The battle against inflation challenges

The country’s monetary authority, in a bid to take hold of the price stability, has kept all its rates steady, at least, for the past 25 months, involving 12 bi-monthly sessions, specifically for purposes that run around inflation. Granted, inflation was not all in the menu of the policymakers. As they met during those sessions, none of the other variables- exchange rate, interest rate and the prudential ratios of the banks, among others, discussed therein, was pruned of their natural link with the subject.

At a certain point, the nature of the nation’s inflation, in some quarters, was described as stagflation, due to its persistent rise that was combined with high unemployment and stagnant demand in the economy. No nation has desired such level of inflation, as it does not aide a positive redistribution of income, but brings about weak purchasing power and extended inequality.For the past 18 months, the good news is that the “monster” has been on the downward trend month-on-month. The latest report put it at 11.14 per cent.

The emerging market economies have been the victim of the ugly economic development, facilitated by low and near non-existence of diversification, in the wake of global commodity shock.For Nigeria, the inflation, then, rode on the back of importations that were facilitated with high exchange rate, given the shortage of foreign currency supply, against huge demand and the country’s insistence on “no devaluation” option. But worse still, almost all the country’s food supplies were imported.

Regulatory response
A two-fold pursuit of exchange rate stability and reduction in inflation level had put the country’s monetary authority on alert, as it has held interest rate at 14 per cent for more than two years, despite clamour for rate cuts to boost growth.Like other central banks across the global, the Central Bank of Nigeria (CBN), was troubled. It had earlier adopted restrictive monetary policy as part of efforts to win the battle against double-digit inflation on the one hand and intensified interventions in the agriculture sector, on the other hand.

The apex bank left its monetary policy tools- benchmark Monetary Policy Rate (MPR), Cash Reserve Requirement (CRR) and Liquidity Ratio tight, in its war against inflation. The International Monetary Fund (IMF), till date, has urged the CBN to sustain it until inflation comes within the single digit target range. CBN Governor, Godwin Emefiele, has severally shown disdain for the double-digit inflation and has acted towards his conviction. At the last meeting of the policymakers, his communiqué favoured commercial paper issuance for cheap funds and as an alternative to reduction in interest rate, given the situations on hand.

“For inflation in Nigeria, the CBN had a target of 6-9 per cent. Unfortunately, it grew out of control to as high as 18 per cent, until we started to reverse it downward with policy measures and I am hopeful that it is going to go down further. I can tell you that at 18 per cent, there were complaints and questions over what we were doing.

“As it is now, I will tell you that we are adopting our own homegrown solutions and you can see and judge, whether it is working or not,” he said.He, however, warned policymakers in the country not to become complacent, stressing the need for all to continue to work to improve and sustain the pace of recovery. “For one, our import bill may have fallen, but our manufacturing and agriculture sectors still have a long way to go, if we must attain self sufficiency in those sectors. We must not be quick to discard the restrictive measures which aided our recovery simply because the metrics have improved,” he said.

According to him, inflation must be put under control and the bank would continue to fine-tune its policies and strategies, based on its understanding of evolving developments and supported by in-house technical analysis and simulations. “As the sentiments improve in the macro-economy and supported by proactive monetary, trade, industrial and fiscal policies, I expect a continued uptick in Gross Domestic Product, with positive spill-over to improve unemployment rate.

“As policies to strengthen the agriculture and industrial sectors become more emergent, growth in these sectors will rise, further bolstering overall economy. As we entrench and sustain the transparency in the foreign exchange market, reserves accretion continues and market confidence and improved sentiments remain, I expect that the exchange rate will not only be stable, but would begin to appreciate against major currencies.” He stressed the need for a re-doubling of the strong policy coordination, collaboration and cooperation between the monetary and fiscal authorities.

Agric intervention
Among the factors responsible for the moderation of the country’s inflation is the apex bank’s aggressive intervention in the agriculture sector. Recently, the monetary authority, estimated the total amount of funds disbursed under the Anchor Borrower’s Programme (ABP), at more than N55.53 billion, reaching more than 250,000 farmers.

ABP is a development finance initiative, which the bank is spearheading, in partnership with the state governments and private sector groups, as part of efforts to give boost to local production of food items, as opposed to importations.These sets of farmers, according to the CBN, had cultivated over 300,000 hectares of farmland for rice, wheat, maize, cotton, soybeans, cassava, among others, in the bid to enhance agricultural activities.

The ABP was designed to support small holder farmers by providing them with the requisite training, tools and funds at single digit interest rates, which will enable improved cultivation of key agricultural items such as maize, soybeans, rice, cotton and wheat. The programme also provides a ready market for farmers by linking them with credible off-takers and processors of their produce.

With almost three years into the implementation, the programme had contributed to the creation of an estimated 890,000 direct and 2.6 million indirect jobs. Emefiele added: “Let me note at this juncture that this attention to agriculture is by no means a bad strategy. In fact, agriculture can still be used as a key catalyst for creating jobs, reducing unemployment and driving growth in Nigeria.”

Pending challenge
IF people cannot go to their farms, it is going to be a problem. And by the way, agriculture is not just crops. When you destroy farmland or livestock, it affects crops and livestock. And agriculture is the biggest part of our GDP, so, it has a way of slowing down economic activity,” the Statistician-General, National Bureau of Statistics, Dr. Yemi Kale, noted.

A research by FSDH Merchant Bank Limited, has raised the alarm that the good work, so far achieved, may be facing aggravated inflation numbers and make Nigeria lose out on its targeted single digit inflation level this year. The challenge, according to the research, stems from the prevailing crisis in the food producing states in Nigeria, which has sustained upward pressure on food prices.

Besides, a sense of uncertainty ahead of the 2019 elections, coupled with the possibility of huge pre-election spending, capable of stimulating demand-pull inflation, could complicate the projections.The Head of Research at FSDH Merchant Bank Limited, Ayodele Akinwunmi, while speaking on the bank’s monthly Economic and Financial Market Outlook, said that year-on-year inflation rate, expectedly, would drop, but would be spurred by base effect, as food index remains high.

According to him, the fact that food index is one of the three major drivers of inflation in the country, with the crisis-induced pressure in food producing states, there is a major risk to the achievement of a single digit inflation rate in 2018.He however, said that banks do not extend credit for its sake, because funding is not totally the challenge, but the viability of the business, adding that “no one goes where crisis is rife. Of course, uncertainty is the chief enemy of investments,” he said.

He also called for additional fiscal measures to improve the ease of doing business in the country, which would lead to a further expansion in the manufacturing and productive activities, as well as the enthronement of cheap loan regime.

The economist noted that the move has become necessary, as the Purchasing Managers’ Index (PMI) for the month of July 2018, showed Manufacturing PMI at 56.8 points in July, slower rate than 57.0 points recorded for June.He pointed out that while Nigeria’s Balance of Payments position, as at first quarter of 2018, is a confirmation of its belief that the country’s external position remains strong, it is also an affirmation of its vulnerability to developments in the crude oil and gas market.

To reach the goal of reign on inflation, there is now need to tame the endless violence in the agriculture areas of the country, raise the level of the country’s export profile, as cushion to any eventual oil shock, deepen the diversification efforts and manage flow of election spending against the consequent demand pull inflation.