As Economy Hurts, Analysts Proffer Solutions to Rising Inflation

Kunle Aderinokun and James Emejo

For the fifth consecutive month, the Consumer Price Index (CPI) which gauges inflation 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.

According to the National Bureau of Statistics (NBS), energy prices, imported items and related products are persistent drivers of the core sub-index while the highest price increases were noticed in the electricity, liquid fuel (kerosene), furniture and furnishings, passenger transport by road and fuel and lubricants for personal transport equipment.

The inflation has however defied the prediction of pundits, who were united in their position to forecast a decline in the June inflation.

The economic research analysts were from the Economic Intelligence Group of Access Bank, DLM Asset Management Ltd and Financial Derivatives Company Ltd.

In their analysis, Access Bank forecast a drop in inflation to 15.4 per cent in June from 15.58 per cent while those from DLM and FDC projected a moderation to 15.53 per cent and 15.50 per cent respectively.

Rising inflation has always been a major source of concern especially for an emerging economy such as Nigeria, which relies heavily on oil proceeds as main source of revenue and yet, with little from non-oil exports.

In an economy whereby the real sector bleeds for lack of credit, a rise in inflation will usually dash the prospects for lowering lending rates from commercial banks as it is most unlikely that interest rates would go below inflation rate.

This unending spike in the headline index is particularly worrisome for the ordinary Nigerians who have had to cope with the increase in the prices of basic commodities-leading to untold economic hardship.

The country’s economic woes have been blamed on the delayed passage of the 2016 budget, the falling price of oil and lack of non-oil export products as well as basic infrastructure to moderate the impact of dwindling revenue.

Meanwhile, experts who spoke to THISDAY on the new June inflation figure analysed the latest development and further highlighted the attendant implications of the rise as well as ways to cushion its impact on the economy.

In their assessment, analysts at Time Economics noted that, “the factors driving inflationary pressures in Nigeria are more of structural and cost-shock than demand related.”

According to them, “ Over the last few months, we have seen prolonged fuel scarcity leading to the eventual removal of subsidies on petroleum products, an increase in electricity tariffs by over 40 per cent and a sharp depreciation in the Naira exchange rate across the official/Inter-bank market and the parallel markets.

“These were further compounded by an economic slowdown and the inability of the business community to access foreign exchange, in adequate quantity, for the importation of raw materials and machineries needed for smooth production of goods and services. Thus, current inflationary pressures arose from these structural shocks.”

The analysts, who, however, pointed out that, “cost -driven inflations typically tend to be transitory in nature due to inbuilt adjustments mechanisms in the economy,” posited that, “With the fuel scarcity challenge out of the way, the economy appears to have largely adjusted to the increase in the pump price of PMS, the higher energy costs and the weakened Naira exchange rate.”

They therefore projected that, “in the absence of any new major shock to the system, we expect growth in the headline inflation to moderate at the current levels in the months ahead.”

Nevertheless, economists and former acting Unity Bank Managing Director, Mr. Muhammed Rislanudenn, said, to mitigate the continued rising inflation, the CBN should design additional policies on intervention funds to specifically target agriculture and the manufacturing sectors at single-digit interest rates.

He said: “With inflation at 16.5 per cent far above monetary policy rate of 12 per cent implies disincentive to save and invest. Immediate implication in the fixed income market is re-pricing of rates upwards, which also has its limit. Lending to real sector may be challenged as cost of borrowing will go up further even if MPC decide not to jerk up rates and end up trading off growth.

“Also government may not achieve its 2016 budget objective of single-digit interest rate and may also find it tough dealing with stagflation (inflation plus unemployment) as well as potential recession. In a contractionary economy, it’s difficult for banks to have risk appetite to lend cost effectively. Real sector may either be starved of funds or forced to borrow at high rates with long-term implication of project failure and high NPLs for banks.”

He said: “CBN should rather be encouraged to come up with more policies on intervention funds that will specifically target agriculture and manufacturing sectors at single-digit interest to support reversal of current negative GDP growth of -0.36 per cent as well as reduction in current unemployment rate of 12.1 per cent.”

Also, an Associate Professor of Finance and Head, Banking & Finance, Department, Nasarawa State University, Keffi, Dr. Uche Uwaleke, said the new rise in inflation rate spells doom for the ordinary man and cautioned against alleged moves by government to increase the value added tax (VAT)

He said: “The NBS June inflation rate of 16.5 per cent, up from 15.6 per cent in May implies an increase in the cost of living and a fall in living standards for the ordinary Nigerian. The key factors responsible for the persistent rise in the Consumer Price Index since February 2016, have remained the same supply-side constraints namely high cost of electricity, transport, fuel, food and imported items. There is no gainsaying the fact that the overall effect of the uptick in inflation on the economy is negative.

“The capital market is not spared due to the adverse effect it has on investors’ real returns. If the CBN increases the benchmark rate (MPR) in response to the spike in inflation, the stock market will take the hit as investment managers revise their portfolio. The resultant rise in the cost of capital will also affect the bottom lines of quoted companies and depress their share prices. The way forward is not to leave the fight against inflation to monetary policy alone in view of the cost-push nature of the challenge and the limited monetary policy tools available to deal with it.

According to him, “What is therefore required is a confluence of monetary and fiscal policies to address the inflationary pressure in a period of declining output and rising unemployment. Government capital spending in agriculture and infrastructure will go a long way in moderating the inflationary pressure in the near term. This is not the right time to increase the VAT as is being canvassed in some quarters as doing so will plunge the economy into deeper recession. The panacea for taming inflation in the medium to long term remains diversification of the productive base of the Nigerian economy.”

Furthermore, economist and ex-banker, Dr. Chijioke Ekechukwu, maintained that resuscitating the oil refineries was the right step to forestall further inflationary trends.

According to him, “Increase in Inflation rate is one of the indicators or outcomes of economic downturn. 16.5 per cent inflation rate therefore is not the least rate to expect. We will expect that banks’ lending rates will continue to rise for the fact that liquidity is threatened and the inflation rate is rising also.”

He said: “Firstly, we need to identify the factors influencing this rise. One of the factors is the instability in the foreign exchange market. An importer buys his products at the exchange rate of N320 per dollar and before the goods come in, rates have risen to N340 per dollar. Apart from increasing his price when he is selling, he will panic before he imports again. The second reason for the high inflation is the non-availability of foreign acceptable currencies for international trade and lack of understanding and clarity of new FX policies by the average middle profile importers who constitute about 65 per cent of total importers of the country.

“Thirdly, the continuous use of electricity generators due to incessant power outages will also increase inflation rate as cost of doing business in Nigeria continues to rise due to high cost of diesel. It currently sells for between N190 to N220 per litre. Fourthly, As far as we continue the importation of petroleum products, there will always be pressure on our foreign reserves and resultant pressure on the value of our currency which affects prices of goods and services. Petroleum products constitute the greatest chunk of our FX utilisation.

“The insurgency in the country which is causing the massive importation of military weapons and equipment takes a large toll of our foreign reserves. These equipment cost so much in value. The building of refineries therefore is the right step to forestall further inflationary trends. Every policy that will motivate exportation of goods and services should be encouraged. Local manufacturing should also be given urgent priority. Sometime towards the second quarter of 2017, I expect a reduction in the inflation rate or at least, stability in the rate.”

On his part, Executive Director, Corporate Finance, BGL Capital Limited, Mr. Femi Ademola opined that the way forward was to lower interest rate and provide affordable funding to the real sector to help domestic production to substitute imports.

He said:” The spike in inflation is expected. With the Naira depreciation and the low supply of products compared to demand, inflation will always go up. As an import-dependent nation, the exchange rate situation leads to a general price increase of all imported goods.

“And the fact that we are experiencing this despite credit constraints to the real sector may have further supported the theory that inflation in Nigeria is not liquidity induced hence the high interest rate is counterproductive. We need to put in place the needed infrastructure and fiscal adjustment to support production and hence lower inflation.

The way forward is to lower interest rate or at least channel affordable funding to the real sector to help domestic production to substitute imports.”