Nigeria’s fiscal and monetary policies are set to work at cross purposes as economic planners confront prospects of the biggest six year rise in consumer prices converging with growth rates plummeting to the lowest levels in a decade.
To kick start growth Nigeria’s newly elected President Muhammadu Buhari last month signed into law an expansionary budget, designed to stimulate economic activity.
The consumer price rise to a near six-year high of 13.7 percent in April and the naira’s 70 percent plunge against the dollar in the parallel market may however force the Monetary policy Committee (MPC) of Nigeria’s Central Bank to continue tightening even as the outlook for Africa’s largest economy deteriorates and credit-rating agencies downgrade the nation’s debt.
“ With the CBN Governor previously stating that a headline inflation rate in excess of the monetary policy rate (MPR) is undesirable, expectations of tightening are likely to build ahead of next week’s MPC meeting. But given the nature of inflation shock, the weakness of the economy, and less effective monetary policy tools, there are no easy answers,” Razia Khan, chief economist, Africa at Standard Chartered bank, said in a note to Business Day in reaction to the inflation numbers.
Nigeria’s Gross domestic product growth was just 2.8 percent last year, its lowest rate since 1999, and speculation of a devaluation of the naira currency is growing.
The National Bureau of Statistics (NBS) said on Monday that the higher inflation rate in April – the highest level since August 2010, reflected increases across all sectors.
In March, Nigeria’s central bank tightened monetary policy, raising the benchmark interest rate to 12 percent from 11 percent to try to curb the galloping inflation – a surprise reversal that came just four months after rates were cut.
“In terms with our discussion with the central bank, they are more concerned with curbing inflation trajectory, rather than addressing economic growth. So yes, they are likely to continue hiking interest rates despite the fact that growth is weakening,” said Yvonne Mhango, Sub-Saharan Africa economist at Renaissance Capital, in an interview with BusinessDay.
“On the impact it will have on the economy, naturally it is negative, especially if you look at the transmission mechanism and impact on credit growth and GDP contraction,” Mhango said.
Last week, the government announced it was scrapping a costly fuel subsidy scheme and increasing petrol prices by up to 67 percent.
The higher consumer prices were stoked in part by rising petrol and electricity prices, the NBS said.
Food prices, which account for the bulk of the inflation basket, rose 13.2 percent in April, up 0.4 percentage points from March, the bureau said on its website.
Inflation has also been fuelled by pressure on the naira, which on Monday slipped to its weakest level in months against the dollar in the non-deliverable forward market.
Ayo Teriba, chief executive officer of economic associates said further tightening will exacerbate the country’s economic woes and contradict the 2016 budget stimulus for growth.
“If you look at the month on month inflation trend, you will find that there has been a decline from a peak in February, and pressure has further fallen in April,” Teriba said.
“Inflation rate spiked in February due to cost shocks, which fizzles out eventually. There was no reason for the MPC to raise interest rate in March, neither is there a need now.”
Policy makers in Africa’s largest economy may be creating another problem as they seek to solve another, according to Taiwo Oyedele, a partner and head of tax and regulatory services, at consulting firm PWC.
“The spike in yr-on-yr inflation rate in April is not as a result of excess money supply; rather it is due to the increase in price of imported goods. In other words, seeking to mop excess liquidity is not the right policy direction.We must have consistent monetary and fiscal policies; and so I’m surprised if the MPC will be looking to increase interest rates amid fiscal policies tailored to reflate the economy,” Oyedele said.
President Muhammadu Buhari, 73, signed Nigeria’s N6.1 trillion ($30.6 billion) budget, the biggest in the country’s history and up 20 percent from the 2015 budget, as the nation looks to spend its way out of an economic slowdown and diversify its $492 billion economy.
The country’s fiscal policy holds strong on stimulating economic growth, as investments in capital projects, which account for 30 percent of the budget, are intended to revive business activities and create jobs.
Admitting the divide between the country’s fiscal and monetary policy, analysts say harmonization of both policies will take some time.
A total of N1.8 trillion was allocated to capital projects and government intends to spend more than N200 billion on road construction, representing an estimated 1000 percent increase from last year’s N18 billion.
“These projects are in the pipe line and they are unlikely to materialize in the short term to cushion the effects of a possible hike in interest rate,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham in a telephone interview.
PATRICK ATUANYA, BALA AUGIE & LOLADE AKINMURELE
