- Say headline inflation blinking red, will drive more Nigerians into poverty
The continuous hike of petrol price due to full deregulation of the oil and gas industry as well as other factors seem complicating the Central Bank of Nigeria’s target of using monetary policy to drive down inflation. FESTUS OKOROMADU reviews the implications of energy cost on headline inflation as the National Bureau of Statistics posts September 2024 headline inflation rate this week.
One of the teething economic challenges bedeviling the President Bola Tinubu administration is how to tackle headline inflation in the face of souring unemployment rate and dwindling national currency valuation.
Think-tanks of his economic team both on the fiscal side under the headship of the Minister of Finance and coordinating minister of the economy, Wale Edun and that of the monetary axis, the Governor of the Central bank of Nigeria, Yemi Cardoso had at various meetings acknowledged the fight against inflation as a key objective of their pursuit.
Hence, when the National Bureau of Statistics in September announced further ease in the country’s inflation rate for the month of August, though the decline reported was the second in a row, some skeptical analysts insisted that the decrease was too good to be true.
According to the NBS report, the country’s headline inflation rate eased further in August to 32.15 percent relative to July 2024 which reported 33.40 percent inflation rate, thus, implying that in August 2024 headline inflation rate slowed by 1.25 percent when compared to July 2024.
Coming on the heels of earlier reported decline in headline inflation rate for July 2024 which eased for the first time in over 18 months to 33.40 percent from 34.19 percent in June 2024, it should have been expected that the economic team had started getting things right.
Unfortunately, that was not the case, as even the CBN governor was not optimistic that inflation rate had started dwindling to meet his single digit inflation rate he set out to achieve for the administration.
“It has become difficult to understand the plans and moves taken by the Ministry of Petroleum Resources, the Nigerian National Petroleum Corporation Limited, and the various oil and gas sector regulators in the face of recent happenings. The controversies surrounding the working relationship between NNPCL and the Dangote Refinery are equally confusing”
Addressing journalists and financial analysts at the end of the September meeting of the CBN monetary policy committee, Cardoso stated that the committee opted for further tightening of the country’s monetary policy rate, (interest rate or cost of borrowing) by 50 basis points to 27.25 percent to counter rising inflation expectation.
Cardoso stated that the MPC members’ expectations were driven by the pass-through effect of higher petrol prices, which has exacerbated core inflation, insisting that even though the headline inflation and food inflation figures moderated for a second consecutive month in August.
Core inflation, however, remains high, surging to 27.58 percent year-on-year in August, driven by elevated transportation costs.
To be fair to the MPC members, they stated clearly the negative implications of continued hike in the cost of energy consisting of electricity and petrol on the economy. Cardoso then called on the managers of the fiscal side of the economy to take necessary precautionary measures not to further increase the cost of energy to help curb inflation.
However, the CBN governor was optimistic that with Dangote Refinery commencing operations and the promise by the Federal Government to sell crude to local refinery operators in Naira, the problem of fuel price hike was insight vis-à-vis reduction in headline inflation.
Twist of events as NNPC increases petrol price
But against the high hope of expected benefits accruable from local refining of petroleum products as a recipe for fighting inflation, the recent unannounced increase of petrol pump price by the Nigerian National Petroleum Company Limited seems to have thrown a spinner on the wheel of presumed inflation rate decline for now.
The Lagos Chamber of Commercial and Industry, Nigerians foremost club of entrepreneurs, has expressed concerns over the latest petrol price hike focusing on the implication on the business environment and implication on the micro and macro economy.
The Chamber in a statement signed by its President, Gabriel Idahosa, on Friday said it was concerned about the continued petrol price hike, noting that the move will not only drive inflation upward but lead to a collapse of the economy if not well managed.
While accepting that the latest price hike is due to deregulation of the petroleum industry, the Chamber noted that the dynamics and controversies surrounding the implementation is injurious to the economy.
“We try to understand that the recent fuel price hikes could be the government’s intention to fully deregulate the oil and gas sector and implement a complete fuel subsidy removal policy. However, the dynamics and controversies around these steps create most of the distortions we experience in the business environment, making businesses operate under dark clouds of uncertainties.
“It has become difficult to understand the plans and moves taken by the Ministry of Petroleum Resources, the Nigerian National Petroleum Corporation Limited, and the various oil and gas sector regulators in the face of recent happenings. The controversies surrounding the working relationship between NNPCL and the Dangote Refinery are equally confusing,” Idahosa stated.
He added that, “Businesses have continued to suffer from increasing burdens of rising operating costs incurred on logistics, power supply, scarcity of FOREX for critical input, and inflated costs on third-party sourced services. With the CBN’s monetary policy rate at 27.25 percent (with allowance up to about 34%), inflation elevated at 32.15 percent (August 2024), an exchange rate above N1620 per USD Dollar, and an unemployment rate at 5.3 percent, we run a business environment that is too tense for businesses to thrive.”
According to him, “Since the inception of this administration, petrol prices have risen by about 430 percent to date. These indicators may worsen in the coming months due to a thriving speculative environment, harsh regulatory ecosystem, unguided controversies, persistent insecurity challenges, and weakening purchasing power that restrain demand for goods and services.”
Proffering solutions, Idahosa stated that the Chamber has consistently recommended the need for fiscal stimulus and non-cash interventions to cushion the burdens unleashed through the tight monetary stance of the government in the past 18 months.
“In the situation we find ourselves in, we urge the government to stay focused and more vigorous regarding the ongoing interventions like the removal of some taxes, the transition to Compressed Natural Gas (CNG) mobility, the Crude for Naira scheme, and the suspension of some import duties. The CNG mobility initiative must be supported with CNG refueling stations nationwide and credit facilities to support quick conversion and usage.
“We also recommend pegging import duties at an exchange rate of N1000 to 1USD to provide much-needed fiscal stimulus. This would stabilize costs for manufacturers who rely on imports, boosting productivity and enabling long-term planning. A fixed rate would lower production costs, leading to increased output and job creation. It would also benefit the broader economy by fostering growth in related sectors like logistics and retail, ultimately supporting Nigeria’s economic stability and expansion.
“Further, LCCI proposes that crude oil supplied to refineries in Naira be pegged at an exchange rate of N1000 to 1 USD. This would significantly lower the cost of petrol for end users, thereby reducing logistics and transportation expenses. The ripple effect would stimulate economic activity and help alleviate the current financial hardships faced by Nigerians. It will also significantly contribute to the reduction in food inflation since transport costs are a major component of food production and delivery costs.”
“The effectiveness of the CBN’s tight monetary policy in curbing inflation remains uncertain, particularly in light of structural challenges such as inadequate infrastructure, high fuel costs, unreliable power supply, and logistical bottlenecks”
The Lagos entrepreneurs club said they are at a crossroads with the government’s policy directions, stressing that Nigeria needs a positive national orientation to navigate the stormy waters we find ourselves in today.
“We therefore recommend that the government come plain to Nigerians and businesses on the direction of their policies and what near-term achievements are possible. This will build some level of certainty to support business planning and decisions.”
Experts predict higher inflation rate for September
Against expectations by the CBN governor, the business community as well as the ordinary Nigerian to see inflation descend to single digit in the nearest possible time, the persistent hike in petrol cum energy price makes such hope elusive.
Financial experts are already predicting that the headline inflation for September expected to be realised by the NBS will show a rise.
For instance, a financial analyst at Financial Derivatives Company in a report released on Thursday is projecting a marginal increase in inflation blaming it on the petrol price hike.
According to the report titled, “Inflation Forecast,” “We are estimating a marginal increase in both headline and monthly inflation. The trend of falling inflation is being bucked for some reasons – the new petrol price, which led to higher transportation and logistics coupled with exchange rate volatility and floods in northern Nigeria, which will undermine agricultural production.
“The September inflation numbers will be released by the NBS on October 15. At FDC, we project that the headline inflation will increase marginally by 0.22% to 32.37%. This will bring an end to the declining trend that commenced in July.”
They noted that the harvest season has been primarily responsible for the disinflation in the last two months, stressing that its price moderating impact in September was, to a large extent, limited by the higher petrol price and exchange rate depreciation.
“This development led to supply shortages of some essential commodities such as rice, beans, chicken, thus creating market disequilibrium. The resulting impact of this was a spike in the prices of these commodities. For instance, the price of a 50kg bag of rice increased by 36% to N120k in September from N88k. A bag of beans now sells at N180,000 from N160,000.”
However, the FDC report is optimistic that the CBN governor and his team at the MPC which is expected to meet in November may not further increase interest rate despite expected inflation rate increase.
“The possible upward reversal in the inflation trend will be a major consideration at the MPC meeting in November. The likelihood of maintaining the status quo is very high because of the aggressive hike in September by 50 basis points to 27.25%p.a. This is to prevent the economy from overheating and a possible recession,” it stated.
Forecasting the inflation rate for September while speaking to investors on Nigeria’s economic landscape during a virtual programme on Thursday, the founder of Cowry Asset Management Group, Johnson Chukwu said he expects the NBS to report an increased inflation rate in September.
“Although Nigeria’s inflation rate declined to 32.19% in August 2024, largely due to improved agricultural yields during the harvest season, there are concerns that inflationary pressures may re-emerge.
“This decline reflects a notable impact on the food index; however, as we approach Q4 2024, rising fuel prices—exceeding N1,000 per litre—are expected to drive up the prices of goods and services, potentially reversing recent gains,” he stated.
Speaking on the CBN governor’s target of using monetary policies to drive down inflation, he said, “The effectiveness of the CBN’s tight monetary policy in curbing inflation remains uncertain, particularly in light of structural challenges such as inadequate infrastructure, high fuel costs, unreliable power supply, and logistical bottlenecks. These persistent issues hinder the overall effectiveness of policy measures aimed at stabilising prices.”
Similarly, the Chief Economist and Partner of SPM Professional, Abuja, Paul Alaje said Nigerians should expect further inflation in the wake of the recent petrol price hike.
Writing his thoughts on his X (formerly twitter) handle on Friday, he stated, “I have told everyone who CARES to listen that the prices of more things will increase in Nigeria, and it will not just be #fuel. The policy of floatation is WRONG. You cannot devalue and expect all to be well. You cannot float the naira. Nigeria is not producing enough. Where are the refineries managed by NNPC?
“We are not exporting enough. Where are those saying the policy is right, the angels of classical economics? Where are you? They want us to devalue like China did but not produce like them. Very funny.
“How long will it take us to manage what is not working?
“The road to economic success is void of shortcuts and quick fixes. We need to produce, block leakages, and export. Band A be ready or maybe Band B too.
“This recent increase in PMS (fuel in Nigeria) will certainly not be the last but the ‘beginning of beginnings’ as long as this floating naira policy is on.
“We can still save the day. To do this, we have to retrace our steps.
“I expect inflation to go up for the month of September. I expect the cost of transport to also slightly increase even though motorists may take advantage of the situation.”
Justification for petrol price equilibrium
While the labour union and some Nigerians are strongly opposed to the concept of total deregulation of the petroleum industry because of its impact on the economy, capitalist economists are of the view that Nigeria has to wean itself off subsidies to achieve price equilibrium.
They contend that allowing market forces to determine fuel prices will better reflect production costs, drive efficiency, and promote investment in local refining capacity, insisting that although the removal of subsidies may result in a short-term price increase; targeted social programs can cushion the impact on vulnerable groups.
