Report Explains Why CBN Must Reduce Interest Rate in 2018

• Energy Crisis threatens to spike inflation rate

Obinna Chima in Lagos and Ndubuisi Francis in Abuja

A report by the Financial Derivatives Company Limited (FDC), which did a comparative analysis between the economies of Nigeria and Ghana in 2017, has advised the Central Bank of Nigeria (CBN) to embrace an accommodative monetary policy stance and reduce interest rate.

The FDC, in the four-page report titled: “Different Strokes for Different Folks: Lessons from Next Door (Ghana),” showed that while unemployment as well as underemployment in Nigeria currently stands at 40 per cent, that of Ghana is 21 per cent.

Nigeria’s population is about 190 million, while that of Ghana is about 28 million.
However, the report pointed out that in 2016, Nigeria and Ghana suffered from similar commodity shocks of oil, cocoa, gold and aluminium.

Both countries saw sharp drops in economic growth, spikes in inflation and currency weaknesses.
Owing to this, both countries adopted drastic steps of fiscal consolidation and international borrowing.

In fact, Ghana went further to raise approximately $1 billion from the InternationalMonetary Fund (IMF), under a four-year extended credit facility programme. The Ghanaian fund raising was further complicated by its closeness to a general election and the Nigerian economic plan is a work in progress.

It added: “As both countries began to see slow improvements in their economic fortunes, they adopted diametrically different approaches to monetary policy.

“The Bank of Ghana eased and lowered interest rates four times in 2017, whilst Nigeria maintained status quo (contraction) in the last 12 months.

“The outcomes are outstanding and tell a stark story of how you can achieve different levels of economic success by being bold, audacious and smart.”

Ghana’s growth spiked from 1.1 per cent as of the second quarter of 2016 to 9.3 per cent in the third quarter 2017, one of the highest in the world. Similarly, the report showed that inflation in Ghana has dropped by 7.5 per cent (from last year’s peak of 19.2%) to 11.7 per cent.

It said: “Ghana was in the league of high inflation countries in the world and has dropped off that ignominious table; its currency has softened by 6.79 per cent this year.

“However, its growth numbers are distorted by its low oil production base in 2015. Nonetheless, the Ghana economic story makes the Nigerian economic management strategy look amateurish and pathetic,” it explained.

On the other hand, Nigeria’s inflation slowed cumulatively by 2.82 per cent and growth of 1.41 per cent was described as suboptimal, fragile and uneven.

According to the report: “Unemployment plus underemployment in Nigeria have spiked to record levels of 40 per cent. The naira has strengthened by 42.47 per cent (year to date) and external reserves have grown but so also is the external debt level.

“The fast-paced growth recorded in Ghana, within a short space of time, signifies the need for Nigeria to embrace an accommodative stance, reduce interest rates and increase liquidity to boost its recovery.
“This has the downside of a weaker currency and heightening inflationary pressure. But as the saying goes, the end justifies the means. According to Keynes, in the long run, we are all dead.”

But the CBN Governor, Mr. Godwin Emefiele, had in justifying the need for retaining its restrictive monetary policy regime at the last Monetary Policy Committee (MPC) meeting, explained that although loosening interest rate would strengthen the outlook for growth by stimulating domestic aggregate demand through reduced cost of borrowing, it could, however, aggravate upward trend in consumer prices and generate exchange rate pressures.

He explained: “Loosening would worsen the current account balance through increased importation. On the argument to hold, the committee believes that key variables have continued to evolve in line with the current stance of macroeconomic policy and should be allowed to fully manifest.”

Meanwhile, there are fears that the current nationwide scarcity of petrol, which has culminated in a spike in transport fare as well as a rise in the prices of other goods and services may worsen inflation rate in the country.

The current energy crisis reared its head in the second week of December and might affect the monthly inflation report of the National Bureau of Statistics (NBS) expected to be released in January 2018.
For ten months in a row, inflation rate has been on a steady decline after peaking at 18.72 per cent in January 2017.

Even without the current energy crisis, the last figures released by the NBS for the month of November indicated a marginal drop, a mere 0.01 per cent from 15.91 per cent recorded in October to 15.90 per cent in November.

But one noticeable feature of the last inflation figures was that high year-on-year food prices and food price pressure continued into November though consistently at a slower pace month-on-month.

The Food Index increased by 20.30 per cent (year-on-year) in November, down marginally by 0.01 per cent points from the rate recorded in October (20.31 per cent).

The November drop in inflation, the tenth consecutive disinflation (slowdown in the inflation rate) though still positive in headline year-on-year inflation since January 2017 saw increases in all
Classification of Individual Consumption by Purpose (COICOP) divisions that yield the Headline Index.
On a month-on-month basis, the Food sub-index increased by 0.88 per cent in November, up by 0.03 per cent from 0.85 per cent recorded in October.

Speaking on the possible impact of the current fuel crisis on the December inflation rate, Associate Professor and Head, Banking and Finance, Nasarawa State University, Dr. Uche Uwaleke, said he would be surprised if both the core and food indexes do not rise primarily due to the fuel scarcity.

Uwaleke told THISDAY: “Regarding what to expect for the month of December, I expect a spike in headline inflation in December, which is bound to continue into January 2018 since consumers are depending more on the costly ‘black market’. Also, I foresee both rural and urban inflation rising in December.
“Unlike the previous months, rural inflation will likely record a higher rate of increase due to the influx of people into the rural communities this festive season.”

Speaking generally about economic performance in 2018, he predicted a marginal improvement over 2017.
He argued: “Because government revenues are still highly dependent on the oil sector, it is a no brainer that the performance of the economy in the New Year will be powered by the outcomes in the international crude oil market.”
According to him, the decision of the Organisation of Petroleum Exporting Countries (OPEC) to extend the output cut agreement through 2018 provides a guarantee that the crude oil price will stay above the budget reference price of US$45 per barrel.

He, however, cautioned about the flip side, warning that the sustained oil price increase would lead to high cost of importing petroleum products.

The Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Mr. Maikanti Baru, was reported to have said recently that the current landing cost of petrol was N171 per litre, a development compounded by hoarding, diversion and cross-border smuggling, on account of the wide price differential between Nigeria and neighbouring countries, pushing up demand for PMS in the country to over 50 million litres per day.

Uwaleke said: “Whichever way the present crisis is resolved, the negative effects of the current fuel scarcity will likely linger into the first quarter of 2018. Headline inflation, which is beginning to prove sticky downwards, will spike in January. In response, the Monetary Policy Committee members in their meeting of January (that is, if a quorum is eventually formed) will leave the policy parameters (namely the Monetary Policy Rate at 14 per cent, Cash Reserve Ratio at 22.5 per cent and Liquidity ratio at 30 per cent) unchanged. There will be no significant departure from this monetary policy stance even during the MPC meeting of March 2018.”