Steady Decline in Inflation: Sustaining the Economic Gains Recorded

Nigeria’s inflation dropped by 0.37% to 17.38% in July 2021, from the 17.75% recorded in June 2021. This is according to the latest report of the National Bureau of Statistics (NBS). According to the Bureau, the decline in the Consumer Price Index (CPI), which measures the rate of change in prices of goods and services, was due to the improvement in food prices.

Inflation rate in Nigeria has been on a steady decline for four consecutive months, when inflation rate in May stood at 17.93%, down from the 18.12% recorded in April, which was also down from the 18.17% that was recorded in March.

The NBS also disclosed that the composite food index fell 21.03% in July, compared to 21.83% in June. In May, food inflation was 22.28%, according to official data. Although food prices moderated in July compared to June, NBS said the rise was due to increases in prices of milk, cheese, eggs, coffee, tea and cocoa, vegetables, bread and cereals, soft drinks, and meat. NBS revealed that food inflation on a year-on-year basis was highest in Kogi (28.51%), Enugu (24.57%), and Lagos (24.04%). On the flip side, Akwa Ibom recorded the slowest growth by 17.85%; Bauchi (17.74%), and Abuja grew at 16.67%.

The latest inflation figure paints a less harsh situation compared to the previous month. That is, Nigeria spent more in July 2021 compared to July 2020, but not as much as the increase recorded when comparing June 2021 and June 2020. This also implies that inflationary pressures are beginning to consistently trickle down; however, the rate of decline is still slow, as 17.38% is still very high compared to returns on investors of various investment portfolios in the country.

The consistent downward movement of the inflationary curve, though marginal, is a welcome development. There was palpable anxiety around March this year when inflation hit 18.17%; and with the existing market distortions and unfavourable economic parametres, many analysts opined that by mid-2021, the nation could be facing an inflation rate in excess of 20%. The negative effects which a soaring inflation rate will further heap on the struggling economy will be multidimensional. It is hoped that factors contributing to the decline will be sustained. The Central Bank of Nigeria’s (CBN) recent policies to boost the different sectors of the economy, steady recovery from the shocks and challenges triggered by the Covid-19 pandemic, and some little gains being recorded in the fight against insecurity in certain areas, leading to increase in agricultural yield and ability to move products, have been some of the factors responsible for the steady fall in inflation.

The deceleration in inflation rate facilitates monetary policy implementation; it is also expected to reduce the incentive for speculative activities in the forex market, as more people begin to increase their faith in the domestic currency. So, the current disinflation will support the value of the naira. It will equally send a positive signal to foreign and domestic investors regarding macroeconomic stability in Nigeria, as well as facilitate the rebound of the stock market.

Be that as it may, the big question is whether the deceleration is sustainable, considering the risks to inflation outlook which are still present. These include insecurity, which directly impacts food inflation, the recent devaluation of the naira, flooding in many parts of the country, and the likely hike in pump price of fuel following the signing into law of the Petroleum Industry Bill (PIB). Even though there have been assurances from the government that the purported complete removal of fuel subsidy as contained in the PIB will not be done in one fell sweep, if that subsidy is removed, regardless of the technique to be used, there will be a multiplier effect on purchasing power, transportation costs, and food prices, which may culminate in a drastic reversal of the gains recorded on inflation so far. It is imperative for the government to put in place workable measures to cushion the effects and negative economic brunt that such a policy may precipitate on the short-term.

Despite the usual increase in demand associated with Sallah and other festive seasons, the drop in the July inflation rate may have been the result of a bountiful harvest season. CBN’s interventions in the agriculture value chain is bearing visible fruits, since the deceleration was noticed in the food component, while the core index actually increased in both the year-on-year and month-on-month basis.

It is pertinent to note that inflationary pressure continues to be driven by the food index at over 21%, reflecting legacy factors such as transport and security challenges. This partly explains why food inflation is reportedly highest in Kogi, at over 28%, and lowest in neighbouring Abuja, at about 16%. Given that the rise in core inflation may not be unconnected with high exchange rates, the CBN should continue to ensure forex market liquidity to enhance access to forex, especially now that crude oil prices are relatively high and in view of the recent suspension of forex sales to BDCs. In order to increase food output and significantly bring down food inflation, the need to tackle the seemingly intractable security challenge facing the country cannot be overemphasised.

Recently, the CBN expressed the hope that inflation will be down to single digit by 2022. It is believed that with the full implementation of the CBN’s recent policies designed to boost different sectors of the economy, the nation’s inflation rate would be kept at bay. More factually, the key economic assumptions of the 2022-2024 Medium Term Expenditure Framework (MTEF) of the Federal Government, as disclosed by Finance Minister, Zainab Ahmed, contains an inflation rate pegged at 13%.

Since the Nigerian economy recovered from recession in the last quarter of 2020, it had maintained a path of recovery. Despite the challenges triggered by the COVID-19 pandemic, insecurity, exchange rate market pressure, declining capital inflows, high debt service payments, and rising fiscal deficits, the nation is projected to record speedy domestic recovery.

If the CBN forecasts for GDP growth are sustained and there is improved vaccination with the health hazards and lockdowns not resurfacing, we may see GDP growth getting close to 3% by the end of 2021. We will also see the inflation rate coming down to the region of 13% by the end of the year and further down to the NBS projection of single digit by 2022 or the middle of 2022.

We will start seeing a downward trend in inflation numbers, particularly headline inflation.  With the right policy mix, including an effective supply system, the country would experience positive growth in late 2021 and the beginning of 2022, and there will be further drops in inflation rate.

All stakeholders must therefore be unified in working together to bring this promising forecast into reality.