Inflation-slam creeps on Nigeria exposing fiscal policy naivetés

By Charles Abuede

• Inflationary pressure driven by rising food prices
• Consumer feel ghostly pinches in their pockets
• A Naira devalued
• Early sting with VAT raise
• Electricity tariffs up despite Covid-19
• Stamp duty implementation driven hard
• Goodbye neighbours, borders remain closed

A cocktail of fiscal policy naivetés demonstrated since 2015 by managers of the treasury when Nigeria’s monetary policy authorities took near total charge of economic management to avoid a vacuum is beginning to creep in eerily in what analysts tell Business A.M. an inflation-slam has taken off and is headed in this direction.

Last week inflation numbers for September shot up again, mimicking the rise that was produced in August. Many economic analysts say it is not surprising the uptrend we are currently witnessing, a number of factors had prepared climbing inflation to look Nigeria’s way.

They cite a devalued domestic currency, the naira, for instance; they add that rise in the headline inflation is the immediate outcome of the double whammy increase in the pump price of fuel and the increase in electricity tariff, for which the government offered a temporary relief in just to avoid a planned showdown with labour.

Earlier in the year, in what appeared like the fiscal authorities only know how to collect, the value added tax (VAT) had been raised because government said it was broke and Nigerians have to pay more to keep it going. Analysts say you can add to that the near aggressive implementation of stamp duty collection enforcement and the continuous closure of the land borders, and you have a cocktail of fiscal and treasury managers showing that they have no hand on the handle, perhaps clutching at straw, said one analyst who did not want to be named.

Some analysts who spoke to Business A.M. for this creeping inflation-slam story talked about not being surprised that food inflation is exerting the most pressure, rising by as high as 16.6 per cent in September, owing to supply shortages from the lingering effects of COVID-19 and insecurity challenges in some food-producing areas of the country.

On the positive angle, the rise of food prices, the analysts said, will attract more people and institutional investors who can introduce a mechanised agricultural system which is believed to boost production with a lot of capital and value being added, especially with the closure of borders that helped push Nigeria as number one in rice production in Africa.

The recently released inflation report from the national bureau statistics (NBS) shows that headline inflation in Nigeria rose by 1.48 per cent month on month to stand at 13.71 per cent in September, the highest rate recorded since March 2018. However, it should be noted that the rate has maintained an upward trajectory since September 2019; and food inflation (16.66%) has been the primary driver of the headline rate acceleration while the supply side constraints have worsened due to the pandemic and is partly to be blamed.

Despite this uptrend in the inflation figure coupled with other factors that are mounting more pressure on inflation and also squeezing the pockets of consumers, it still remains that supply disruption due to the rain, logistics issues, roadblocks, the deteriorating state of the roads have significantly impacted on the inflation numbers negatively. Similarly, COVID-19 pandemic has played its role and it is still showing signs that it is here to stay with fresh cases arising with announcement of lockdowns around the world; thus, food prices have tripled more than what they were at the start of the year.

The chartered accountant, Ijezie Okwudili, founder and managing director of Okwudili Ijezie & Co and I & I Investment Limited, an investment advisory company, in an interview with Business A.M., predicted that inflation figure will hit 20 per cent by the close of the year; though, the Abuja based statistics bureau reports the indicator to average between 12 and 13 per cent.

“Earlier, I predicted that the inflation rate will hit 20 per cent by the end of the year 2020. Meanwhile, I’m off the mark as some international agencies have predicted just a few weeks back that Nigeria’s inflation rate is 31.1 per cent. Meanwhile, NBS said inflation is averaged at 12 to 13 per cent. It is a lie. Our inflation rate is in excess of 20 per cent.

“Even the president had complained about the rising prices of food. It is unfortunate but expected. In the northeast region, no one farms there because, people are in the IDP camps, and the Boko Haram members will have their day to burn the houses, farms and nobody dares go to the farm. The same story writes for the North West with banditry. You get to the farm, bandits can come to kill or scare one away. So, nobody goes to the farm. No cultivation.

“In the north-central, the herdsmen have their fame there especially in the Plateau, Taraba and Benue and even Niger states. The herdsmen raid there; they visit people in their farms, rape women and kill farmers there. So, why would you go to the farm? So the food prices have skyrocketed and there is scarcity,” said Okwudili.

In a similar development, the Financial Derivative Company (FDC) had also projected headline inflation to 13.56 per cent while food inflation to 16.45 per cent for September, away from 13.22 recorded in August. According to the projection, the coronavirus pandemic has played its role and still showing signs that it is here to stay with fresh cases arising and lockdowns around the world; this has shown a significant impact on prices. Furthermore, the government is in a bid to increase the money supply to make sure they can alleviate the problems that were originally there, and it is likely to have an impact on inflation numbers.

However, with the increased money supply, we are likely to see an increase in consumer demand, and when consumer demand is increasing, when there is no supply to complement it, then you will obviously see an increase in inflation and, particularly, the food commodities will get affected as we approach the festive season.

Meanwhile, considering the position of the monetary policy committee (MPC) at its last meeting in September where they posited that the rise in the inflation numbers were not due to monetary factors, Uche Uwaleke, a professor of the capital market and president of the Capital Market Academics of Nigeria (ACMAN), in a note to Business A.M. attributed the causal factors of Nigeria’s rising inflation to the current economic realities which are natural and also man-made as seen to create uncertainties in the economy.

“The uptrend in headline inflation is expected. It is the immediate outcome of the increase in the pump price of fuel, the Value Added Tax, electricity tariffs as well as the implementation of stamp duties and the continuous border closure. All these factors aggravated the legacy issues reflected in infrastructure deficit, especially power and transport, as well as illiquidity in the forex market and insecurity.

“It is also not a surprise that food inflation is exerting the most pressure, rising by as high as 16.6 per cent in September, owing to supply shortages from the lingering effects of COVID-19 and insecurity challenges in some food-producing areas of the country. As a matter of fact, insecurity situation in states like Zamfara and Katsina is contributing to the inflationary pressure from reduced food output.

“It is no surprise therefore that Bauchi and Zamfara recorded the highest inflation rates while relatively safe areas like Lagos and Abuja had the least numbers. The harvest season may not significantly rein-in inflation except if issues of insecurity and forex pressure is addressed” the capital market concludes.

Concurring to the views of Ayodeji Ebo, Head of Research at Greenwich Merchant Bank, looking at the numbers, we can attribute the major pressure on the food inflation to the flooding within the northern region which affected lots of harvests, depreciation of the naira at the parallel market, and because we are importing, most traders use the market to access funds. Also, the increase in the September PMS Price, transport challenges among other factors.

“From the foregoing, we see the outlook to be: there would be more inflationary pressure and also with the poor harvesting and poor storage system of our agricultural products in the value chain, it will also lead to price increases like we do see on a seasonal basis. By and large, we expect the pressure to come from the food inflation angle, based on the known factors and the impact of COVID on the distribution channels” Ayodeji told Business A.M.

Lending his voice to MPC position on inflation, Garba Kurfi, the managing director of APT Securities and Funds Limited, said the MPC’s reduction of the MPR by 100 basis points as monetary easing stance is a right step to reducing the cost of funds for the borrower of funds from bank and discourage saving and pushing investors into looking for alternative ways to invest rather than keeping money in the bank, which pushes more funds into the capital market.

“The Nigerian investors are already looking for alternative investments such as capital market; agricultural commodities, which are beneficial to the recent CBN policy. However, the #Endsars protests, if not put under control, can affect the little hope of a bounce-back of the economy,” he said.

A number of questions stare many in the face. For, instance, how can Nigerian businesses scale on the back of rising inflation, covid-19 pandemic, falling oil prices, dwindling rate of economic activities as a result of the #Endsars protest across the country?

It’s really a trying time for most businesses in Nigeria with the pandemic hampering on activities, inflation is affecting disposable income and it will eventually affect demand. Analysts are of the view that for most companies, it’s a time for survival by trying to see how they can expand. On the other hand, the protest will also affect distributions of goods and services should it get prolonged; movements of goods and services will be affected as other businesses indirectly will begin to also face the challenge which will, in turn, affect profitability. For businesses, it is time to see how to restructure loans in order to maintain cash flow.

Meanwhile, the federal government’s projection of inflation to 11.95 per cent for 2021 is wishful thinking, say many analysts. They say while it is not bad to wish, this can only be achieved if all things being equal yield to expectations. The pegged rate of the exchange rate is to give confidence to foreign investors that there is not likely to be a devaluation of the naira again, which helps in planning for the economy. But this is dependant on the availability of FX and price of crude oil, which is a major source of FX.

Fundamentally, the harvest season may not significantly rein-in inflation except for issues of insecurity and forex pressure is addressed, Uwaleke had earlier told Business A.M. Also, the interventions in the agriculture sector by the CBN needs to be monitored to ensure that the funds are used for the purposes meant. There is equally the need to speed up the implementation of the mass agriculture programme in the government’s Economic Sustainability Plan.