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You are here:Home>>Strategic Research & Analysis>>Nigeria’s inflation receding and 10% Target within CBN Reach
Sunday, 20 March 2011 17:51

Nigeria’s inflation receding and 10% Target within CBN Reach

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A woman sells tomatoes in Jos A woman sells tomatoes in Jos REUTERS / Akintunde Akinleye

Central Bank of Nigeria (CBN) targeted 10percent inflation rate

There is good news coming from Nigeria’s National Bureau of Statistics (NBS) on inflation. It was reported that the February rate of inflation has receded to an annual 11.1 percent. Although the targeted rate by the country’s apex bank, Central Bank of Nigeria (CBN) was 10percent. The key point is that the inflation rate is receding and may likely come down to the CBN’s 10 percent target.

The myriad issues that contributed to the rising inflation including the massive amount of money injected into the circulation to ease credit crunch. The recapitalization of the failed banks and the buying of the toxic assets of the failed banks introduced equally a large sum into the monetary base.

The problem that summons the greatest barrier to the control of inflationary trends might be the rising price of oil that has increased above $100 per barrel. On one hand it is good because it will swell and increase the country’s decreasing foreign reserve due to excessive withdrawal. But on another hand since Nigeria refined 70 percent of her domestic consumed gasoline outside the country together with the inherent subsides would make it difficult for CBN to be consistent and to have smooth operations.

Bloomberg reported that "While Nigeria is Africa’s biggest oil producer, it relies on fuel imports for more than 70 percent of its domestic needs because of a lack of refining capacity. The government subsidizes domestic fuel prices, boosting its spending as oil costs rise, increasing pressure on inflation. Crude oil reached $106.95 a barrel on March 7, a 29-month high."

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But for now the price of oil was recorded less than $100 per barrel due to the lower demand as a result of the natural disaster that took place in Japan. But the rise of oil demand is likely to increase with the price eventually as Japan will need more energy to replace the collapse of nuclear technology.

Nigerian government has been increasing spending while at same time having a large trade deficits with some trading partners due to increased spending and importation. Another source of the rising inflation may come from the massive and continuous borrowings of the Federal Government of Nigeria. Nigeria has been borrowing heavily lately inorder to finance the rebuilding and renovations of infrastructures.

Rising Inflationary trend is the most persistent threat to Nigeria’s growing economy.  The Central Bank of Nigeria and its monetary policy committee voted to lift the benchmark interest rate of previously 6.25 percent to 6.50 percent last time they met. Before that at the end of fourth quarter of 2009 when the monetary committee gathered, they left the interest rate unaltered at 6.25 percent. The inflation rate then was exceeding 13 percent although its surging momentum has since receded, yet inflation rate is still above 10 percent in the first quarter of 2011.

The  governor of Central Bank of Nigeria (CBN) promised to hold back inflation below 10 percent last year but  inflation rate is still moving upward in spite of the tighten of the monetary policy. Sometimes the CBN can be overly cautious with its application of monetary instrument to stem down inflation. When the benchmark interest rate was retained last year, Afripol financial experts commented on the timidity of the monetary policy committee in not raising the interest rate in the face of rising and persistent inflation.

Nigeria has injected a lot of money into the monetary base to recapitalize the banks that were bailed out from total collapse due to mismanagement.  Nigeria recapitalized the banks with almost $4 billion and Nigeria’s Asset Management Corporation (AMCON) is buying back toxic debts from bad banks at the tune of $14 billion. The liquidity flowing into the economy due to quantitative easing has the tendency to overheat the economy, thereby triggering inflationary trend.  At same time the quick economic growth that attracts investment can over stimulate the economy and keep the inflation surging.

On the borrowings of large amount of money, Nigeria's debt-to-GDP ratio may be minimal but that will not be an inducement for excessive borrowing. All the borrowings are bringing in a lot of money into the circulation and that too can exert inflationary pressure on the economy.  The borrowings Nigeria made last year was enormous but it is not cooling off in 2011. Reuters reported that "Sub-Saharan Africa's second biggest economy (Nigeria)  plans to issue 66.5 billion naira in February, including 36.5 billion naira in three-year and 30 billion naira in five-year bonds. For March, the DMO said in its offer calendar it would issue 30 billion naira each in three-year and five-year paper."

There is a success story with the policies of Central Bank of Nigeria (CBN) on restrictions of inflation so far. To continue with the good result and to further cut back the receding inflation in Nigeria’s economic landscape, the Central Bank of Nigeria (CBN) will likely to continue with the tightening of its monetary policy and probably persuading the executive branch to cut down in spending.

































Last modified on Sunday, 20 March 2011 18:02

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