The tacticians in the inflation rate war room of the Central Bank of Nigeria (CBN) had good times in the last five years. They were able to rein in inflation rate even as exchange and lending rates were running riot. At a certain point, inflation rate went as low as eight per cent even as prime lending rate was well over 20 per cent.
At that point in time, high risk fund users like small and medium enterprises (SMEs) were accessing funds at 35 per cent from the few banks that grudgingly offered to do business with them.
The monster known as inflation managed to cross the single digit line last year. Even with that, few economy watchers saw danger lurking around the corner.
However, everyone knows that no one can control inflation, lending and exchange rates at the same time. Exchange and lending rates are used to control inflation rate. That is why the CBN tenaciously clung to the pegging of the exchange rate of the naira. Inflation rate moves in opposite direction with the other two rates. It surges when the currency is devalued or lending rate climbs down.
Therefore, it was obvious that the CBN’s decision to grudgingly abandon the pegging of the naira for the flexible exchange rate system would only set inflation rate surging. The CBN took the plunge in June. Last week, it was time to count the cost.
Statistics from the Federal Bureau of Statistics (FBS) set consumers panting and wandering where the economy is heading to. Inflation rate surged by 0.9 per cent in just one month. It broke a 10-year record as it moved from 15.6 per cent in May to 16.5 per cent in June.
The FBS blamed the devaluation of the naira through the CBN flexible exchange rate policy, escalating food and fuel prices and the 45 per cent hike in electricity tariff for the surging inflation rate.
From all indications, the flexible exchange rate of the naira takes the lion share among the factors responsible for the surging inflation rate. The reason is that Nigeria is an import dependent economy. Imported inflation is largely responsible for the surging rates.
In fact there are fears that the surge in inflation rate might just have started. The foreign investors expected to bring in scarce dollars after the introduction of the flexible exchange rate were still watching the scene with caution last week. The naira at N296 to the dollar was considered to be over-valued.
An acute scarcity of forex in the flexible rate window momentarily forced the naira down to N310 to the dollar last week. Many expected the naira to trade above N300 to the dollar under the flexible exchange rate system. The expectation now is that with the exchange rate crossing the N300 mark, foreign investors would be willing to bring in scarce dollars to ease the crippling demand pressure in the foreign exchange market.
If that happens, the naira might stabilize at N300 before a gradual process of appreciation sets in. Right now, the scene is set for inflation to surge further.
The exchange rate for the current price structure of petrol which put the pump price of the product at N145 per litre is N285 to the dollar.
The naira crossed that reference price last week. At a certain point the fuel price structure reference exchange rate was exceeded by N25 per dollar. That sets the stage for a fresh round of fuel price hike.
The federal government can only stem a fresh fuel price hike by selling dollars to marketers at the agreed rate of N285. That would amount to introducing fuel subsidy through the backdoor.
If the federal government resists the temptation to re-introduce fuel subsidy through concessional exchange rate, the pump price of fuel might sail perilously close to N200 per litre.
That in turn would push up transport fares significantly.
Transport fare hike would engender a steep climb in the prices of food items, thus triggering a chain reaction in the entire economy. That scenario might push inflation rate above the 20 per cent range within weeks.
By Third World standards, that probably is still an economy planners’ comfort zone. Besides, given Nigeria’s population and the worrisome cash crunch, the current inflation rate is tolerable.
Ghana with a population of 27 million is battling inflation rates well above 20 per cent. Like Nigeria, Venezuela is a member of the Organisation of Petroleum Exporting Countries (OPEC). It has a population of just 30 million and produces 2.42 million barrels of oil per day.
That is more than 200, 000 barrels above what Nigeria produces for 170 million people. Venezuela is grappling with empty shops and an inflation rate of 720 per cent. Last week, the scarcity of essential commodities was so excruciating in Venezuela that the government opened its border with Columbia to enable its citizens buy things in Columbia. The border was closed last year to stem cross-border raids by Columbian rebels.
Judging from the plight of Venezuela, Nigeria’s inflation rate is still within the Third World’s comfort zone. The problem is if it could be kept within that zone.
