2011 budget: Expenditure outlay heightens inflation risk CBN

According to a communiqué released at the end of its b-monthly meeting in Abuja on Tuesday MPC said the situation is made even more precarious with the rising global food and energy prices.

In this regard, the committee recalled that in its past few meetings, it had stressed the need for tighter fiscal management and drew attention to the unsustainability of the rising trend of domestic debt, saying, however, the proposed expenditure outlay negates the initial sentiment for fiscal retrenchment which would have supported monetary policy effectiveness.

“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 would have to bear a high cost in terms of pressure on foreign reserves, high interest rates and/or higher level of inflation,  the committee stressed in the communiqué.

Against the foregoing, the MPC stressed the need for further tightening of monetary policy, saying the stance needs to be appreciated in the context of the fact that resolution of the problems in the banking sector has not yet been completed though a number of banks have signed a memorandum of understanding with core investors. It disclosed that public announcement will be made in that regard this week.

In the light of this, the MPC said the inter-bank guarantees and guarantees of foreign credit lines will need to be extended beyond the deadline of June 30, 2011.

It said in the light of the foregoing analysis, there should be further tightening of monetary policy because of heightened risk of inflation. The members of the committee further pointed out the rising international food and energy prices, the impact of import costs on domestic prices, the challenges that fiscal stance posed to the external value of the Naira and the likely front-loading of public expenditure in the election period.

Daily Champion notes that the National Assembly last week passed a N4.972 trillion 2011 budget, higher than President Goodluck Jonathan initial proposal three months ago.

Headline inflation eased to 11.1 percent year-on-year in February, but growth in food prices rose. The shambolic state of the nation’s oil refineries means Nigeria relies on fuel imports despite being a major crude oil producer, further heightening the risk of imported inflation with world oil prices rising.

The naira edged down to its weakest for around 18 months last week, as businesses and wealthy Nigerians buy dollars to hedge against the risk of any prolonged political upheaval triggered by April elections.

One trader said the rate rise, announced after the foreign exchange market closed, would ease pressure on the naira.

But the Central governor Mallam Sanusi Lamido Sanusi had said that strong dollar demand was a temporary phenomenon and not a reflection of economic fundamentals. He said he was confident Nigeria could maintain a stable exchange rate at the same time as building up its foreign reserves.

The nation’s foreign reserves stood at $35.16 billion by March 16, up from $33.25 billion at the end of February as world oil prices rise, but they remain well below year-ago levels of around $42 billion.

Source : Daily Champion