Photo Credit; Daily Post
Cheers trailed the successful primaries held at the PDP National Convention at Port Harcourt over the weekend. Just as you know, Atiku led the polls with a landslide victory garnering 49% of total valid votes. The unrelenting septuagenarian clinched the PDP presidential ticket barely 10 months after defecting from the ruling party.
He has had his fair share of national leadership, having assumed the office of the Vice President for two consecutive tenures. Drawing from a bank of experience and wealth of business-driven personality, he was able to head the National Economic Council during the period of relative economic stability and deserves credit for conceiving the concept of the listing of the NNPC on the stock exchange.
His candidacy poses a major threat to the incumbency given the divided allegiance of the Northern and Southern part of the country upon his emergence as the top contender for the office of the CEO of Nigeria Inc (as Wale Olusi refers to the company - Nigeria).
With the North West divided between Muhammadu Buhari and Rabiu Kwankwaso’s Atiku, the South West seem lopsided towards the APC due to the predominance of the Progressives. The South East and South-South seem to be Atiku’s best bet in that section of the country due to the rising unpopularity of the ruling administration due to biased handling of the IPOB and herdsmen situations.
The major focus currently is the selection of a running mate by the big two parties. While the choice of the ruling party is clearly Prof Osibanjo, an intelligent legal expert whose antecedents cannot be forgotten as regards the introduction of VAIDS, dismissal of erring DSS chief and the overhaul of the erstwhile parasitic SARS alongside other noteworthy achievements; the PDP flagbearer is currently on the look out for a running mate.
The search has been speculated to be streamlined towards economists from the South Western or South Eastern Region. The speculated nominees include the current Senate Vice President - Ike Ekweremadu, former governor of Anambra State – Peter Obi, former minister of finance and one-time deputy president of the World bank – Okonjo Iweala, as well as a two-time minister and vice president of World Bank Africa – Oby Ezekwesili. The spotlight also fell on Akinwunmi Adesina, current President of African Development Bank.
The endeared search for an economist to take up the role is expedient as the economy of Nigeria is a major concern for both the electorate and investors. The rising unemployment figures, worsening human development positions, rising debt profile, falling external reserves and rising inflation figures are all current situations bedeviling the Nigerian economy.
The recent slowdown in growth from 1.95% to 1.45% in the second quarter of 2018 raises a red flag on a likely downslide into another recession. In economic parlance, when an economy experiences two consecutive quarters of negative growth in the GDP, that economy is said to be in a recession. However, if the economy experiences a positive growth result and relapses after a short period into negative territory, such an economy is said to be in a double-dip recession.
Nigeria, the country enmeshed in a constant wealth of petrodollars overtook India as the country with the largest number of citizens living in abject poverty. It is estimated that about 87 million citizens are living less than the poverty line of $1.90 (N689.70 at N363 to a dollar) a day.
This is unsurprising as the current minimum wage per day current stands at N580.65, forming the bedrock of the clamour for an increment in the minimum wage. Much traction or direction is needed on the plans of the political contenders to cut the cost of governance.
Earlier this year, the Emir of Kano and ex – boss of the CBN, Sanusi Lamido Sanusi gave the following analysis on cutting the cost of governance to stem rising unemployment levels;
*A senator receives N36 million monthly. If this is divided into two, it comes to N18 million. The second half of N18 million can be used to create jobs for 200 Nigerians, each earning N90, 000 monthly.
“When you multiply 200 people by 109 senators, this will give 21,800 Nigerians gainful employment. In short, 200 Nigerians will be able to live a comfortable life on half a senator’s monthly salary.
“Half of that amount is N12.5 million, which is enough to employ 135 Nigerians with a monthly salary of N92, 500 each. Nigeria has 360 members in the House of Representatives. Half of their salaries can employ 48,600 Nigerians who can live comfortably.
“So, the Buhari Administration can employ 70,400 Nigerians with monthly salaries ranging from N90, 000 to N92, 500. This is just by dividing the salaries of senators and representatives.
“Half their present salaries is more than enough for them in a country where majority of Nigerians live on less than a dollar per day”.*
The Federal Government has although hinted on a possible upward review as their decision could yield grave consequences for the ruling party if a strike is embarked upon less than 140 days to the election.
On the flip side, the sustainability of the wage review becomes pertinent since a government is a going concern and is to run based on earlier agreements irrespective of the party in power. The latter could be taken care of if the cost of governance is cut down to considerably fair levels reflective of the state of the economy so that funds would trickle down to the masses in form of improved human development indices.
Furthermore, the need to select an economist is paramount to balancing the political and economic will of the ruling class. Hindsight showed us about an earlier occurrence of a clash between the duo - the Jonathan Subsidy Removal Saga. The decision to remove subsidy in January 2012 was sound economically but fatal politically. Although, the Jonathan administration was under fire due to the inconsistency in government policy – his predecessor had increased subsidy (or reduced the pump price paid by consumers), yet the policy was welcome at a time when the oil boom was about to bust. Two years later, crude oil prices crashed vehemently to the detriment of oil producing nations. The Venezuelan economy is yet to recover from that crises despite allegedly possessing the largest oil reserve in the world.
Hence, this critical search based on federal character and knowledge of economics is critical to the outcome of the elections as a sound legal professor with solid grasp of economics flagged by the incumbency remains the man to beat. As the election season unfolds, all we can do is to keep tabs on Buharinomics and likely implications of an Atikulate administration,
Common to any election period are bill boards, posters, fliers with self-accredited glories and endorsements placed at catchy areas to seize the attention of by-passers, car owners. This trickles down to unprecedented flows of cash in circulation, precipitated by political juggernauts who are either first-timers or seeking re-election into certain political offices.
A market is created as politicians seek to upgrade their presence in the environs to boost their chances of curling a well full of votes while advert agents seeking a means of livelihood in the harsh economy find comfort in the surplus cash doled out by politicians during electoral seasons.
While some wait till dusk to put up the posters, others take pleasure in tearing down the posters of their opponents. The election season might be a turbulent one for the stock market of a developing country. However, the selfsame period brings bumper harvest for hungry Nigerians.
A windfall is a temporary income that occurs once in a blue moon. Windfalls are highly unpredictable in the real world sense. This is why the great British Economist Milton Friedman categorized income and expenses under permanent and transitory categories.
Permanent income are predictable incomes that an household earns e.g. salaries and are used to fund critical household expenditures – rent, school fees etc. On the other hand, transitory incomes are non-recurring income sources for the household e.g. lottery gains, trading gains etc. They are usually highly unpredictable and risky to earn. This is why they end up being wasted on impulse buying and conspicuous consumption. The psychological nature of an economic agent makes him spend temporary income on temporary consumables. This is why earnings from lotteries are most likely used to finance wild partying, purchase of expensive phones or under-taking luxurious trips below one’s current level of permanent income
The election season is where there is an upsurge in monetary activities as consumers seek to expand their income base. For instance, 100 pieces of a poster are given to each individual for a return of N10,000. This means that for every one candidate with an average of 100 advert agents spends N1,000,000. With an average of 1280 positions (1 Presidential, 36 gubernatorial, 109 senatorial, 360 house of rep and 774 local governments) available with at least 2 contenders, this balls down to an average of N1.28 billion injected into the economy. This means an average of N6 is spent to reach out to one citizen assuming a population of 198 million Nigerians if there are only two contenders for such post. This also implies that an average of 128,000 get employed temporarily during this season.
The downside to election windfalls is the negative effect on price stability. Due to lower unemployment, more wages, money in circulation increases. Much money chasing few goods will result in a rise in the prices of goods and services. This is one of the contributing factors is the recent upwards redirection in inflation rate after 18 months of lesser pressure on prices.
Election windfalls may be key in kick-starting the economy within few months into the electoral cycle, more discretion is advised in consumer spending as lack of financial discipline erodes the purchasing power of the very money collected. This means N10,000 could end up buying N8000 worth of goods.
Funny enough, the electoral season is a period where stocks are stupendously cheap. Adopt the Buffet principle by investing while others are spending. Invest in sound stocks in the stock market or fixed income instruments now when others are running away and watch the value appreciate within the next one year. Saving is key and very lucrative in situations like this. No impulse buying, invest your electoral windfalls and yield great returns.
Lay-man explanation of NBS August 2018 inflation report
The inflation rate has eventually risen after declining for 18 consecutive months.
The CPI rose by 11.23% year–on–year in August 2018, which is 0.09% higher than the headline inflation rate in July 2018 (11.14%).
This simply means the rate at which the general price level rose in August 2018 (from August 2017) is higher than the rate at which the same metric rose in July 2018 (from July 2017)
This is the first time headline inflation has risen on a year on year basis since January 2017, when inflation was as high as 18.72%.
The headline inflation rate rose due to a rise in all price indices in the economy. This means that all price indices including food, clothing, housing, furniture, health, transport, communication, recreation and restaurants rose simultaneously in August 2018.
Ironically, the Headline index increased on a month-on-month basis by 1.05 percent in August 2018, down by 0.08 percent points from the rate recorded in July 2018 (1.13 percent). This means prices rose at a slower rate between July 2018 and August 2018.
What does this mean to you?
To the average Nigerian, this actually means prices are responding to the electoral season which is fast approaching as demand is rising in the economy.
This also implies that creditors lose as debtors gain. This will lead to a rise in lending rates on loans from banks due to the high risk environment. So, banks will demand for more interest to compensate for the fall in the purchasing power of the Naira.
Furthermore, this means the real worth of pensions fall as pensioners will purchase lesser amount of goods with the same amount of money now than in previous months.
Finally, the rise in inflation shows a higher risk to investors. The rule is the higher the risk, the higher the return expected on investment. Therefore, investors will bid for higher yields on treasury bills.
The food inflation figures show a rather impressive result as it records the second slowest rise in food prices since January 2017. This is a turning point from the earlier declines recorded year to date. This is because the food inflation index rose by 13.16 percent in August 2018, higher than 12.85 percent in July 2018.
According to the report by the NBS, the rise in the food index was caused by increases in prices of bread and cereals, potatoes, yam and other tubers, meat, vegetables, fish, fruits and oils and fat. This could be attributed to the religious festivities – Ileya which led to an upsurge in demand for goods and services all across the nation.
Further analysis reveals that food prices rose at the slowest pace in July 2018 (12.85 %) in the last 18 months (since January 2018). August 2018 (13.16%) was the month with the second slowest rise in food prices within the last 18 months. This upward movement could be traced to the easing crises between herdsmen and farmers. Within the last 18 months, food prices rose fastest in September 2017, a period that coincided with reports of massacre by the herdsmen.
What about all other items except food?
The Core Index which measures the movement in all other items except agricultural products grew at a slower rate in August 2018 (at 10.0 % year on year) than in July 2018 (10.2%). The fastest price increases were recorded in the prices of domestic services and household services, dental services, hospital services, medical services, repair of household appliances, tobacco, wine and repair of furniture.
Urban and Rural Inflation
It may interest you to know that there’s an inflation reading for rural and urban areas with regards to their varying consumption patterns.
Urban inflation rate rose by 11.67 % year on year in August 2018, greater by 1 basis points (0.01%) in July 2018 (11.66 %).
Rural inflation increased by 10.84% in August 2018, a similar basis point difference above the figure in July 2018 (10.83%).
On a monthly basis, both urban and rural inflation figures rose by a slower rate – 1.00% and 0.96% from 1.23% and 1.18% respectively.
This means that prices rose faster in urban areas than in rural areas. Off course, common sense supports this view. However, both are rising due to the trickle down effects of macroeconomic events that affect both areas.
Indeed, NBS also has a unique inflation reading for different states in Nigeria. Due to the difference in consumption pattern amidst various states, it may be difficult to do a comparative analysis between the sub-nationals. The NBS records the rise in all items (called all-items inflation) and in food (food inflation) for all states.
On a year on year basis, Yobe State was the state with the fastest hike in prices of all items (12.90%). Lagos came next with an inflation figure of 12.64% while Enugu had the third fastest hike in prices (12.52%). This means prices of all goods and services in those states rose faster in these states between August 2017 and August 2018 than all other states of the federation.
Meanwhile, places with the slowest rise in prices include Kwara (8.25%), Borno (9.88%) and Benue (10.11%) on a year on year basis. This implies that prices rose slower in one South western state and two northern states when comparing prices in those states between August 2017 and August 2018.
On month on month basis (that is comparing prices between July 2018 and August 2018), all items-inflation was highest in Plateau (1.96%), Lagos (1.73%), and Ogun (1.58%).
It’s unsurprising that Lagos makes the top-three list of states again when comparing prices on a monthly basis. This mirrors the rising migration of individuals into Lagos, the smallest state in the country.
The lowest month on month inflation was recorded in Kwara. In fact, the south western state recorded a negative inflation or price deflation. This means that prices actually fell in the state. This could be attributed to its premium position between the North and the South that affords it access to agricultural products from the north and other surrounding south-western states. Its strategic position could have been the reason for the decline in prices in the state.
The top two states that experienced the slowest rise in prices are Abia (0.37%) and Delta (0.53%) states.
Food Inflation In States
In August 2018, Lagos (15.79%) had the fastest food inflation reading on a year on year basis while Abuja (14.99%) came next. The third state with the fastest rise in the prices of food is Ebonyi (14.83%).
It’s obvious that food inflation rose the fastest on a year on year basis in both the political and economic capital of Nigeria due to the high standard of living in both areas coupled with the influx of investors and visitors from every part of the nation.
Kano (10.64%), Akwa Ibom (11.02%) and Borno (11.03%) recorded the slowest rise in food inflation on a year on year basis.
On month on month basis however, August 2018 food inflation was highest in Ebonyi (2.71%), Lagos (2.57%) and Katsina (2.49%). Again, Lagos makes the top 3 states with the highest inflation reading while Abia (0.25%) and Delta (0.27%) recorded the slowest rise in food prices.
Once more, Kwara recorded food price deflation or negative inflation (general decrease in the general price level of goods and services or a negative inflation rate) in August 2018.
Last week, an expository article explaining inflation in layman terms was published on Ask Nigeria.
A review of the economic agenda of 2019 presidential aspirants
To begin with, the performance of the incumbent government compared with its campaign promises is obviously underwhelming. This is because very few politicians take time to consider the exogeneous factors that could thwart their well-meant intentions and subvert their plans for the economy.
While I sat comfortably skimming through the ideologies of presidential aspirants especially concerning their plans for improving the Nigerian economy, I found several ideas that need to be critically appraised even as electoral tensions build up. Cutting across several aspirants, I would present a critique of these ideas and their relevance in the Nigerian context.
Economic recovery and growth
Mirroring the antecedents of the incumbent, the gruesome contraction in the economy between Q2 2016 and Q2 2017 needed an urgent correction. Though the decisions of the government led to heightened debt obligations, the recovery could largely be attributed to the ceasefire by the Niger Delta militants. This means that the oil sector alone could determine the direction of the economy and unless an alternative route is found, our economy remains spellbound by it. The FG has invested in agriculture, power projects amidst other efforts.
According to an earlier report on trade by the CBN in 2018, a surplus on the Current Account of about N2 trillion was achieved due to a surge in exports of primary products. Somewhat clear is the direction of the economic agenda of the incumbent, however the politicisation of national issues could serve as a slowdown in the progress of the administration in future as more focus and will is expedient.
Interjections in Monetary Policy
On the flipside, the incumbent and other aspirants need not tamper with critical decisions of the economy in the hands of independent, regulatory and non-partisan bodies in order to achieve their ends.
For instance, the attempt to politically influence the devaluation of the Naira, the monetary policy rate and floatation of the currency in the past were threats to the autonomy of the monetary authority. This could have spelt doom for the economy had the monetary authority not taken firm positions in its decisions.
In fact, some aspirants have decided to introduce a new Nigerian currency to curb fake currency production at a time when the stock of Foreign Reserves for a whole country is no longer correlating with rising oil prices ( and below the quarterly profit of a multi-national company - Apple Inc (above $60 billion for Q1 2018).
It is practically expensive to print and issue currency. What is the guarantee that the new currency won’t be dubbed? How do you stem the inflationary impact of such a decision? What will be the reaction of the international community? All these reasons show that such an idea is not only utopic but irrelevant to Nigeria’s economic space.
Another suggestion I’ve heard is the need to urgently ease the rates to foster lending in the economy to interest rate-sensitive sectors of the economy.
Many aspirants fail to understand the Nigerian economy is highly prone to oil shocks and policies in advanced economies. No successful policy can be suggested without critical appraisal of global happenings and domestic events as excellently performed by the Monetary Policy Committee. A solid argument for politically influencing the CBN to ease the rates is the stellar profit declarations by banks in a high interest rate environment that stifles doing business in the economy.
Well, the focus should be redirected to what the government can do to ensure rates are brought down. Interest rates are set in tandem with the inflation rate and the creditworthiness of the borrower, which is indirectly affected by infrastructural deficits in the society.
Despite the decline in inflation rates, it still hovers above 10%. Without any complex analysis, it is crystal clear that setting the rates at a single digit without corresponding deceleration in the inflation rates mean creditors lose while the debtors gain. Even innovative lending platforms that have been launched to ease borrowing have set theirs at 15% minimum due to the MPR and inflation rate constraints.
Moving on, restructuring has been the newest melody in town by nationalists and politicians. As sweet as this sounds, not many recognize the intricacies of a comprehensive issue as this. Economically, restructuring as proposed by politicians implies the redistribution of revenue sources in such a way that more economic power will be given to the states and less to the Federal Government. The first question is why will the FG reduce its income sources in favour of state governments? Secondly, will the legislature support the restructuring bill? We are still aware that the 2014 Confab report is yet to be implemented and unlikely to see sunlight. The Petroleum Industry Bill is currently under pressure given the advantage this could pull for private investors. The 96-4 syndrome still holds sway in the Nigerian economy. This simply means those with 96% expenditure obligations have access to 4% of the nation’s revenue while those with 4% expenditure obligation possess 96% of the nation’s revenue.
Although the Nigerian economy is suffering from the incapability of some states to fund their expenditure obligations without receipts from the federation account, yet the economic restructuring idea may not work without clear and precise exposition on what the advocates for restructuring mean, how they will be able to convince the legislative and judicial arm and the trickle down effect on the Nigerian economy.
One of the selling points to the youths is the proposed release of funds for entrepreneurs with ideas that could generate more employment and boost growth in the economy. Such an idea is welcome in the Nigerian context, however what are the institutions that would be in place to checkmate the efforts to defraud the system? Which mechanism will be put in place to measure the transparency? As beautiful as this idea may be, a lot has to be put in place to checkmate abuse of released funds. Nigeria’s system has not been developed to the extent that such would be implemented without hitches.
Another important suggestion discovered during my research was ensuring human resources are sourced locally in building projects. Notwithstanding the contractor executing the projects, the people must feel an impact of such projects through job creation. This makes a lot of sense in economic parlance as this would help strengthen the labour force and reduce the unemployment rate. This was one of the policies instrumental to the prosperity of the Chinese economy and would benefit the development of the labour force. However, attention has to be paid on human capital development. The alarming state of the health and education sector has led to capital flight. Monies that would have been in the coffers of Nigerian hospitals are paid to foreign hospitals with higher standards of health care and greater technological innovations. This means more needs to be done to make the average Nigerian man fit for work in an economy as pregnant with potentials as Nigeria
Rather than talking the economy to work, it would be great to hear aspirants proffer policies that could subdue inflation rates below 10 percent, bold fiscal reforms that provide necessary infrastructure, reduce exposure to oil shocks and improved relevance of the currency within the Sub Saharan Africa. All these would improve demand for the naira, ensure appreciation in the exchange rates, reduced inflation as well as reduced lending rates.
In further write ups, I would analyse the economic policies of aspirants anonymously as I hear or read about them and seek to enlighten the public on holding their leaders accountable and ensuring their manifestoes make economic sense.
It’s no news that the South African economy has experienced its first recession since the exit of Zuma and it's second since the global economic meltdown. This event unfolded barely six months into the tenure of Cyril Ramaphosa, the chairman of a booming but currently disturbed telecoms business –MTN. Despite rejigging the ministerial cabinet, reforming state-owned enterprises, pursuing an investment-driven economy and launching a similar youth empowerment scheme within his first 100 days in office, the South African economy still receded seven months later.
This consecutive decline for two quarters in growth of the Gross Domestic Product means that the economy has encountered a recession. The GDP measures the market value of goods and services at a particular point in time. This metric (GDP) is calculated by the Statistical Agency in a nation and released quarterly. On the other hand, recession is a slowdown in the economic activities of a country. Such a situation is characterized by fall in spending, boom in unemployment, rising inflation and decline in corporate profits. Recession is usually corrected by expansionary fiscal or monetary policies such as reducing interest rates, reducing taxes, increase in government spending e.g. bailout funds to critical sectors of the economy.
The economy of SA initially contracted by a revised 2.6% downslide in the first quarter of 2018 (compared to the first quarter of 2017) before recording another decline in output by 0.7% quarter on quarter in the second quarter of 2018. The recession was led by a decline in Agriculture (which fell by 29.2%), transport industry (which dipped by 4.9%) and Trade (which went south by 1.9%). These declines were caused by harsh environmental conditions affecting agriculture, industrial action in the transport sector, fall in government and household expenditures due to the reformist polices of Ramaphosa and lesser manufacturing output. Although, the mining sector soared by 4.9% and the Construction sector recorded a positive growth of 2.3%, they were not sufficient to drive growth figures northward. It seems that the upsurge in the South African markets following the election of Ramaphosa waned due to the knock-on effects of the looming trade war and sell-offs that overwhelmed efforts of the private and public sectors.
Recently, the Nigerian GDP report for the second quarter was released showing a lower but positive growth rate of 1.50%, 45 basis points lower than the 1.95% growth figure recorded in the first quarter. This growth was driven by the non-oil sector which grew by 2.05% (from 1.29% in Q1 2018) – Construction, Agriculture, Transportation, Storage and Other Services. The oil sector relapsed by -3.95% despite the oil price rally from about $69 at the beginning of 2018 to about $78 dollars currently due to fall in oil volume caused by frequent repairs carried out on oil installations. This saw oil output sliding from 2 million barrels per day (mbpd) to 1.8 mbpd.
From the above analysis, we see that both African economies experienced a lower growth in output. This coincided with a period of turmoil for emerging market and frontier economies. An emerging market is a country that’s progressing towards becoming a developed economy e.g. Argentina, Turkey, Mexico etc. while frontier economies are countries that are experiencing a slower rate of transformation into a developed one e.g. Nigeria, Ghana, Kenya etc. Emerging and frontier markets experience faster rates of growth than advanced economies. Advanced countries grow at a steady rate and possess developed infrastructure, institutions and system for running its economy.
Though the Buhari Administration came under fire for not taking similar steps as his South African Counterpart when he assumed office, yet the current economic sphere has taken its toll on both economies. As both economies jostle to win over investors and sign memoranda of understanding, the thick black cloud of the looming trade wars seem to settle down on both economies.
Earlier this year, the Chinese and US economies have exchanged banters over an alleged breach of trust in handling US exports resulting in tariff impositions on critical import items of the Chinese economy. While the war of words and trade go on, as they say the green grass bears the brunt. The grass in this case are frontier economies like South Africa and Nigeria. This is because of the dependence of these nations on bigwigs like China and the US. Following the hike in Fed rates (the rate at which money is lent to US banks), many foreign investors sold off their securities in these markets and opted for a safer dollar haven.
Still on the trade war, Nigeria has been experiencing a recession in trade sub sector prior to this time while the South African nation has lagged recently in the same sector. This becomes worrisome at a time when the Continental Free Trade Agreement is on its way. Just as the benefit of the agreement is to African economies, the cost of a trade war can dampen the sustainability of the agreement due to the huge dependence on the dollar especially when China is yet to retaliate intensely.
The dollar has recently strengthened following the exit of dollars from emerging markets all over the world upon the raise in the Fed rates. The European bank and Bank of England are also set to increase their monetary policy rates, hereby attracting investors that had invested in emerging economies upon the quantitative easing policies of advanced economies in correcting the global credit crunch of 2009.
In retrospect, virtually most analysts got their forecasts wrong about these two economies this year due to the unfavourable international climate and some local issues. In Nigeria, the impact of the herdsmen crises is yet to be felt due to the lag period in agricultural production however resurgence of such activities could dampen non-oil growth and drag growth figures further in the mud. Even as legal issues constrain investments in the oil sector, the government should not rest on its oars in revamping the ailing sector. Following the listing of 40% of shares of the NNPC on the exchange, more transparency is needed to attract the much-needed investment.
As both economies draw towards an electioneering season in 2019, wavering investor confidence may continue. The rand closed lower by 1.5% on Wednesday while the Naira appreciated by 9 basis points (0.09%) at the Investors Exporters Window but closed 8 basis points lower at the parallel market on the same day. This shows the cautious steps taken by foreign investors in emerging economies. Had the Investors/Exporters Window not been established in 2017, Nigeria might have experienced another recession this year. The market-driven forex platform seems to boost investor confidence in the economy. While some risk takers are taking advantage of undervalued high-quality stocks in these economies, others have chosen to seek refuge in the dollar.
Looking forward, it is expected that African economies begin to plug in economic policies that boost private sector involvement, reduce dependence on the state and attract funds that will be used in revamping the economy at large.
After the release of a news event, report or proceeding, it is commonplace as a democratic society to listen to the views of well-meaning Nigerians. In as much as there is room to air out their opinions, my countrymen express their views so expressly that it may lead to emotional outbursts atimes. While they do excellently well in certain fields like entertainment, sports, crime and politics, they are unable to provide adequate feedback when it comes to basic economic matters like inflation due to incomplete or incorrect knowledge. The trap in understanding economic concepts is that they may sound so simple but could have completely different interpretation in economic parlance.
Nigeria has experienced a consistent drop in inflation figures since January 2017, what exactly does this mean? Many Nigerians express deep distrust for such news and even go ahead to politicise the whole issue. How do you say inflation is dropping when things are getting so expensive as the day goes by? They will even go on to tell you about times when a 35cl bottle of Coca-Cola was sold for as low as N20 and Agege bread for as low as N30. Well, I make bold to break down this monster called inflation to the reading public and amend this ailing relationship between the statisticians and the streets.
Inflation can be defined as the increase in the general price level of goods and services in an economy. Don’t rejoice yet, it’s more than what you see, lets explain two confusing terms; Increase and General Price Level. Have you ever heard of general price level at the supermarket? So just hold on and read.
General Price level
To begin with, note the definition says inflation measures general price level and not individual prices alone. This means that if the price of a commodity like Coca Cola rises, inflation rate may or may not rise (in fact it could fall). This is because there are many other commodities in the beverage space and in other sectors that can be unaffected by the factors that led to the price increase in Coca Cola. In other words, an increase in the price of Coca Cola may not be caused by a macroeconomic factor – an event that affects prices, cycles, output, trade or employment in an economy. So you need to ask yourself; Is the price of Cocacola affected by something that affects all other products – automobiles, textiles etc. If the answer is probably exchange rate cost, you are sure this will affect all other commodities and could affect the general price level significantly.
If we want to measure inflation, we do not consider the price of Coca Cola, Bubble Gum, Cars or Fuel in isolation. We look at one price that houses all other prices, that’s what we call the Consumer Price Index (CPI). How then do we measure general price level since there are so many goods in the economy? This responsibility is given to the National Bureau of Statistics. What they do is that they hire agents to go to markets and gather data on the actual prices of all goods and services sold nationwide. This is done on a monthly basis. The Statisticians (NBS) then collates the prices and assigns weights to each class of good or service according to their scale of importance.
The CPI is actually a combination of several prices of several baskets of goods and services, that have their relative weights based on order of importance in the economy. The CPI has 12 baskets with Food & Non-Alcoholic Beverage (51.8%) having the largest weight while Housing Water, Electricity. Gas and Other Fuel (16.7%) takes second place and Clothing & Footwear (7.7%) accounting for the third largest component of the general price level. others include Furnishings & Household Equipment Maintenance (5%), Education (3.9%), Health (3.0%), Miscellaneous Goods & Services (1.7%), Restaurant & Hotels (1.2%), Alcoholic Beverage, Tobacco & Kola (1.1%), Recreation & Culture (0.7%) and Communication (0.7%).
Food Comes First!
As we know that food is the most important need of man and comes in various classes, colours, forms and style, it is that commodity basket that is deemed absolutely necessary for survival. However, due to its premium position in the consumer goods space and high contribution to price increments alongside energy needs, an inflation rate reading is given to acknowledge food inflation. This isolated view is necessary so as to capture the rate of change in other prices as well as remove the seasonality factor that characterizes agricultural products such as gestation periods (periods between planting and harvest for plants and between copulation and delivery for livestock).
Food could bully the inflation figure so much especially when there are threats to agricultural production such as famine, natural disasters or unchecked violence as the herdsmen crisis in the North. We see that food inflation heightened during the second half of 2017 reaching as high as 20% due to the farmers/herdsmen scare. However, food inflation has been declining of recent. Food inflation in July 2018 dropped to 12.85% from 12.98% in June 2018 signalling lesser pressure on food price (lesser pressure not lesser prices). Food inflation figures for this month (August 2018) may slightly rise due to the festivities of our Muslim brothers.
Energy; Mr. Indispensable
Speaking of energy needs, you will agree with me that virtually all sectors of the economy require power for successful operation. The fact that an oligopoly (few suppliers) are in charge of power and energy in the country that is vital in every industry shows how fast this component can aggravate the general price level. From the analysis above, you will discover that energy needs alone have a weighting of 16.7%. This alone shows that an increase in fuel prices or electricity tariffs could affect inflation greater than the giant-food item space due to the bargaining power of the suppliers and the indispensability of the product if there are no agricultural shocks (like famine).
Recall that Nigeria was thrown into tantrums when Jonathan announced the removal of fuel subsidy on New Year’s Day in 2012. This removal of subsidy on petrol led to an increase in the price of fuel to be paid by end users from N 65 to N141. What you may call a meagre N76 increase had pronounced effects on inflation why? Virtually, all sectors of the economy uses fuel to supply electricity for themselves. This led to increase in cost of transportation as conductors increase their fares, this fed quickly into the prices of food as traders increase prices to cover costs and the price spiral goes on and on to affect businesses, corporates etc. After this period, you couldn’t even afford sachet water with N5. The price of sachet water rose by 100% and rose for good (actually from N5 to N10; don’t be scared, that’s how we analysts compose our melodies).
A cursory look at CPI data from over 9 years (January 2009 – June 2018) showed that Nigeria experienced the fastest month-on-month increase in January 2012 (3.35 %), accounting for close to 30% increase in the price level in 2012. What this tells us is that inflation is most likely going to be affected by energy needs than any other factor at any given circumstance.
Headline and Core
This disruptive nature of food and energy calls for another measure of inflation to see how fast or slow prices are moving in other sectors. Abi no be so? Hence, we have the Core Index. this is an index that measures the rate of increase in the prices of all items except food items and energy needs– Core inflation. So, Core inflation measures the rise in the general price level of non-farm and non-energy items too. It comprises the other 10 components of the CPI to see how prices rise in other sectors of the economy other than the loud top two.
Meanwhile, the proxy for measuring the price change in all sectors is called the Headline Inflation. Yeah, just like the headline news that covers all stories for the newshour, the Headline Inflation shows the movement in prices of all sectors in an economy.
So now, we can easily identify the Consumer Price Index, the components of the CPI and how they affect inflation as well as the types of Inflation – Headline Inflation and Core Inflation. We’re about to slide into the part that gets confusing. We have said Inflation occurs when the general price level rises – How then do we know when inflation rises? Does a drop in inflation rate mean prices are falling? What does rising or falling inflation rate mean?
Reconciling Increase and General Prices (CPI)
Simply put, Inflation happens when the general price level rises. This means as long as the CPI is rising, there is always inflation. If the CPI falls, there is deflation.
Is falling price levels the same thing as falling inflation?
The answer is NO. Inflation rises when the CPI rises faster and inflation falls when the CPI rises at a slower rate. In other words, the speed at which the price levels rise determines whether the inflation rate rises or falls. This means a falling inflation rate doesn’t mean prices are not rising, it just means prices are rising at a slower rate. In the same vein a rising inflation rate doesn’t just mean prices are rising but it means prices are rising at a faster pace. In both cases, prices are rising but the speed of increase compared with the speed at which the previous price rose determines whether inflation goes up or down.
Rising CPI and Falling Inflation
If the CPI rises faster in the current period than in the previous period (often referred to as base period), inflation rises. The periods can be monthly or yearly. The reported figures are usually yearly in order to compare similar seasonal periods. Inflation rate currently stands at 11.14% comparing the CPI between July 2017 and July 2018. On a monthly basis inflation rate stands at 0.83% (May 2018 and June 2018). Like I said earlier, we refer to the yearly change whenever you hear inflation rates, so inflation rate is currently 11.14%, this means that the general price level rose by 11.4% between July 2017 and July 2018.
Data also shows us that although the general price level rose, inflation rate fell from June 2018 (compared to June 2017 at 11.23%) to July 2018 (compared to July 2017 at 11.14%). This simply means that prices rose slower in July 2018 than in June 2018. This is probably due to an ease in pressure on prices like exchange rate stability. In July 2017, the exchange rate situation was not as stable as it is now. This made prices rise at a steadier rate in July 2018. So it is established that prices can still rise when inflation falls because they are rising at a slower rate.
A quick flash to the subsidy example showed us that when fuel prices increased, there was a speedy response in the prices of goods and services. In fact some prices were increased so high that a strike action had to be taken by the labour union to rescind the decision or lower the price by subsidy rearrangements. This is because wages that are used to purchases goods don’t rise as fast as prices do. The problem we had is that if at all subsidy should be removed, it should have been done gradually. This will allow prices to rise steadily keeping inflation rate low. The speed at which the decision affected prices was high, that’s why inflation rose. We know price increases are good for the economy, but it should rise at a slow rate and shouldn’t rise too fast. Imagine a loaf of bread worth a thousand naira overnight. Steady increase in prices is desirable because it helps consumers plan their expenditures and adjust adequately. Unexpected price increments erodes the purchasing power of fixed income earners as it requires more money to buy the same basket of goods.
We have hereby established that Inflation rises when prices rises faster than usual and we have highlighted some things that can lead to an unprecedented rise in inflation rate such as exchange rate instability, subsidy removals, increase in electricity tariffs, shortage of food production etcetera. Let’s see why inflation is good for the economy.
Inflation is good, Why?
Inflation is actually good for the economy. What? Did I just say good? Yes, it is but the worry is that it inflation should not be too high or prices shouldn’t rise too fast, because it is a measure of consumer confidence in an economy. Inflation means rising price levels. Rising price levels means rising demand, which means more goods are produced. When more goods are produced, more people need to be employed.
In other words, if the CPI rises too fast like in the case of war, goods will become so expensive within a short period of time and people may be unable to buy. That’s why one of my lecturers back in school used to say, after war, if you want to propose to a lady, buy her a bar of soap. She’s all yours. Funny right! This is because the speed at which prices rise can erode consumer welfare. You may not be able to buy the same amount of things with the same amount of money.
So, we see that inflation reduces unemployment, but inflation has to take place steadily to avoid a fall in demand (where people cannot buy because their money have lost value).
In the same vein, general price decline (or what we economists call deflation) are bad because people will buy less due to the increase in the value of their money. When less output is bought, producers don’t make their money and they will have to layoff workers. This idea is what is known as the Phillips Curve – the higher inflation, the lower unemployment and vice versa.
What if the CPI falls, this is called Deflation. This means that the general price level falls as a whole (remember this is not the same as fall in the price of Pepsi alone). A fall in the CPI can be caused by appreciation in the exchange rate. However, an appreciation in the exchange rate can also lead to a slower rise in the CPI especially in a consuming nation like Nigeria where there’s a lot of impulse buying (latest phones, shoes, movies etc.). Assuming, Nigeria government makes her business environment so conducive that investors are bringing in their dollars to establish partnerships in key sectors in Nigeria making our foreign reserves skyrocket to let say $200 trillion. This means a lot of dollar comes into the economy and more dollars will be available for exporters and forex users. This will lead to improved exchange rates (like N100 to a dollar), reduce the forex cost of importing goods and boost manufacturing sector up to the extent that so many producers will be competing for customers. This competition can ultimately reduce the prices of key items in the economy (this is far from reality, Nigeria’s consumption pattern will continuously be outrageous due to the Joneses effect – spending like rich neighbours). Deflation could actually hurt the economy because prices will crumble due to excess supply, this means there is capacity over-utilisation, machines will be shut down and workers laid off etc.
Nigeria’s Inflation Story
The good news about Nigeria that many were upset with is the fact that the NBS reported that inflation rates have fallen for 18 consecutive months. I hope we can understand what the statisticians are trying to say now. They are simply saying that between January 2017 to July 2018 (at the writing of this report- August 2018), prices have been rising at a slower rate. That’s all, they never said prices are falling. All they want us to know is there are some factors that may have been responsible for this free fall in speed of price increases.
First of all, we saw prices rose faster within 2016, Imagine Inflation left the target band (between 6-9%) of the CBN and hell was let loose at the rate of price increases just within one year, what really happened? We see that Nigeria’s mainstay – oil, which produces over 90% of foreign exchange earnings was severely under threat due to the falling crude prices in the international market and domestic pipeline mishaps perpetrated by Niger Delta militants. This affected oil output, which in turn affected our store of foreign currency (foreign reserves) so much that it depleted to miserably low levels. This led to the floating of the Naira in June 2016. What that means is that the demand for dollars (by importers for instance) and supply of dollars (by oil revenues or foreign investment) had to determine how much naira to be exchanged for dollars without CBN intervention (for a while). Guess what happens when the demand for public transport is close to 50 people at the bus stop and you have an 18-seater bus coming, the fare will rise very fast, wouldn’t it? This is what happened as people had to pay more naira to get a dollar. The CBN had to put so much policies in places including rationing dollars to be kept in houses as well as ensuring all transactions within the country are denominated in naira. All these were put in place to stem the stiff-neckedness of long-throat gain hunters, who want to sell their dollars for increasingly high amounts. This had an alarming impact on prices across the economy due to the necessities of life that are highly dependent on dollar availability. It must have really been a tough year for the monetary authorities I must confess. This culminated in a technical recession in the second quarter of 2016. Recession simply refers to a period of negative growth in the GDP after two consecutive declines in the output growth rate. It is characterised by high inflation, unemployment and weakened aggregate demand.
Luckily for us, the aggrieved militants decided to retreat and that marked the beginning of recovery in oil production. In fact by the second quarter of 2017, we were out of recession due to the opposite of the causal factors in the first place – ceasefire by militants and Deal of Cooperation. The Deal of Cooperation was an agreement by OPEC countries to reduce supply so as to buoy prices that had fallen to as low as $30 per barrel. As from January 2017, inflation started to drop meaning prices rose at a slower rate and another breakthrough in the exchange rate occurred in April 2017 to further concretise slower price increases. This was the introduction of a market-based exchange rate platform known as the Investors/Exporters Window where demand and supply determines the exchange rate. This has led to a rapid accretion to our foreign reserves boosting our ability to meet forex demands. Exchange rate appreciated from as low as 400 to settle somewhere around 360 naira to a dollar before improving to the current level. Like I told you earlier, exchange rate appreciation feeds positively on the inflation rate.
As things stand currently in the Nigerian economy, inflation rate forecasts by analysts see a continual fall in the inflation rate (we call this disinflation in economics) towards single digit level. The only deterrents to such outlook is pre-election spending, likely impact of herdsmen clashes when gestation period is over, likely increase in electricity tariffs to reflect the market situation. Do you see now why inflation could likely fall for the rest of the year? As long as there are no macroeconomic shocks or policy triggers, we should achieve single digit rates before the end of the year.
I hope you’ve learnt a lot. Here is a quick recap; We have said The CPI measures all goods in the Nigerian economy assigning weights based on order of usage and importance. When CPI rises, there is inflation; when CPI falls, that’s deflation. Inflation simply measures the speed at which prices measured by the CPI rise in an economy. We said inflation is good for the economy because it spurs employment but should be kept at sustainable levels so as not to erode consumer’s welfare as rapid price increases do not come with rise in wages in the real world. Inflation rate is computed by the National Bureau of Statistics (in Nigeria) through monthly market surveys. The official headline inflation figure reported compares price increments between similar period in a year. We also saw that inflation rises when CPI rises at a faster rate and inflation declines (or disinflation occurs) when CPI rises at a slower rate. This means that prices could still be rising when inflation is falling. Finally, we considered the Nigerian situation; why prices rose faster prior to January 2017, why prices have been rising at a slower pace since recovery from recession and why they may likely maintain a further drag in coming months.
Do well to familiarise yourselves with all key items. Next time you get interviewed on inflation, give it to them like an economic literate. It’s very simple to understand.
Happy Macroeconomic Literacy