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Rewane: Global inflation poses economic risks to Nigeria

With inflation rate now a global phenomenon and 18 out of 21 countries of Nigeria’s trading partners battling record high inflation rates, there are indications that remittance inflows from Nigerians in the Diaspora will decline this year. Also, Nigeria should brace to pay higher interest rates, higher debt service costs and increase in cost of financing trade transactions.

The Chief Executive Officer, Financial Derivatives Company Limited, Bismarck Rewane, disclosed this in a chat in Lagos, saying that inflationary pressure was mounting in major developed economies, including the United States and others. Rewane said that as at May 15, 18 out of 21 countries had raised interest rates so far and this will consequently affect Nigeria in the areas of higher interest rates, higher debt service costs, increase in cost of financing trade transactions, decline in Diaspora remittances, increased savings and lower consumption levels amidst implications of global tightening of interest rate. According to a World Bank release, Nigerians in the Diaspora remitted a total of $106.58 billion back home in five years. Accordjng to the breakdown, they remitted $22.04 billion, $24.32 billion, $23.81 billion and $17.21 billion in 2017, 2018, 2019 and 2020 respectively.

The renowned economist stated that in the past, inflation was localised, but now it is globalised. Speaking further, the economic expert said that Nigeria’s trading partners were battling record inflation rates. According to the details, China 0.9 (Feb) (Mar’22), 1.5 (Mar) (Apr’22), +0.60 (per cent change). India 6.07 (Feb) (Mar’22), 6.95 (Mar) (Apr’22), +0.88 ( per cent change). Indonesia 2.64 (Feb) (Mar’22), 3.47 (Mar) (Apr’22), +0.83 (per cent change). US 7.9 (Feb) (Mar’22), 8.5 (Mar) (Apr’22), +0.60 (per cent change). Spain 9.8 (Feb) (Mar’22), 8.4 (Mar) (Apr’22), -1.40 (per cent change). Belgium 8.31(Feb) (Mar’22), 8.31 (Mar) (Apr’22), negative zero (per cent change). Rewane added that marginal propensity to import was 0.28 per cent. In response to global inflation, the Financial Derivatives Company CEO said: “Major central banks have increased interest rates rapidly and sharply. “Central banks increasing rates in response to spiralling inflation. Central banks are becoming more aggressive in the fight against inflation. U.S. inflation at a 41-year high of 8.5 per cent (650bps higher than its two per cent target).” The economist noted that this was an era of monetary policy tightening where most central banks were going into another cycle of tightening to contain inflationary pressures.

He hinted that U.S. Fed raised its policy rate by 25bps to 0.5 per cent per annum (p.a), with additional hints on six more rate hikes this year. Rewane added that the Russia/ Ukraine war had further compounded global economic situations, affirming that prior to the war, most of the countries were grappling with high debt levels, currency pressures and inflation rate. On the implications of global tightening on Nigeria’s GDP, Rewane pointed out that borrowing for consumption was dangerous, while borrowing to boost productivity will increase total factor productivity and sustain growth.

To him, in seven years, Nigeria’s total external debt has risen by 400 per cent. That’s 2015 ($10 billion) 2022 ($38 billion) per cent change (400 per cent). However, he stated that debt service burden for developing economies like Nigeria would increase, adding that, already, Nigeria raised $1.25 billion at 8.37 per cent (p.a) for a sevenyear paper. Rewane said: “In this age of supply shock inflation amongst other factors, how is the average Nigerian (or survivor) going to cope? Money is a store of value while inflation is a thief in your wallet. “Cumulatively in Nigeria, official inflation has increased by 93.88 per cent in the last five years while anecdotal evidence is much higher.”

 

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