Nigeria: Analysts Seek Better Security, Productivity As Inflation Rises to 12.82 Percent

A commercial tricycle operator operating along Tafawa Balewa Square in Lagos Nigeria
18 August 2020

Analysts yesterday urged the federal government to end the incessant bandit attacks on farming communities as well as pursue an aggressive implementation of the Economic Sustainability Plan (ESP) to address the impact of rising inflation, which peaked at 12.82 per cent in July.

They charged both monetary and fiscal authorities to respectively deploy policy tools in tackling inflationary pressure as well as stimulate the critical sectors of the economy to boost productivity and production.

The analysts who spoke in separate interviews with THISDAY also urged the Central Bank of Nigeria (CBN) to among other things focus on how to improve liquidity in the forex market, particularly through the ongoing unification of exchange rates.

The Consumer Price Index, (CPI), which measures inflation increased to 12.82 per cent (year-on-year) in July compared to 12.56 per cent in the preceding month, representing the highest rate in 29 months, according to the National Bureau of Statistics (NBS).

However, Professor of Finance and Capital Markets at the Nasarawa State University, Keffi, Prof. Uche Uwaleke, said the rising inflation amidst the downturn in economic activities was worrisome.

He described it as a "stagflation, which further complicates monetary policy against the backdrop of forex market illiquidity and rising unemployment similar to the country's experience during the 2016-2017 recession."

He attributed the upward inflationary trend to commodity prices of increase in VAT and the pump price of fuel, border closure, COVID-19 impact on supply chains and insecurity in the food belt regions of the country as well as a reflection of the high exchange rate.

Uwaleke, a former Imo State commissioner of finance, urged the CBN to continue to maintain the status quo on policy parameters.

"There is no doubt that the CBN has done a lot in the pursuit of its developmental function to stimulate the growth of the agriculture sector in particular.

"I am confident that in the coming months, the impact of these interventions, including the recent non-interest financing schemes for the agriculture value chain, will reflect on bountiful harvest and help moderate the inflation rate," he stated.

He said the best way to check the rising inflation was to synchronise monetary and fiscal policies in addressing the major inflation driver, which is the food component that is in excess of 15 per cent.

Uwaleke said: "On the fiscal side, it is important that the government puts on its fighting gloves to wrestle the incessant bandit attacks on farming communities even if it means overhauling the entire security apparatus."

Also, an economist and former Director-General, Abuja Chamber of Commerce and Industry (ACCI), Dr. Chijioke Ekechukwu, blamed the inflationary pressure on forex, low oil price and effects of the VAT increase.

He said: "We need to identify the causes of the rise in the inflation rate. Top on the list is the exchange rate, which is rising in reaction to demand and supply of foreign currencies.

"Revenue base of the country is threatened by low demand for oil and drop in its price. This has caused the exchange rate to rise. The supply chain of goods and services were also distorted at the period of lockdown.

"This affected prices of goods and services. The effect of the VAT increase also had its effect on prices. The inflation rate, therefore, will continue to rise until all the factors affecting supply and demand are controlled.

"From the monetary policy perspective, the higher the money in circulation, the higher the price of goods and services. All the monetary policy tools should be used to address this. On the fiscal policy side, the critical sectors of the economy must be given stimulus packages to stimulate productivity and production."

However, Head of Research, United Capital, Mr. Wale Olusi, predicted inflation to rise to 13.06 per cent as a result of the underlying factors.

He said: "For the month of August 2020, we do not see any relief in sight as pressure on the headline inflation is expected to be sustained given that fundamentals remain the same. For food inflation, as land borders remain closed, we expect the resulting food deficit to persist. Similarly, the core-inflation sub-index is foreseen to continue the northward trend.

"Firstly, CBN's continued suspension of FX sales to BDC and the illiquid status of the Investors and Exporters window remains, which we expect to continue to spur demand at the parallel market, keeping exchange rate high and driving up corporate cost components as well as the cost of imported cost.

"Also, the modulated monthly petrol wholesale price increased to N138.62 in August, bringing the retail price band to N150-N157 versus N140.8-N143.8 in July 2020. Bearing these key factors in mind, we expect month-on-month inflation to come in at 1.2 per cent in August 2020, bringing headline rate to 13.06 per cent."

Also speaking to THISDAY, an economist, Dr. Muhammad Rislanudeen, said the country's post-2014 GDP rebasing tax to GDP ratio remained "very low" at about eight per cent compared to other African countries.

He said: "This underscores the imperative for more effective and efficient tax initiatives to support government finances.

"However, in the era of the pandemic, it will be more optimal to make existing tax collections more effective and efficient and also by bringing more individuals and companies into the tax net. IMF projected the economy to go into recession by -5.4 per cent in 2020. It will be difficult to raise taxes in a period of potential recession."

Food, Commodity Prices Worsen Inflation

The NBS, however, attributed the 0.26 per cent uptick in the headline index to increases in all the parameters that determine inflation.

According to the CPI figures for July, which was released yesterday, the composite food index increased to 15.48 per cent in July 2020 compared to 15.18 per cent in June in the review period.

The food sub-index increased by 1.52 per cent in July 2020, up by 0.04 per cent compared to 1.48 per cent recorded in June.

According to the statistical agency, the rise in the food index was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, meat, fruits, oils and fats and fish.

On the other hand, core inflation, which excludes the prices of volatile agricultural produce, stood at 10.10 per cent in July, down by 0.03 per cent when compared with 10.13 per cent recorded in June.

The core sub-index increased by 0.75 per cent in July, down by 0.11 per cent when compared with 0.86 per cent recorded in the preceding month.

Core inflation was fuelled by the highest increases in prices of medical services, passenger transport by air, pharmaceutical products, hospital services, passenger transport by road, maintenance and repair of personal transport equipment, paramedical services and vehicle spare parts.

The urban inflation rate increased by 13.40 per cent (year-on-year) in July from 13.18 per cent recorded in June while the rural index increased by 12.28 per cent in July 2020 from 11.99 per cent in the preceding month.

The NBS stated that on a month-on-month basis, in July, all-item inflation was highest in Kogi 2.85 per cent, Zamfara 2.44 per cent and Yobe 2.35 per cent, while Ondo 0.67 per cent, Adamawa 0.63 per cent and Ogun and Imo both 0.62 per cent recorded the slowest rise in the headline index.

Year-on-year, however, all-item inflation was highest in Bauchi 16.10 per cent, Kogi 15.90 per cent and Sokoto and Plateau 15.20 per cent, while Lagos 10.70 per cent, Adamawa 10.60 per cent and Kwara 10.50 per cent recorded the slowest rise in headline inflation.

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