Nigeria's Rising inflation rate at 12.6% may dampens economic growth
The latest number released by Nigeria’s National Bureau of Statistics on the rate of inflation in first quarter of this year stood at 12.6%. The market was not much surprise of the rapid rise of inflation rate in the country knowing quite well that partial removal of fuel subsidy did trigger higher inflationary trends. But the market was expecting something slightly below the recorded 12.6 percent. The inflation rate recorded at the fourth quarter of last year was 10.3 percent in December, although the rising inflation rate was anticipated but danger lies in its propensity to freely escalate. This is going to pose a major problem to Sanusi's Central Bank of Nigeria (CBN) that is already standing with one leg. CBN option to fissile out the growing inflationary pressure on the economy is to tighten its monetary tools.
The application of the monetary tighten policy has its limitations and may have become to wane. How much more can you mop the monetary base liquidity by jacking up interest rate? At the last gathering of monetary policy committee, Sanusi's CBN retained the benchmark interest rate at 12 percent. Now with this latest number on inflation rate at 12.6 % coming from National Bureau of Statistics, Sanusi and his people at CBN will not fold their hands and do nothing. At least they will make an effort to reassure the market that they are on top of the situation without injecting jittery into the economic community.
At this time Central Bank of Nigeria is inclined to be prudent on what do with the interest rate - to retain it at 12 percent as they did last time or to aggressively increase it to checkmate the rising inflation rate next time they meet. That is a difficult call to make; for upward raising of the benchmark interest rate beyond the 12 percent may have a reverse effect and dramatically slow down the robust growing economy. Nigerian economy is in a robust momentum and is expected to grow up to 6.7- 6.9 percent this year below the earlier expectation. The higher inflation triggered by the partial removal of fuel subsidies has reversed the higher predicted economic growth.
Therefore with high level of poverty in the country and large unemployment rate, the last thing CBN wants to do is to slow down the economic growth. But it is beginning to look like that might be the last resort if it sticks to the increasing of the interest rate expect help comes from the fiscal policy of the presidency. In that case slashing spending becomes imminent and fiscal expenditure adheres to the budget constraints.
CBN supported the removal of fuel subsidy and Sanusi expected the higher inflation rate to step in when fuel subsidies were removed. The inflation rate will even go higher as subsidy removal effects kicks in. The economy of Nigeria is petroleum based: The farmers, manufacturers and service providers cost of production increases and and they will pass it down to the consumers.
CBN revealed in its forecasting that the annual inflation rate of 2012 may rise up to 15 percent and by the next year 2013 inflation will dip below 10 percent. The problem with CBN wild assertion is that it may end up being a fussy math because the economic trends was not grounded on fundamentals but on the prevailing momentum. Nigeria is on a roller coaster and that makes economic prediction difficult. If CBN expected much a drastic rise in the inflation rate why not find another way other than jacking up of interest rate to tame it. Again there is no assurance to say for sure that inflation will dip below 10 percent in 2013. This is beginning to show that CBN may not be grounded on logical analysis rather pointing to the direction of the wind. This scenario of chasing the wind does not portray a sound and coordinated manger of risks associated with inflation control in a turbulent economic period.
Many of the experts and financial groups that expected economic growth similar to last year 7.7 percent growth are rescinding their forecast and expectations. Bank of America- Merrill Lynch that predicted Nigeria's economy growth of 6.7 percent has curtailed it to 6.3 percent. By no means, Nigeria's robust economic growth is not bad at all when compare to the global anemic growth of 2.6 percent according to UN base forecast for 2012. Notwithstanding, Nigeria is a special case due to higher unemployment, surging inflation rate and escalating social unrest, all these factors are not recipe for rosy economic growth.