The Nigerian economy and indeed consumers have a rough drive ahead with no indication that inflation rate would lessen and interest rates reduced. That the Central Bank of Nigeria (CBN)’s Monetary Policy Committee (MPC) did not tighten monetary policy last week is little to cheer.
Indications are that, fiscal activities that would unveil beginning from June and the later part of the third quarter of this year points to very disturbing times. First, a new electricity tariff to be unleashed soon would that ensure consumers spend more money than before, thus adding more pressure to the inflation basket.
Secondly, analysts said they expect the federal government to embark on various projects, thus push more money into the system that will further add to spending.
In all these, there is little hope that the increase in inflation rate, which many see as short-term may not be after all.
Bismarck Rewane, chief executive officer of Financial Derivatives Company Limted in his current Economic Bulletin said “with price pressures expected to increase due to an increase in government spending in the third quarter, and the compounding increase in the electricity tariff, price levels could yet touch 13.1 percent ± 0.2 per cent in May. The consensus forecast is that headline inflation is expected to close the year at 14 per cent -15.5 per cent.”
On the possible impact of rising inflation on the naira, Rewane said the value of the naira has been relatively stable and not responsive to inflation data since March. Traders are of the view that CBN is committed to maintaining its band of N150 – N160/$ and mid range of N155/$. However, a continuous rise in prices could encourage the CBN to review this band.
He however allayed fears that this is unlikely at the moment because the inflationary pressure has not altered the Purchasing Power Parity (PPP) value of naira as of yet. If there is a spike in the Consumer Price Index (CPI) for example to 15 per ent, the chances are that the CBN will adjust the value of the naira by at least three per cent towards N160/$ upper band.
As for labour unions, Rewane said response to inflation is typically to seek wage adjustments based on the philosophy of indexation. However, because of the high unemployment rate (23.9 percent), the bargaining power of the organised labour is relatively weak.
“Therefore, we do not expect major confrontations between employers and labour”, he said.
Real estate market, particularly residential properties, has been a major casualty of high interest rates; with property values dipping by as much as 20 per centww due to the high vacancy ratio. Occupancy in commercial properties is equally low and this slacking demand has led to a continued decline in values.
Razia Khan, Regional Head of Research, Africa Global Research, Standard Chartered Bank, London said, evidence of weaker domestic agricultural output, combined with the anticipated imposition of tariffs on some imported food items are a significant risk factor for inflation which should continue to rise in the near term.
She however said the extent to which this feeds into generalised price pressures should be significantly offset by benign money supply trends and evidence of a cyclical slowdown of sorts in the Nigerian economy.
Also, with the level of subscription in treasury bills and government securities market, analysts fear that banks may want to invest their funds in safe havens as against lending to the risky real sector, particularly small and medium businesses. This has the potential to further increase lending rates, although analysts believe that inflation rise affects interest rates less than increase in Monetary Policy Rate (MPR) does.
The tepid reaction of the market to an increase in inflation reflects market sentiments about the possibility of the CBN holding the MPR at 12 per cent per annum. Average short-term rates on Open Buy Back (OBB), Overnight, 7-day, and 30-day facilities did not register any significant increase after the release of the April inflation figure. However there has been an increase in money market rates by an average of 319 basis points since the MPR was increased by 275 basis points to 12 per cent p.a. in October 2011, said Rewane.
The level of subscription has risen significantly as a result of the higher yields and low risk. The average level of oversubscription has been 180 percent since January.
Rewane said, the total amount of government securities out-standing as a percentage of Gross Domestic Product (GDP) is now at 1.2 per cent compared to 1.1 per cent in 2011.