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Further rise in inflation imminent as economy hurts

By on May 2, 2016

Following the rise in the Consumer Price Index (CPI), which measures inflation for three consecutive months to 12.8 percent in March, experts have cautioned that the index is likely to maintain its upward trend in April.

The headline index had increased to 11.4 per cent in February from 9.6 percent in January, according to the National Bureau of Statistics (NBS).

The latest increase had been blamed on an increase in the prices of goods and services across the country, the highest year-on-year rise since July 2012.

The statistical agency also pointed out that the planting season, transportation costs as well as foreign exchange movements contributed significantly in the upward movement witnessed on the food index in March.

The inflationary pressure was further compounded by the knock-on effect of foreign exchange movements, which in turn affected the prices of imported food and non food items, the importation of Premium Motor Spirit as well as the adjustment in the electricity tariffs nationwide had resulted in a surge of rates.

As a result, price of commodities in the local markets have continued to spiral out of hand, making it difficult for the ordinary Nigerians to afford basic needs as prices have more than doubled while more workers, particularly in the real sector lose their jobs as companies shut down under unfavourable operating conditions worsened by the foreign exchange crisis and the restrictions placed on the importation of some essential items, which could be produced locally.

The delay in the passage of the 2016 budget is also believed to play a significant role in the rise of both inflation and unemployment rates in the economy.

Experts however, warned that the present hardship could endure because the factors which had fueled inflation were still much around.

Speaking in an interview with THISDAY, economist and ex-banker, Dr. Chijioke Ekechukwu, said the revival of the real sector was crucial to taming inflation and resetting the economy.

He said:”In an economy that is dwindling like Nigeria, except there’s frantic effort made to build the real sector of our economy, the unemployment situation may not improve for now. And if that is so, we also see that the inflation rate will also be going up just because, of course, the value of the naira is going down and people are just buying things at a higher rate; and so on gradual basis, inflation would be increasing.”

He said:”I have mentioned before that for inflation to start dropping gradually, the country has to do everything to stop the importation of petroleum product because that’s actually what’s putting so much pressure on the value of our currency.

“And because that’s putting so much pressure on the value of our currency, inflation would keep increasing. And like I said, until the real sector, which is the manufacturing sector starts producing, and at very reasonable capacity, we are not going to have our employment situation improve: don’t also forget that the main bane of the real sector growth is electricity-and I know that government is making certain efforts to improve on the electricity of the country but you’ll see that we are no where yet-and until the electricity sector is improved in this country, the real sector cannot grow. And until the real sector grows, employment cannot grow-and so these are the issues that are actually affecting the two areas just mentioned.”

He also said government must help young entrepreneurs get easy access to financing and free them from the hostile interest rate regime from commercial banks.

Also speaking in an interview with THISDAY on the implications of the galloping inflation on the economy, an Associate Professor of Finance and Head, Banking & Finance, Department, Nassarawa State University, Keffi, Dr. Uche Uwaleke, said the rising inflation rate which is cost-induced has the capacity to further reduce the standard of living of Nigerians.

According to him,”of course, you know the overall impact of inflation in an economy is negative. It increases the cost of goods and services and it would make it more difficult for the common man to survive.

“In essence it reduces the standard of living of the people. Of course, the inflation we have in the country right now is principally a direct consequence of the energy and foreign exchange shortages that we are having.”

“In my view, it is more of a cost-push inflation than demand-pull inflation, because demand pull is where you have money chasing few goods but there’s no money in the economy and so it is more of cost-push because foreign exchange is scarce-and we import virtually all that we use here-and even for commodities you think have inelastic demand is becoming difficult for even the producers to pass on the high cost of these commodities to the ultimate consumer; because as I said, the demand is not there and so it is more of cost-push inflation,” he added.

Warning that the headline index could further rise in the coming month, he raised concern over the fact that the monetary policy rate (MPR) is currently lower than inflation.

According to Uwaleke:”And that’s also why you find the Central Bank of Nigeria increase the monetary policy rate last time from11 percent to 12 percent, it’s all in a bid to tackle inflation.

“Right now, the inflation rate is around 12.8 percent, the highest we’ve seen in recent times and the monetary policy rate is 12 percent. So monetary policy rate is less than inflation rate-and the CBN governor has hinted recently that it is not normal for the MPR to be lower than inflation.”

He said:”So that means that there’s also the likelihood that the MPR would be increased at the next MPC meeting and you know the MPR is the benchmark interest rate in an economy. If it goes up, it also means interest rates are going up and if interest rate goes up, not also means more businesses cannot access loans at cheaper cost-the cost of accessing loans would be high and that also means the cost of production in the country would be high and cost of doing business would be high-you would find that the things is a vicious cycle.

According to him:”The unfortunate aspect of it again is that while inflation rate is also going up, you can see the impact on the economy; unemployment rate is also going up. We have in Nigeria today, a case of taxation-where inflation and unemployment rates are all going up.

“And I told you why unemployment rate is high-because the demand for good is not there-and because the demand is not there, most of these companies have stock of inventory-they are not selling-and at the same time, they cannot lower the cost of those goods because they must break even.

“The high inventory has also resulted into low capacity utilisation and because of all these, you find them retrenching workers…And so the budget has also not been implemented yet and so there’s no money.”

 

[ThisDay]