The buildup towards the 2019 general election and unrest in food producing states are two key factors that may hinder the Central Bank of Nigeria (CBN) to achieve a single digit inflation rate this year.
When inflation rate reached a record high of 18.72 per cent in early 2017 and instability rocked the nation’s foreign exchange, the Monetary Policy Committee (MPC) members of CBN were disturbed and considered possible means to ease pressure on the nation’s economy.
Since Inflation rate in Nigeria eased further to 11.23 per cent in June of 2018 from 11.61 per cent in the previous month, the CBN is now faced with other challenges, political spending and herdsmen attacks in key five food producing states.
Inflation Rate in Nigeria averaged 12.50 per cent from 1996 until 2018, reaching an all time high of 47.56 per cent in January of 1996 and a record low of -2.49 per cent in January of 2000.
According to analysts, the prevailing crisis in the food producing states in Nigeria is putting single digit inflation rate in 2018 on pressure.
They hinted that the attack is a major risk to the achievement of CBN’s single digit inflation rate in 2018.
According to FSDH report, “Although the inflation rate may continue to drop, it may remain in double digits in 2018. Under the current situation, they (FSDH Research) expect the inflation rate to end the year in the region of 10.4per cent.”
Coronation Research, a part of Coronation Merchant Bank Group, has said there are strong indications that the CBN will raise interest rate in fourth quarter (Q4) of 2018 to retain foreign portfolio investors in the country.
The company said Nigeria will have to offer a higher interest rates more than what the market currently offers to attract international investors looking for a return, and lock in domestic funds that might otherwise go to the foreign exchange market.
The governor of CBN, Godwin Emefiele, at the last MPC, noted that the downside risks to growth outlook include: continuing delay in the implementation of the 2018 budget; worsening farmer-herdsmen conflicts in some parts of the country; continued non-payment of workers’ salaries and pensions in some states; rising sovereign debt, as well as uncertainties surrounding the direction of trade, including the external demand for Nigeria’s oil.
The Independent National Electoral Commission (INEC) has scheduled the 2019 Presidential and National Assembly elections for Saturday, February 16, 2019, while the Governorship and State Assembly/Federal Capital Territory (FCT) Council elections have been scheduled for Saturday, March 2nd, 2019.
Emefiele also flagged the delayed passage of the record 2018 budget of N9.12 trillion ($25 billion) and pre-election spending as possible price risks in the second half of the year.
He explained that the members, called on the Bank to continue to build on the progress already made to sustain the moderation in inflation.
MPC, which is the highest policy making committee of the CBN is expected to achieve inflation rate that will engender productivity and sustainable development without creating undue instability in the economy.
While inflation rate has since slowed to below the monetary policy rate, the MPC has shifted from some members voting for rate cuts in January to three of 10 members favouring higher rates at the July meeting.
Meanwhile, the MPC members over time had voted to retain Interest rate also called Monetary Policy Rate (MPR) at 14 per cent; Cash Reserve Ratio at 22.5 per cent and Liquidity Ratio at 30 per cent, in a move to further slow down inflation rate.
Amid crisis to sustain the slowdown in inflation rate, the apex bank had consistently intervene in the foreign exchange, grant loans to key sector of the economy and drive agriculture productivity in some rice producing states.
However, the planned raise in its benchmark interest rate before the general elections might be considered as bail out to slowdown inflation rate as most analysts did not see that coming.
There is a scope that the MPC members might increase MPR before the February general elections.
Nigerian NewsDirect is not in support of hike in MPR and tighten policy in response to higher inflation rate.
The apex bank MPC members should initiate another fresh strategy at tackling inflow of foreign investors and stabilize the Naira.
The MPR might slowdown inflation rate and attract foreign investors, but the multiple effects, lending to domestic investors and common man on the street might not feel the effect of the hike.
After all, the federal government of Nigeria is not relenting in its efforts to curb the herdsmen attacks in affected states, which should be another impetus that the MPC should consider before increasing MPR.
We further urged the CBN to consider other economic tools in its framework to intervene in possible hike in inflation rate going forward.