Taming inflation in an election year

The Central Bank of Nigeria, in a bid to curb public spending ahead of the general elections in April, has again increased the lending rate from 6.5 per cent to 7.5 per cent. In this report, IFEANYI ONUBA examines the effectiveness of the policy amidst the N4.97tn expansionary budget recently passed by the National Assembly.

By all measures, the political events in the country gained momentum a couple of weeks ago immediately the release of names of candidates that would vie for various elective offices in the general elections in April.

Following the release by the Independent National Electoral Commission, the tempo of political campaigns in the country has increased as aspirants have devised different means to convince the electorate and win votes.

In the midst of this was the passage of the budget last week by the National Assembly.

The N4.97tn budget, as passed by the National Assembly, was N745bn higher than the N4.221tn proposal submitted by President Goodluck Jonathan on December 15, 2010.

The expansionary budget had heightened fears that Inflation might be on the increase.

Generally, inflation targeting constitutes a major macro-economic policy of a country. This is so because there are many factors within the external environment that influence a country’s economic variables.

For instance, Nigeria achieved single-digit inflation rates of 5.5 per cent and 5.4 per cent in 1985 and 1986, respectively. But inhibiting factors, particularly reckless monetary management, forced it up during the late General Sani Abacha’s regime.

This was again brought down, according to data from the National Bureau of Statistics, to 8.5 per cent by 1997.

The year-on-year inflation rate sprang back to 16.5 per cent in 2001, dipped to 12.2 per cent in 2002 and went up again to 23.8 per cent in 2003. The rise in 2003 was linked to financial mismanagement, typical of an election year.

The figure similarly declined between 2003 and 2007 where it rose from 4.1 per cent in September 2007 to 6.1 per cent in November of that same year.

Between 2007 and 2009, inflation figure had been on the upward trend.

However, recent data from the NBS indicated that the year-on-year headline inflation in February was 11.1 per cent compared to 12.1 per cent recorded in January 2011 and 12.8 per cent in December 2010.

Core inflation was 10.6 per cent in February 2011, down from 12.1 per cent in January and 10.9 per cent in December 2010. Food inflation, however, rose to 12.2 per cent in February from 10.3 per cent in January but was lower than the 12.7 per cent in December 2010.

However, worried by the heightened risk of inflation, which the proposed high expenditure outlay of the Federal Government as contained in the 2011 budget posed for the economy, the 12-man monetary policy committee of the CBN met in Abuja to review the development with a view to checking fiscal spending.

The meeting, which was presided over by the CBN Governor, Mr. Lamido Sanusi, had in attendance, the Deputy Governor, Financial System Stability, Dr. Kingsley Moghalu, the Deputy Governor, Economic Policy, Mrs. Sarah Alade; Deputy Governor, Corporate Services, Alh. Suleiman Barau and the Deputy Governor Operations, Mr. Tunde Lemo.

Others are Prof. Sam Olofin, Mr. Ochi Achinuvu, Dr. Adedoyin Salami, Mr. John Oshilaja, Prof. Chibuike Uche, Dr. Shehu Yahaya, and Prof. Abdul-Ganiyu Garba .

The CBN governor, who briefed journalists shortly after the meeting, said that nine out of the 12 member committee agreed that the MPR be increased by 100 basis points to 7.5 per cent, while three others voted for a 50 per cent increase.

The apex bank boss also said that the committee considered the country’s growth outlook in the near to medium term but expressed concern over the heightened risk of inflation arising from the proposed high expenditure outlay of the federal government as contained in the 2011 budget.

This, he noted, was necessary, especially in the wake of the global food and energy prices.

He, however, stressed that the “proposed expenditure outlay negates the initial sentiment for fiscal retrenchment, which would have supported monetary policy effectiveness.”

Continuing, he said, ”The current fiscal stance is inconsistent with the objective of maintaining stability in exchange rates, prices and interest rates. The committee, therefore, believes that unless the fiscal stance is reversed, the economy will have to bear a high cost in terms of pressure on foreign reserves, high interest rates and higher level of inflation.

He said that the need for tightening must be appreciated, since the problems in the banking sector had not been completed, adding that a number of banks had signed memoranda of understanding with core investors.

The decision came just as analysts said that the impact of an increase in MPR would be minimal on public spending owing to time lag.

Reacting to the decision, the Managing Director, Financial Derivatives, Mr. Bismarck Rewane, noted that it would take between three and six months for the impact of the tightening to be felt.

This, he attributed to the effect of the time lag between the period that the announcement was made and when the market reacts.

He, however, said that owing to the tightening, the naira might return to equilibrium within the next four weeks as those who speculate with borrowed funds would have to do so at a higher cost.

He said, “It is a good decision but there will still be an increase in spending due to the time lag between when the announcement is made and when the market begins to feel the impact and my fear is that this may take between three and six months.

“The naira is undervalued and it will soon come back to equilibrium and if I will speculate, it might take four weeks because when people who borrow money to speculate discover that it is now costly to do so, the naira will return to equilibrium.”

Also commenting on the impact of the expansionary budget on the economy, the Minister of Finance, Mr. Olusegun Aganga, said that there was need to reduce the budget to make it implementable.

He said, “It is difficult to comment on the budget at this stage because we have not received the details from the National Assembly. “However, based on the information available, there are areas of concern. For example, we are concerned about the level of deficit, the level of borrowing. The 2011 budget is supposed to signal the beginning of fiscal consolidation, but we now have another expansionary budget, which is not implementable.”

“If we are to build our economy on a solid foundation and avoid the boom and bust of the past, it is critical that we embrace discipline in the way we manage public finances. We cannot continue like this.

“I will be advising that we engage with the National Assembly to resolve these areas of concern. We have always had a very good relationship with the relevant National Assembly committees. So, I am optimistic that we can resolve these areas of concern very quickly.”

Source : Punch