Single-digit inflation: CBN’s proactive approach


By Ayobami Adedinni

The Nigeria economy of recent has showed some improvement in the first half of 2017 compared to a contractionary 2016 which saw a relatively worse economic performance, emerging from its first recession in 25 years.

Analysts have given a credit to the Central Bank of Nigeria (CBN) under the leadership of Mr. Godwin Emefiele, who by the way, had taken many knocks over the initial failings in the domestic economy.

The steady increase in global economy and improved crude oil prices played critical role in domestic economy recovery though International Monetary Fund (IMF), had predicted global economy growth in 2017 and 2018.

According to IMF, the global economic growth forecast for 2017 and 2018 by 0.1 per cent apiece, to 3.6per cent and 3.7per cent respectively – driven by improvement in trade, investment and consumer confidence.

The World Bank forecast Nigeria’s economy to grow by 1 per cent in 2017 – 0.2 percentage points below its forecast in April.

This development in domestic economy followed support from improved crude oil production due to relative calm in the Niger Delta region of the country as well as relatively higher crude oil prices.

Key stakeholders welcomed CBN’s measures aimed at improved foreign exchange supply, relatively lower foreign exchange rates, improved confidence levels and moderation in inflation rate among others, as key catalysts in the recent developments in the economy.

As part of Federal government and CBN effort to diversify the economy away from Oil & gas sector, the manufacturing and agriculture sectors were given priority by both monetary and fiscal authorities.

For Consumer Price Index (CPI) used in measuring Inflation rate, governors at CBN are often judged with how inflation rates were controlled during the period of their stewardship.

CPI represents an official confirmation of what is common knowledge to the ordinary Nigerian: that prices of goods and services in the country have hit the rooftop.

After all the number one priority of the Monetary Policy Committee (MPC) of the CBN is to lower inflation rate and create enabling environment for Foreign Investment in Nigeria.

National Bureau of Statistics (NBS), said Nigeria’s inflation rate since January 2017, dropped to 15.98 per cent in September from 18.72 per cent in January.

NBS had reported 16.01 per cent inflation rate in August from 16.05 per cent in July. The inflation rate was at 16.25 per cent and 16.1 per cent in May and June respectively. The rate for April was at 17.24 per cent; 17.26 per cent in March; 17.78 per cent in February.

The Bureau puts the blame for this disturbing trajectory largely on supply-side factors notably high costs of fuel, electricity, transport, food and imported items.

Analysts had attributed inflation hike in Nigeria to three fundamental variables: cost-push factors; excess-demand factors and increase in agreed money supply.

With limited policy options, the CBN is very much handicapped where the inflationary pressure is of the cost-push factors as the one being experienced in Nigeria today.

The rate of inflation in a country can have a major impact on the value of the country’s currency and the rates of foreign exchange it has with the currencies of other nations. However, inflation is just one factor among many that combine to influence a country’s exchange rate.

With above said, the CBN Governor during the weekend said he expected inflation rate to fall at a faster pace and hit high single-digit rates mid-next year.

According to him, “We are very optimistic that food prices will come down, and as they come down it will help to complement the reduction in core inflation.

“We are hoping that by the middle of next year we should begin to approach the high single digits,” he said. Around nine per cent would be a good target, he said.

Emefiele said as the economy began to hit thresholds on inflation and other gauges, he expected the MPC would begin to look at interest rate cuts a bit more favourably and think about easing.

“I would like to see low interest rates and I would like to see low inflation and I would be happy to see it as quickly as possible. When? I cannot categorically say.”

The CBN left its benchmark rate unchanged at 14 per cent at the last MPC meeting in September, to keep liquidity tight stressing  it felt that loosening would worsen inflation rate and drive bond yields negative which could lead to capital flight and hurt the local currency.

To achieve, a single-digit inflation rate, the CBN had done its home work on diversifying the nation’s economy away from Oil & Gas, reduce interest rate, strengthen the foreign reserves, supporting Investors & Exporters access to foreign exchange and support for Small and Medium Enterprises that tend to create employment.

The Apex bank continued to grow its financial inclusion polices, mandate commercial banks to donate five per cent of their profit to Agriculture/SMEs, among others.

The CBN left its benchmark rate unchanged at 14 per cent in 2017 and is expected to announce its next rate before the end of the year.

That the inflationary pressure has subdued following CBN weekly intervention at the foreign exchange market, underscores high output and reduction in unemployment.

A recent CBN report on economic activity in Nigeria indicates that the Purchasing Manager Index (PMI), a measure of manufacturing activity, increases for sixth consecutive month to 55.3 Index points in September 2017, indicating rapid growth in the manufacturing sector.

The apex bank based its composite PMI for the manufacturing sector on five indicators that include production, new orders, supplier delivery time, employment level and raw materials inventory.

The PMI report by CBN disclosed that “The employment level index in September 2017 stood at 52.8 points, indicating growth in employment level for the fifth consecutive month.”

It is obvious that the country’s economy has been revived with indicators to show.

A group of analysts at BMI Research, a Fitch Group of company forecasted 12 per cent Consumer inflation rate by 2017 and 10 per cent in 2018.

They stated that, “Slowing inflation and sluggish economic growth will encourage the Central Bank of Nigeria to adopt a more dovish stance when setting monetary policy over the coming quarters, prompting the beginning of the cutting cycle before year-end 2017. That being said, concerns over the normalization of monetary policy in developed markets and high levels of credit growth will temper the pace of easing.

“Nigeria’s CBN will continue to tightly manage the naira through 2017, as the country’s improving fundamentals indicate downside pressure on the currency is beginning to decline. That being said, the current multiple-rate foreign exchange regime is unsustainable beyond the short term, and will likely be consolidated into a single – more flexible – rate in 2018.”

What therefore is needed under this situation is a combination of monetary and fiscal measures aimed at removing supply side constraints.

Without prejudice to the outcome of the next meeting, the MPC would be well-advised to fine-tune a proper interest rate in a bid to further subdue the inflationary pressure as doing so would further hurt the effect of its weekly intervention and increase unemployment.

Analysts at FBNQuest said, “The improved access to foreign exchange (FX) through CBN’s sustained FX interventions and improved utilization of local input substitutes by manufacturers led to the continuous expansion in the manufacturing sector.”

Rather, the Committee should consider easing monetary policy with a view to stimulating economic growth and reducing unemployment. With significant growth in output, inflation will be tamed ultimately.

Perhaps, there is no better time than now to scale up the CBN’s developmental function targeting agriculture, infrastructure and small businesses.

While unveiling his plans for the apex bank shortly after assuming office in June 2014, the CBN Governor, had promised to “pursue a gradual reduction in interest rates” as well as focus on development banking with a view to creating jobs and reducing poverty.

Going forward, the panacea for taming the inflation rate monster in the medium-to-long term remains the diversification of the productive base of the nation’s economy into an exporting country ting country.


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