As inflation rate simmered down to single digit in January, Obinna Chima examines details of the National Bureau of Statistics (NBS) report and wonders if the level can be sustained.
Inflation in Nigeria, which has stubbornly hovered around double digits, fell to nine per cent in January, the lowest in over four years.
The last time the Consumer Price Index (CPI), which measures changes in the price level of consumer goods and services purchased by households got close to its current position was in July and August 2011, when inflation declined to 9.4 and 9.3 per cent respectively.
High inflation distorts consumer behaviour. It can also destabilise markets by creating unnecessary shortages. Similarly, high inflation which is not the desire of any economy redistributes the income of people and brings about weak purchasing power.
That is why the Central Bank of Nigeria (CBN) and other central banks globally, are never comfortable with this 'evil.'
The CBN had adopted restrictive monetary policy in the past 20 months as part of efforts to achieve the battle against double-digit inflation.
In fact, the apex bank has left its monetary policy tools such as the monetary policy rate, cash reserve requirement and liquidity ratio at double digits, in line with its war against inflationary pressure in the country. Beside all these, the banking sector regulator had also resuscitated its Open Market Operation (OMO) and has continued to mop up excess liquidity from the market.
CBN Governor, Mallam Sanusi Lamido Sanusi, has never hidden his utter disdain for double-digit inflation.
Sanusi stressed recently that attaining a single-digit inflation rate would not place the economy's growth or stability at risk, saying that the apex bank wanted the inflation rate to drop "as quickly as possible."
Some African countries have been able to manage inflation with the single-digit band. For instance, Ghana's inflation for January stood at nine per cent, South Africa's 5.40 per cent and Angola 8.90 per cent.
Nevertheless, some experts have argued that sustaining single-digit inflation would be difficult unless the Nigerian economy is diversified and productive.
Details of the NBS Report
According to the National Bureau of Statistics (NBS), the CPI dropped by 300 basis points to nine per cent year-on-year in January from 12 per cent in December 2012.
The NBS also explained that the core inflation index also decreased to 11.3 per cent from 13.7 per cent in the previous month. The bureau, however, attributed the 25 per cent drop in CPI to base effects including lower food prices.
"These are as a result of higher price levels in the previous year, which imply that the year-on-year changes exhibited this year will be muted. In particular, the Nigerian economy exhibited several shocks in January 2012. The partial repeal of the premium motor spirit ( petrol ) subsidy led to increases in transportation costs as well as secondary effects, as the transportation costs affected both food and non-food prices.
"There were also the civil protests that followed, and the man-made price gouging during the month, as merchants tried to take advantage of temporary shortages. The resulting base effects - the relative lower rise in year-on-year changes exhibited in January 2013- is particularly noticeable in the decline in the Core index, decreasing to 11.3 per cent in January (from 13.7 per cent in December)," it had said.
The NBS, said further that the relative moderation in the headline index in January was helped by declines in seven out of the 12 United Nations Classification of Individual Consumption by Purpose (COICOP) divisions, as well as declines in major the Food and Core sub-indices.
Maintaining Single-digit Inflation
To analysts at FSDH Merchant Bank Limited, the structural bottlenecks in the economy, if not addressed, would continue to cause inflationary pressure in the economy.
The firm stated: "Investors in fixed income securities and other fund managers consider inflation rate in making investment decision. We note that the supply bottleneck and rigidities in the economy may make the achievement of a sustainable single digit inflation rate in Nigeria a difficult task. An economy of this nature should be self-sufficient in terms of food production if appropriate policies are in place to encourage the use of modern farming techniques.
"We hold the view that rejuvenating agriculture in Nigeria will not be possible until the development of a good transportation system (road, sea and rail); increasing electricity generation that can support appropriate storage facilities of farm produce; appropriate funding of the universities of agriculture where intensive research can be carried out to improve farming processes to increase production.
"Adopting these measures, to position agriculture, will enable it produce enough to feed the nation and meet the intermediate input requirements of the manufacturing sector to reduce costs and thus position the economy on a path of sustainable single digit inflation rate regime."
On his part, the Africa Economist/Managing Director, Economic and Market Analysis, Citibank, Mr. David Cowan, argued that inflation might pick up again in the coming months and then trend down in the second half of the year.
Cowan explained: "The fiscal side is still under huge amount of pressure. If you are thinking from a planning purpose about Nigeria's inflation, what I always tell people is that there is only one period in history that we have seen Nigeria's inflation falling to single-digit. So if you are making a long view of inflation, then probably around 10 per cent inflation for the next few years is logical.
"But the volatility of inflation in Nigeria has fallen significantly and is becoming more stable. That actually makes planning easier. But I will still be surprised to see inflation stay at single digit for a long period. It is generally assumed, not just in Nigeria, but in most African countries that the weakening of the exchange rate will lead to a surge in inflation. But that seems to be quite contradictory."
Also, a former President of the Chartered Institute of Bankers of Nigeria (CIBN), Mr. Okechukwu Unegbu, opined that unless the high rate of unemployment in the country was addressed, inflationary threat would persist.
"Even though in the past one year, exchange rate has been stable, the rate of unemployment in the country is alarming. Other indicators like retail price index, wholesale price index are still inching up.
"As a country, we need to do a lot to maintain single-digit inflation. Nobody is addressing the issue of unemployment. If the middle class is doing well, it will help to push down the rate of inflation, but we are not making efforts to create jobs," Unegbu stressed.
However, A former Director of Research and statistics, CBN, Dr. Joseph Nnanna, expressed optimism that inflation would remain at single-digit if food harvest was sustained.
According to him, "Inflation in Nigeria is largely driven by food. If the food harvest is kept on track, inflation would continue to fall as long as monetary policy is on course and fiscal policy is properly managed. I believe that single-digit inflation in Nigeria is due."
But analysts at the Consolidated Discount Limited (CDL) noted that the NBS figures suggested that we might still experience pressure on prices in 2013.
The firm further explained that the NBS' outlook also signified that inflation rate might even rise further by over 160 basis points from its current nine per cent position to about 10.6 per cent by the end of this quarter.
The CDL report added: "Thus the MPC may be reluctant to cut rates for now. The increase in the benchmark price for crude to $79 per barrel also suggests that there are still strong inflationary pressures ahead that may also make the committee adopt a cautious stance on monetary cuts in its next meeting.
"Interestingly, the NBS' inflationary outlook is premised on the existing tight monetary stance of the CBN and the stable fuel prices which some have argued could be tinkered during the year.
"With the inflation rate dropping to nine per cent, the real yields on the benchmark bonds and treasury bills are in the positive region again. This increases opportunities in the government securities market especially for local institutional investors. However, risks abound. Yields on FGN bonds are within a range of 10.2-10.7 per cent. On the other hand Treasury Bills seem to offer more volatility trading between 9.7-11.1 per cent. These yields indicate that real yields on FGN bonds are over 100 basis points."