What ‘status quo MPR’ means to ordinary man, middle class, elite
by HOPE MOSES-ASHIKE
May 24, 2018 | 10:44 am| | | Start Conversation
The fear that inflation rate could go up again which prompted the Central Bank of Nigeria (CBN) to retain the Monetary Policy Rate (MPR) at 14 percent for 10 consecutive months could actually happen. MPR is the interest rate at which the CBN lends to the banks.
Specifically, Nigeria is now in planting season and Ramadam Festival, a period when prices of domestic goods go up. A market survey by BusinessDay shows that a basket of tomatoes which was sold at N7,000 in April now goes for about N20,000 in Mile 12 market. A businessman who deals in foodstuff told BusinessDay that a bag of 50kg rice is now N16,000 as against N14,000 in April.
Meanwhile, election spending is coming up, putting pressure on foreign exchange. Naira has depreciated to N366 per dollar from N363/$ at the parallel market.
Data from the National Bureau of Statistics (NBS) indicates that inflation rate has moderated for 15 consecutive months – from a high of 18.72 percent in January 2017 to a two -year low of 12.48 percent in April 2018.
Also, the apex bank, after the two-day Monetary Policy Committee (MPC) meeting n Abuja on Monday and Tuesday kept unchanged the liquidity ratio at 30 percent, Cash Reserve Ratio at 22.5 percent, hinting that it would not consider easing the rate until inflation falls to single digits.
“The predominant argument for a hold at this time is to await more clarity on the evolution of key indicators, that is the passage of the budget and implementation, economic activity and traction in fiscal policy in 2018,” Godwin Emefiele, governor of the CBN, explained after the MPC meeting.
“It is the fear that inflation could go up again, election spending is imminent, minimum wage has not been accounted for in the budget and could trigger price inflation, U.S interest rates are going to go up again so the interest rate inflation dissention could work against the naira”, said Bismarch Rewane, CEO, Financial Derivatives Company.
Rewane explained that the problem was not price inflation as a result of excess demand in the economy, pointing out that the fundamental problem was productivity output and the problem of unemployment.
The Purchasing Managers Index (PMI) was down from 59 in January to 51 in April, consumer confidence is down to -6, GDP has decline from 2.1 in last quarter of 2017 to 1.96 in the first quarter 2018, interest rate sensitive sectors are actually contracting and slowing, notably agriculture, transport and construction.
The labour intensive sectors are the ones contracting while the ones that don’t employ more people like insurance, and oil sector are growing. All these indicate a vulnerable and very shaky recovery.
Notably, Ghana has cut interest rates five times in the last 12 months. Consequently, Ghana inflation is down to about 9.6 percent, and growth is 8.5 percent.
“There is contraction in money supply. There is contraction in economy in certain areas which employ people, unemployment and underemployment is above 40 percent, when you add inflation to that you have a misery index in excess of 50”, Rewane posited.
What does this mean and what will happen next?
To businesses, unemployment and underemployment will remain high, the stock market will wobble, interest expense of companies will remain high and deposits rate are already fallen. The policy rate itself is not as important as the actual effective rate. Interest rates have actually come down and the fact that interest rates have come down and liquidity has increased does not mean that banks are lending. The CBN alluded that it is going to penalise banks for not lending to real sector.
How it will affect an individual, middle class and elite?
Rewane argued that if you are a worker, until the wage review, you have actually had an erosion in your income and nothing seems to happen because the interest rate is still going to remain high. The domestic prices of food are going to go up because this is planting season and the Ramadam season. Garri which is N7,000, per bag, palm oil came down from N25,000 to about N10,000, semolina is N3,000, rice N15,000 and beans (Olotu) which was as high as N38,000 and down to N28,000, we are going to see these things increase again.
For the middle class, your rent is going to increase, school fees will remain flat and your salary will remain flat. For the affluent people it really makes no difference.
In the final analysis, he said the expanded budget is going to kick in, the activities of government, credit to private sector will remain flat, unemployment will continue to rise, external debt will increase and growth will come stronger but not strong enough.
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