yet to have a significant impact on food prices. “It is yet to have a significant impact as the Food Sub-index increased by 15.8 per cent (year-on-year) in July, 0.5 per cent points lower from rates recorded in June. Prices however increased at a slower pace across a few groups within the Food sub-index namely Milk, Cheese and Eggs; Oils and Fats; and Fruits.”
Ahead of the release of the July inflation data, analysts had predicted a rise in CPI of around 70 basis points. By the analysts’ estimation, the pace of increase in the CPI would, however, be reduced, compared to the 90 basis points it recorded when it hit 16.48 per cent in June from the preceding month’s 15.58 per cent.
According to the latest NBS report, the economy shrunk by 0.36 per cent while unemployment rate stood at 12.1 in the first quarter of 2016. More so, for the half year, economic growth stands at -1.23 percent. This is basically in line with the prediction of analysts that inflation rate will be at a slower pace in subsequent months beating the prediction of the International Monetary Fund (IMF) who had forecasted a growth of -1.8 per cent for 2016.
Reacting to the NBS report, the Special Adviser to the President on Economic Matters, Dr. Adeyemi Dipeolu, said the data report is as a result of sharp contraction in the oil sector due to huge losses of crude oil production as a result of vandalism and sabotage. He argued that there was growth in areas of government priority like the agricultural and solid minerals sectors during the second quarter of the year.
According to Dipeolu, “Agriculture grew by 4.53 per cent in the second quarter of 2016 as compared with 3.09 per cent in the first quarter. The metal ores sector showed similar performance with coal mining, quarrying and other minerals also showing positive growth of over 2.5 per cent. “Notably also, the share of investments in GDP increased to its highest levels since 2010, growing to about 17 per cent of Gross Domestic Product.
“The manufacturing sector though not yet truly out of the woods is beginning to show signs of recovery while the service sector similarly bears watching. “Nevertheless, the data already shows a reduction in imports and an increase in locally produced goods and services and this process will be maintained, although it will start off slowly in these initial stages before picking up later”.
The Central Bank of Nigeria (CBN) has always regulated the supply of money so that it is sufficiently scarce that it can serve as a store of value. For example, in response to the uptick in headline inflation to 11.4 per cent in February from 9.6 per cent in January, the Monetary Policy Committee of the CBN had in March 2016 voted to review the MPR upward from 11 per cent to 12 per cent as well as the CRR from 20 per cent to 22.5 per cent while maintaining the liquidity ratio at 30 per cent.
That the inflationary pressure has remained in spite of the CBN efforts to control money supply underscores the fact that in reality, dealing with double-digit inflation often proves more complex than the theoretical arguments suggest especially in periods of declining output and high unemployment. A recent CBN report on economic activity in Nigeria indicates that the Purchasing Manager Index, a measure of manufacturing activity, dropped to 41.9 index points in June 2016, as against 45.8 points in the preceding month.
This index has been under the 50 point threshold on the average for the first half of 2016. It is obvious that the country’s economy has entered into stagflation, a situation of declining growth and high inflation that lead to high unemployment. When Monetary Policy Committee (MPC) at its 251st sitting and the CBN announced the increase of the benchmark interest from 12 to 14 percent, the governor said it was part of the measure to attract foreign capital and check headline inflation.
The CBN might have, looked at the situation as resultant of cash supply, whether from the banking system or whichever source a control of the banking sector can also stem. As a cure, therefore, the CBN raised its rate from 12% to 14%.
Many reasons according to economic analysts may be responsible for the current inflation rate in the country, Scarcity of foreign exchange (forex) and fuel is one of the major factors responsible for the spike in inflation figure according to report by the research arm of First Bank of Nigeria, FBN Quest. Analyzing the NBS data, FBN Quest team warned that the inflation figure would worsen if the fuel and forex crises persist.
While the prices of housing, water, electricity, gas and others increased by 15.9 per cent year-on-year, forex scarcity will mean that importers can only a small part of their needs at the Central Bank of Nigeria (CBN) rate. This may force importers to acquire forex via parallel market which will further increase inflation rate due to high cost of products and service. What therefore is needed according to analyst under this situation is a combination of monetary and fiscal measures aimed at removing supply side constraints.
Without prejudice to the outcome of that meeting, the MPC would be well-advised not to jerk up the MPR in a bid to subdue the inflationary pressure as doing so would further hurt output and employment. Rather, the Committee should consider easing monetary policy with a view to stimulating economic growth and reducing unemployment. With significant growth in output, inflation will be tamed ultimately, some economic analysts also argued.
According to an Associate Professor of Finance and Head of Banking & Finance Department, Nasarawa State University, Keffi, Uchenna Uwaleke, the task of taming the rising inflation should not be left to the CBN alone. Given the key factors driving inflation in Nigeria, the need for complementary fiscal measures cannot be over-emphasised. The high cost of fuel, road transport, electricity and food will go down if the government spends right in fixing the refineries, roads, rail, housing and power infrastructure as well as committing huge funds to agriculture. With respect to taxation as a fiscal policy tool, the country’s tax regime may be low compared to peers, but the conditions are certainly different. Therefore, this is not the time to increase the Value Added Tax as has been canvassed in some quarters recently.
While unveiling his plans for the apex bank shortly after assuming office in June 2014, the CBN Governor, Godwin Emefiele, had promised to “pursue a gradual reduction in interest rates” as well as focus on development banking with a view to creating jobs and reducing poverty. In line with this pledge, the CBN should not be too focused on targeting inflation to the detriment of output growth especially against the backdrop of a looming economic recession.
In a similar vein, the president of Federation of Agricultural Commodity Associations (FACAN), Dr. Victor Iyama, has called for a comprehensive policy package that will help the exchange rate stabilise, foreign reserves replenished, and inflation reduced. Dr Iyama noted that there was need for the government to improve the effectiveness of the macroeconomic stabilisation package to enable Nigerians have confidence in economic management.
According to him, restoring macroeconomic stability is the immediate priority, but addressing causes of high inflation requires greater efforts on structural reforms. He added that agriculture can play a key role in the economic growth. For this to help, he said the sector needs restructuring to develop a more vibrant and diversified rural economy with sustainable agricultural growth, high value creation, food safety according to international standard, higher competitiveness and farmer income, and technology-intensive agriculture. According to him, there is need to expand agricultural production by improving seeds, building irrigation works, more efficient markets, and mechanisation and roads.
Thus going forward, the panacea for taming the inflation monster in the medium-to-long term remains the diversification of the productive base of the Nigerian economy, analysts believed.