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Inflation: Experts’ perspectives on single digit target



Inflation: Experts’ perspectives on single digit target

In the last six months, the headline inflation has been subdued, trending down consecutively month after month; though still within double-digit circle, the Central Bank has promised to crash it to a single digit by 2018, just as experts offer their perspectives on the target. ABDULWAHAB ISA reports


The Consumer Price Index (CPI), which measures inflation, has been trending down, going by monthly inflation data from the National Bureau of Statistics (NBS).
The latest in the series was the October figure released recently. The headline inflation decreased to 15.91 per cent (year-on-year), lower than 15.98 per cent recorded in September.
On a month-on-month basis, the headline index, the bureaus said, increased by 0.76 per cent in October 2017, 0.02 per cent points lower from the rate of 0.78 per cent recorded in September.
However, food index increased by 20.31 per cent (year-on-year) in October, down marginally by 0.01 per cent points from the rate recorded in September (20.32 per cent).
“On a month-on-month basis, the food sub-index increased by 0.85 per cent in October, down from 0.87 per cent recorded in August.
This represents the fifth consecutive disinflation in month-on-month inflation since a 2017 high of 2.57 per cent in May 2017. October 2017 also represents the lowest recorded month-on-month inflation since September.
Keeping the price of goods and services relatively stable is at the heart of macroeconomic policy of all central banks.
When price of commodities is unnecessarily high above affordable level of average citizens, purchasing power is eroded; it poses grave danger to the economy, inflation sets in. In a lay man’s understanding, inflation is a phase in any economy when much money fetches fewer items or services.

Inflation control
Since 2014, the economy has been battling with high price of commodities and services. This was occasioned by fall in price of Nigeria’s major commodity, crude oil. Drastic fall in crude oil price also affected the acreages into foreign reserves and added to the economic misfortune.
The Central Bank of Nigeria, in line with its core mandate of maintaining price and exchange rate stability, rose to the challenge of reining in inflation by applying tight monetary policy measures to subdue it.
For example, when it was apparent that headline inflation was picking up in 2016, moving to 11.4 per cent in February 2016 from 9.6 per cent in January, the Monetary Policy Committee of the CBN had in March 2016 voted to review the
MPR upward from 11 per cent to 12 per cent as well as the CRR from 20 per cent to 22.5 per cent while maintaining the liquidity ratio at 30 per cent.
However, the inflation uptick remained adamant. Month after month, it added percentage, got to boiling double digit figure last year. The economy slipped into recession with major sectors positing negatives.
The situation spurred CBN to introduce maximum tightening of its key policy. The apex bank increased MPR to 14 per cent this year just as it introduced reforms in foreign exchange targeted at achieving stability in forex window.
Reviewing inflation outlook recently at the last Monetary Policy Meeting in Abuja, the CBN Governor, Godwin Emiefele, noted that “inflationary pressures in the economy continued to moderate with headline inflation (year-on-year) receding for the ninth consecutive month to 15.91 per cent in October 2017 from 15.98 per cent in September 2017. Food inflation fell marginally to 20.31 per cent from 20.32 per cent in September, while core inflation increased slightly to 12.14 per cent from 12.12 per cent during the same period.
“These developments were attributable to the contraction in money supply, favourable but dwindling base effects, and the relatively stable naira exchange rate. In spite of the marginal decline in food inflation in October, the Committee noted that the rate remained high, traceable to cross border sales, distribution bottlenecks, high prices of farm inputs and supply shortages.”

Single digit target
Though still on relatively high side, headline inflation has a been decelerating on monthly basis. It came down to 15.98 per cent in October, according to NBS.
However, Emefiele has given 2018 as deadline to return the economy to single digit economy.
He said that given the consistency in the current trend, single digit target by 2018 is feasible.
“Between early 2013 and 2014, and around 2015, the CBN set inflation target of 6-9 per cent and this was substantially adhered to.
“We must realise that those were periods from 2012 and we keep saying five straight years from 2009 to about 2014, crude prices averaged $110 per barrel. Reserve accretion at a time in 2008 stood at $62 billion. Exchange rate stability was taken for granted during those periods but unfortunately beginning from the Q1 of 2014, we got hit by three external shocks: the drop in commodity prices, and for us crude price; the geopolitical tension along various trading routes across the world, as well as the US normalisation policy.
“These had tremendous adverse consequences on our economy and we could see that inflation moved from nine percent in January 2016 to 18.7 per cent in January 2017. And that is the reason most members of policy committee meeting think it is too high and we are working very hard, thinking very seriously and manage for price and monetary stability and see to the fact that inflation is brought down to the traditional level where we have our target of between 6-9 per cent.
“We are working hard at it and I am very optimistic that with the focused and tenacity of the monetary policy committee that this will be achieved,” the governor noted.

Experts’ views
Experts have, however, differed on CBN’s assurance of subduing inflation to a single digit by 2018. They are of the view that key fundamentals that shape economy on strong footing are yet to be replicated in Nigeria and expressed doubt about apex bank’s single digit inflation target.
Professor Uche Collins , of Economics department, Nnamdi Azikwe University, noted: “Let’s look at our real sector. Is production driven from within? Especially with employment, domestic manufacturing, service. Let’s look at import profile, food import, especially rice, apparels. How much comes from outside? Then money supply and its derivatives, how much influence has CBN over these? What are the positions of monetary policy committee on interest targeting? With these issues, you will find that CBN is just hypothesising despite the infrastructure within her disposal. Oil is still driving the economy. CBN’s projection may eventually not be realistic.”
In his view, Developmental Economist, Odilim Enwegbara, said he was not excited by CBN’s single digit inflation target.
“I can’t really see this as good news given that this blind fighting of inflation is coming through mopping of liquidity. Since low inflation means a stronger naira that means more imported goods.
“That is why lowering inflation rates at this stage is simply anti-investment, anti-growth and anti-jobs, especially with inflation fought blindly. That’s why for me, it is better to have high inflation if that could mean more liquidity in system at lower interest rates than low inflation, which is causing illiquid problem, crowding out the real sector firms from the debt market.
“I will propose fighting interest rates rather than fighting inflation, especially when artificially doing that gives naira the kind of high value that imports take advantage of, at the detriment of local producers of the same goods.
“To truly determine the true value of the naira, the CBN should stop injecting billions of dollars into the forex markets through intervention simply in an effort to subside imports. The CBN should participate in the forex markets since that is what it’s supposed to do in floating currency like the naira, which its value ought to be determined by market forces.
“Let the record be set straight here. Without any form of ambiguity, it has since been established that in supposed dynamic economies like ours, there should be no cause for alarm if the inflation rate goes as high as 25 per cent, so long as the economy is fast growing and fast replacing most of its imports with locally made ones,” said Odillim.

Last line
With consecutive five months of steady decline in headline inflation spurred by various reforms initiatives of the apex bank, it is safe to conclude that Emefiele’s target of single digit inflation is feasible by 2018 given that forex reforms, current revolution in agriculture value chain are sustained.

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