For the managers of the Nigerian economy, last week, was eventful as the unabated rise in the inflation rate triggered a flurry of activities by political and economic leaders who began to initiate measures to retool the economy for better performance. However, the consensus is that the success of this endeavour will largely depend on how fast the nation can reactivate the productive sector of the economy.
One week after the release of the inflation figures for July by the National Bureau of Statistics (NBS), managers of the Nigerian economy are still grappling with the chain of events unleashed by the release of the data that put the current rate of change in prices of goods and services at 19.64 per cent, compared to the 18.60 per cent it was the previous month.
Interestingly, the problem of rising inflation was not peculiar to Nigeria as figures emanating from other jurisdictions are worrisome too. For instance, July’s inflation figures for July showed that Ghana, Angola, Rwanda, and Zambia recorded 31.70, 21.4, 19.60, and 9.90, respectively.
To mitigate the effects of the rising inflationary trends, the CBN, in a spontaneous reaction directed banks to raise the negotiable minimum interest rate payable on local currency savings deposits to 30 per cent of the Monetary Policy Rate (MPR) currently at 14 per cent, with financial analysts expressing doubts on the ability of the new policy change to tame inflation largely triggered by insufficient productivity in Nigeria.
However, the other end of the chain was the emergency meeting of the 36 states’ governors under the umbrella of the Nigerian Governors Forum, where the issue of the frightening dimension of the emerging challenges in the economy and the intractable problem of insecurity were the focus.
Reflecting the poor finances of the state government, the NGF meeting cenred on the affirmation of their rejection of the controversial deductions for Paris Club disbursement and the setting up of a Primary Health Care (PHC) Leadership Challenge Fund.
Analysts said the combative posture of the governors to the Paris Club payment controversy was a reflection of the desperate financial situation of most state governments while the leadership challenge fund could be seen as a rescue mission for the nation’s health sector.
The apex bank, in a letter in a circular dated August 15, directed commercial banks to review their interest rate to 4.2%, up from the 1.4% that the central bank had pegged the rate in 2020.
Inflation: 17-year High
According to the CPI report for July which was posted on the statistical agency’s website, the rise in food inflation was caused by increases in prices of bread and cereals, food products potatoes, yam, and other tubers, meat, fish, oil, and fat.
On a month-on-month basis, food inflation declined by 0.01 per cent to 2.04 per cent in July, which was an insignificant reduction compared to 2.05 per cent.
In Nigeria, like in other parts of the world, the condition of living is worsening as the costs of living soar. Analysts said apart from the widespread economic instability on the global scene, Nigeria has been witnessing inconsistency in its approach to some peculiar economic developments which eventually aggravate the nation’s problems.
Analysts from Financial Derivatives Company of Nigeria, for instance, argued that the July inflation rate put at a 17-year high of 19.64% did not come as a surprise to most Nigerians, pointing out however that what was baffling though, was that the monthly inflation rate seems to be tapering at a time when most consumers had virtually lost hope.
It argues that the current inflation rate is a reflection of consumers’ fallen capacity and the corresponding control of their appetites for consumer goods.
“Our analysis suggests that headline inflation may be approaching a point of inflection and the reasons are not far-fetched. Despite cost-push factors, consumers are resisting price increases because most Nigerians are broke. They are living on a shoestring, eating less, and switching to cheaper substitutes,” FDC analysts explained.
They, however, expect a marginal reduction in the inflation rate with the coming of the harvest season and the attendant decline in the prices of food.
According to them.“As the harvest season approaches, we expect prices to decline, especially because global food prices are down and Bonny light is now at $92pb, way below its high of $125pb. We are projecting that inflation could taper to 19.3% in September before falling further.”
Food inflation rose by 0.99 per cent to 22.02 per cent year-on-year in July compared to 21.03 per cent in 2021.
The NBS however attributed the decline to a reduction in the prices of some food items namely tubers, maize, garri, and vegetables.
The average annual rate of food inflation for the 12 months ending July 2022, over the previous 12-month average, was 18.75 per cent, which was a 1.42 per cent decline from the 20.16 per cent average annual rate of change recorded in July 2021.
Similarly, the “All items less farm produce’’ or Core inflation, which excludes the prices of volatile agricultural produce increased by 2.54 per cent to 16.26 per cent year-on-year compared to 13.72 per cent in 2021.
On a month-on-month basis, core inflation rose by 0.20 per cent to 1.75 per cent in July compared to 1.56 per cent recorded in June.
While the year-on-year inflation figure is rising, the NBS data showed that the monthly inflation is slowing. Analysts believe this is so because consumers are broke and so they are cutting down on their expenses. The slowing of monthly figures is also attributed to consumer resistance as they are now eating less. Other factors include the marginal improvement in naira value as well as a little reduction in the price of diesel from N820 to N775 per litre.
As Inflation Defies Interest Rate Hike
Economists who weighed the recourse to an interest rate hike as a measure of tackling the problem of rising inflation by the CBN described the policy action as ineffective because Nigeria’s headline inflation has continued to worsen despite the CBN’s attempt to hike interest rates.
When central banks raise interest rates, almost everyone is affected. Economic activity slows; unemployment often rises. Though savers can gain, borrowers lose. Mortgage payments go up; house prices can fall, they argued.
The CBN Governor, Godwin Emefiele, who spoke at the last meeting of the Monetary Policy Committee also confirmed the failure of previous increases in interest rates to tame inflation.
According to him, “The MPC noted with concern the continued aggressive movement in inflation, even after the rate hike at its last meeting, and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen the fragile recovery.”
Analysts from Nairametrics, who raised the issue of the futility of the past interest rate hike at moderating inflation, noted that the CBN raised interest rates to 14% in July 2022 compared to 11% in January 2022, recording a 27% tightening of MPR. In other words, despite multiple interest rate hikes by the Central Bank of Nigeria (CBN), inflation continues to rise, leading to the massive erosion purchasing power of Nigerians.
According to them, when a central bank raises interest rates, it attempts to impact consumption by raising the costs of borrowing, this is because of the assumption that reducing consumption will slow purchases and ultimately force suppliers to reduce prices to attract consumers.
However, the reality is this approach to tackling inflation via interest rates can only be relevant in countries where inflation is driven by consumption (i.e. countries with full employment and experiencing GDP growth fuelling price upticks due to consumer demand).
Tackling the Problem of Weak Productivity
The analysts argued that Nigeria’s inflation is the result of insufficient productivity which is now being compounded by an ultra-high spike in the money supply.
With the level of weak productivity which has manifested in virtually all the sectors of the economy, analysts said that traditional tools available to the CBN are not adequate to keep Nigeria’s inflation in check.
“In other words, rising interest rates cannot unilaterally improve growth, neither can raising the interest rates to create jobs for Nigerians nor address challenges across the various economic sectors from manufacturing to trade and services.”
Some analysts believed that the rate hike will encourage savings. They noted that before the interest rate rose to 4.2%, its level of 1.4% had discouraged people from saving, as it wasn’t lucrative and made savers pay the bank for saving. However, the new rate will see money kept in banks grow in value.
Despite this positive assumption, some analysts said tackling inflation in Nigeria is beyond the monetary authorities. They pointed out that while managing the prices is the duty of the Central Bank, the fundamental cause of the problem will require a response from the fiscal authority, both politically and otherwise. They also maintained that the will to curb oil theft and other insecurity issues should be unambiguous while implementable tasks should be developed and actioned immediately.
According to them, many factors impact a country’s productivity. Such things include investment in plant and equipment, innovation, improvements in supply chain logistics, education, enterprise, and competition. Explaining that higher productivity increases wages, they advised that Nigeria needs to temporarily reduce consumption to make investments that will increase productivity and support more consumption in the future.
