The looming global recession may affect Nigeria’s 2019 budget, economy – Adi, economist expert at LBS

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Bongo Adi

Bongo Adi, is of the Economics Faculty, Lagos Business School(LBS), Pan-Atlantic University (formerly Pan-African University).  In this interview with KAYODE TOKEDE, he said the looming global recession may affect Nigeria, linking it to factors affecting dwindling nation’s foreign reserves. He also highlights reasons Nigerians are not feeling 42-month decline in inflation rate.  

Despite the decline in inflation rate, the prices of goods and services are still on high side. Why is it that Nigerians are not feeling the impact of inflation rate depreciation this year?

You know inflation is not calculated using all the goods in the market. If you continue to focus on the prices of specific commodities, you may capture or observe the trend of decline in prices. Inflation that is reported is the Consumer Price Index (CPI).

So, inflation is usually the percentage change in the cost of certain basket of goods and services by the average consumer which is the CPI. So, the rest of change on that may be monthly or annually is what is reported as the inflation rate.

What we need to look at now is what constitutes or what makes up that basket. For that basket, we are looking at basic commodities like foods, housing, transportation, clothing, communication and other essential things. So, if you go through that, you would notice that to a certain extent, the price has not increased, but had gone down when you are looking at the aggregate.

Of course, it is important to disengage between headline inflation, the core inflation and food inflation. Now, when you add up the core inflation with the food inflation, you are going to get the headline inflation which is what the National Bureau of Statistics (NBS) has reported.

If you now take away the food-specific inflation which is usually higher because the food inflation has been going up but like we are in August, foods like yam and all of that have started to come in, you will expect that food inflation rate has started to go down. So, as a result, you would see that dragging the total inflation rate a little bit lower due to the decrease in the food inflation component of the total inflaton rate.

I can tell you these things are seasonal. During the planting season, food inflation really goes up, after the planting season, when we begin to harvest, that means the scarcity in food production is going to reduce, and then if transportation is also included, we can also say that to an extent, interstate transportation has improved a bit because this government has also invested in that. So, if you look at the interconnecting road has actually improved but of course, we had some bottleneck like Fulani herdsmen, and bandits on the road that has limited movement of goods.

But we still experienced that food inflation has gone down and I think that is what contributes to further drop in the inflation rate.

On the impact 

Well, the impact is that if you go to the market, for instance, you would see that new yam is coming up, new crops are coming, the price of rice has gone down. If you look at it the price of rice, it has dropped from N25,000 to N15,000 which is the cheapest in a very long time for about three years after the recession.

During the recession, the price of rice went from N9,000 and doubled to N20,000 but now it has gone down because Lagos state has brought in some local rice into the market and some other state s as well. I think it is on that basis that the President Buhari asked the Central Bank of Nigeria (CBN) to curtail disbursement of foreign exchange to importers of food.

Again, if you look at the food shortfall in Nigeria, it is massive and it does not make sense to curtail importers of food access to foreign exchange but I can understand government has different objectives in different areas.

So, for the people to feel the impact, it depends because people living in a place like Lagos, prices tend to be higher in some areas. So, it depends on the place where one is. When it comes to local goods and services, prices are significantly lower in the northern part than a place where you have higher level of congestion and high aggravated demand for everything.

Is it possible for the CBN to achieve a single-digit inflation rate this year or next? 

That has been the apex bank target and then we are seeing that happening. To compare the Monetary Policy Rate (MPR) with inflation, you can see that finally the inflation line is trending below MPR over the past two years.

I think this started to happen as soon as inflation got below the MPR which was 14 per cent in late last year when it was reviewed to 13.5 per cent.

So, you can see that trend continued. Again, you need to be looking at the stability in the foreign exchange market. So, as long as oil price remains stable, it means that the government has buffer in which they can continue to defend the currency even though we say we do not need to worry about inflation because it is not our problem in Nigeria.

What we need to look at is the treasury inflation which begins to penalize productivity. Right now, CBN is focusing on achieving the single digit inflation rate not minding the cost of the real sector. So, you can see the content on borrowing. Credit to the private sector is abysmal, is almost negative.

This means that it is not really happening. The CBN has done a lot in the lending market with a sectoral targeted policies. I can mention CBN’s intervention in Agriculture, Manufacturing, Textile, Small & Medium Enterprises (SMEs), among others. The apex bank is disbursing loans to these specific sectors at below market rate. The MPR is 13.5 per cent but CBN is giving out loans to these sectors at nine per cent.

Meanwhile, commercial banks cannot compete with CBN. Then, how many people have access to CBN’s intervention. CBN has created a distortion in the market.

I think CBN should create a policy that will sensitize private sector to drive the knowledgeable fund match and not interfering in the market directly.

There is no equilibrium in the market. We have multiple exchange rates and multiple interest rates. It is not helping the nation’s economy at large and anybody. We are struggling in a dilemma between socialism, communism and capitalism, what are we running in this country?

I think the CBN is using monetary policy to fight every element of the society.

The CBN has the exclusive right on monetary policy but we have seen CBN moving beyond monetary policy and interfering in the development sector, among others. The CBN is now a development bank and they are everywhere. It is throwing in a lot of confusion into the system.

You just think everything is not right and that is why Mr President is telling CBN who to give foreign exchange to and who not to give it to. CBN is also using some kind of fear to regulate commercial banks, telling them who to give money and impose punishment for any defaulter.

I do not think that is the market-driven economy. We want market deregulated which is what works for everybody. Push money into the system and let everybody have access to cheap cash. We are going back to 1970s trade policies that did not work for anybody in this country which was import substitutions.

I should be concerned about that and not achieving a single-digit inflation rate. Achieving a single-digit inflation rate at what cost?

Should we be concerned as the trade war between US-China has started to affect foreign reserves of the CBN?   

A drop in the oil price may not be totally and directly connected to the trade war between China and US. It is also possible and if you observe in the past few days, it has been the concern that the global economy is going to another recession. The recession is again the 10 years US bond (the yield curve).

People are worried about investing and that is why the yield is dropping. So, it is a good indicator for the future world economy but if it is in a negative, nobody is going to put money in the 10years US bond, meaning that people are not making money in it because it is not giving them any returns and they are seeking an alternative.

The reason why people are concerned about it is that 10years, 20years US bond is the safest investment in the world. Investors are withdrawing and that tells you the prospect has diminished and we are at another recession.

So, that could actually come to Nigeria in form of demand for oil and one of the things that is dragging down oil price. So, if adding that to the US-China imbroglio, then it complicates the situation even more. So, reconnecting it to the budget, we need to pray that the global economy do not get into recession because in the past, the global recession of 2007 that Obama made were so much integrated into the financial architecture of the word but today we are everywhere because we have experienced it in our stock market in such a way that anything that happened anywhere affects us.  If there is any recession in the US, it will affect us. Am only speaking from the facts presented to us every day.

 

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