Warm reactions have continued to trail the recent marginal reduction in Nigeria's inflation rate for the month of July but economic experts say the positive signal is not sufficient enough for the relaxation of the prevailing monetary policy rates.
There are indications that the stringent monetary policy put in place by the financial authorities in recent times may have succeeded in insulating the nation's economy from the anticipated inflationary pressures expected from the regime of new tariffs rolled out by the federal government in the course of the year. Economic watchers a fortnight ago heaved a sigh of relief when inflation figures for the month of July was recently made public by the National Bureau of Statistics, showing an unbelievably good CPI print, with headline inflation actually decelerating from June's 12.9% y/y, to 12.8% y/y. The Consumer Price Index (CPI) is an indicator of changes in consumer prices. It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased by consumers. Since the basket contains goods and services of unchanging or equivalent quantity and quality, the index reflects only pure price change.
Below Projection
Some analysts had predicted a jump in inflation rate for the month of July on the back of new tariffs on imported food, especially rice and wheat as well as other price pressures related to Muslim Ramadan fast period, which started in July. These measures were expected to significantly affect cost of living at a period when Nigerians were experiencing the reality of the twin effects of the partial fuel subsidy removal and June's electricity tariff increase. Before the latest inflation figure was rolled into the public domain, some analysts had come up with a forecast which favoured a rise of 1.5% m/m, with headline CPI rising 14.1% y/y (possibly the peak in inflation this year) based on the regime of new tariffs.
One of those taken by surprise by the fall in inflation rate for the month of July was Head of Macro-Economics and Regional Head of Research for Africa, Standard Chartered Bank, Razia Khan, who explained that apart from the pressures from recent tariff increases, the month of July normally sees a sizeable increase in the gain in the overall CPI index, before the country's harvest starts to have a more favourable impact. Going down memory lane, Khan said: "Although the past is never a perfect guide to the future, it is worth noting that the rebased CPI index rose 1.9 points in July 2008, two points in July 2009, and 1.1 in July 2010. Although July 2011 saw a smaller increase of 0.4 in the headline index, this year, amidst all of the pressure that we might have anticipated, we saw a pretty benign rise, with the index up only 0.4 points once again from June."
The Standard Chartered chief was also surprised that rather than strangulate the economy, the recent monetary tightening did not put pressure on the economy by the time the July inflation figure came out. She said: "Given the naira weakness in place over the survey period (before the CBN's most recent increase in the cash reserve ratio), one might have expected even more pressure, even given relatively subdued money supply growth. Apparently, this was not the case, with core inflation decelerating to 15% y/y from June's 15.2%.
No Going Back on Tight Monetary Stance
"So what should we expect going forward? First, although the slowdown in GDP growth as well as the tight monetary environment both provide reason to expect more benign price pressures going forward, we're still a bit stumped as to why supply-side factors - long the principal cause of 'inflation' in Nigeria - are not having more of an effect."
However, for those thinking the marginal improvement in the July inflation figures will automatically influence the monetary authorities to loosen their grip on the monetary policy at the next meeting of the Central Bank of Nigeria's Monetary Policy Committee meeting slated for next month, Khan said the prevailing realities do not favour a change of course by the apex bank, at least for now. She believed the modest improvement in the nation's economy notwithstanding, consideration would be given to the quest to build the nation's foreign reserves, especially given the shock brought about by the recent volatility in the crude oil market and the attendant depletion of the foreign reserves.
She said: "Looking at things holistically, we do not believe that we will see a move to ease monetary policy, even following this inflation print. Inflation remains in double digits for now, leaving little room for complacency. While the slowdown in the economy may exert more influence on the price level in the future, it is not a given that we will see this offsetting supply-side drivers of inflation, especially in the event of further fuel price adjustment - which is becoming more of a budget necessity."
According to her, "monetary policy is tight not because of these supply-side factors. Policy was tightened to allow for foreign exchange stability in the face of a potential worsening of second-round inflation effects. Rebuilding external reserves given global uncertainty remains the key policy priority, without it Nigeria cannot achieve foreign exchange stability - its key safeguard against higher inflation. To the extent that tight monetary policy allows for the rebuilding of reserves to continue, we think it will be maintained. Nigeria may have seen a more benign July inflation print than we had expected, but global uncertainty and downside economic risks have hardly diminished."
Like Khan, Like Mhango
Khan's position was shared by Sub-Saharan Economist with the international financial advisory firm, Renaissance Capital, Yvonne Mhango, who admitted that the July inflation was below Rencap's projection of 13% YoY although, there appeared to be a tinge of doubt over the veracity of the formula used for the latest figure.
According to her, "Nigeria's inflation decreased slightly to 12.8% YoY in July, from 12.9% YoY in June. It is noteworthy that the July's inflation came in below our projection of 13.8% YoY, which was also the consensus expectation. The market was evidently expecting inflation to come in higher. We think Nigeria's inflation is understated and the main reason for this is the rural and urban composition of CPI. (Recall Nigeria uses population weights to calculate CPI - an uncommon practice.) Urban inflation increased to 15.6% YoY in July, while rural inflation eased to 10.7% YoY. Evidently, the moderation in July's inflation was largely due to the slowdown in rural inflation, which is typically lower than urban inflation, Mhango stated.
In her estimation, core inflation, which excludes farm produce, is significantly higher than headline inflation at 15.0% in July. This implies farm produce is actually the disinflationary factor that is pulling down headline inflation, due to significantly lower inflation for farm produce.
"We expect inflation to remain in the early double-digits region in the short term, partly due to government spending and rising global food prices. (Imported food makes up 13% of Nigeria's CPI basket)," she submitted.
In Favour of the Statusquo
And like Khan, Mhango said Rencap expects the MPC to keep the policy rate unchanged at 12% at the next MPC scheduled for late September, more so because it appears as though inflation will stay within the CBN's 2012 target range of 11-14.5%.
The latest figures released by the Statistician-General of the Federation, Dr. Yemi Kale, showed that Nigeria's urban inflation rate worsened in July whereas inflationary rate at the rural areas declined from 11.4 per cent in June to 10.6 per cent in July. Urban inflation rose from 15 per cent in June to 15.6 per cent in July. According to the latest figures released by the National Bureau of Statistics (NBS), there was a sharp increase in July in the Composite Food Index. It increased year-on-year by 12.1 per cent to 138.1 points. The index was also higher than levels recorded in June of this year by 0.3 percent.
"The appreciation in the food Index was as a result of an increase in the price of oils and fats, vegetables, soft drinks, as well as fruit classes. The latter being a key dietary component during the traditional break of the fast during the period of Ramadan. Also, prices of wheat, flour, and associated by-products partially contributed to the rise in the food index. This came as the import duty on wheat grains and flour increased effectively by 20 per cent and 100 per cent respectively in July," said the statement by Dr. Kale.
Kale said that the average annual rate of rise of the index was 11.0 per cent year-on-year for the 12-month period ending July.
In its analysis of the current inflationary trend, Proshare, an online financial and capital market watchdog, noted that y/y change in inflation recorded in 2012 has remained at persistently higher levels when compared to the previous fiscal year due to base effects. "Headline inflation rate trended lower in 2011 with an average inflation rate of 10.9% in comparison to the 13.8% recorded in 2010.
The upward trajectory in inflation was expected against the backdrop of the recent increase in electricity tariffs (June 2012) as well as the lingering effects of the partial removal of subsidy on premium motor spirit (PMS) on household incomes and the rapid draw down of stored food products during the planting season early in the year, which pushed food prices higher in the broad economy.
However, we are inclined to highlight that although the CPI has generally risen, its increase has been at a slower rate in the last three months. The headline index recorded m/m changes of 0.75%, 1.15% and 0.24% in May, June and July respectively while the food index recorded m/m changes of 1.2%%, 0.5% and 0.3% and core index was recorded at 1.1%, 1.0% and 0.1% during the same period," Proshare said.
It maintained that real rate in the economy remains positive given that average yields on government bonds and treasuries are ahead of inflation by c. 289 and 207bps respectively.
It said, "Ahead of the release of the GDP growth rate for the second quarter of the fiscal year, we still maintain our stance on gradual reduction of the Monetary Policy Rate to single digit levels to stimulate economic activities, grow the domestic bond market and provide for sustainable growth.
We also reiterate the need to aggressively grow external reserves to help cushion the economy against domestic and external shocks as we note that the global economy will decelerate further this year due to the protracted debt crisis in the Euro-zone. As at August 15 2012, Nigeria's external reserves stood at c.US$36.9 billion, up 5.59% from the corresponding period in 2011".
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