Today, two developments (both of them much trailed) will occur. More precisely, one of these events commences, while the other will be announced. First (and this is not in any specific order) the rate-setting arm (the Monetary Policy Committee — MPC) of the Central Bank of Nigeria (CBN) meets for the last time in a year that has seen it hold the monetary policy rate (MPR) steady at 12% for the first three quarters. Second, the National Bureau of Statistics (NBS) releases details of the consumer price index for October. Which of these will happen first? I imagine that members of the MPC will have access to the new inflation numbers as part of their portfolio of pre-meeting documents (the rest of us will look to the NBS’ website for the public version).
What will members of the MPC see in the numbers before them? I expect inflation to move up. The floods, which recently ravaged parts of the country, were significant. A large number of internally displaced persons will take time to resettle. Indeed, in some locations the floodwaters recede reluctantly. Most of the displaced adults should shoe up in the unemployment count at some point in the not too distant future. In the absence of any form of insurance, the damage to and loss of property will be harder to account for. Consequently, most of this loss will not show up in any measure of output. Still, by far the biggest abatement from the flood incidents should be to agricultural output. The larger proportion of the area inundated were prime farmlands.
First round effects of this ought to be evident in the GDP numbers for the third quarter; and I imagine that this causal relationship should hold well into the first quarter of next year. Nonetheless, the immediate worry will be with the second round effects of the flood. To the extent that farm output decreases because of these floods, it is to be expected that the resulting diminution in food supplies will show up in increased food prices. With agriculture and agro-based activity accounting for about 40% of the basket of goods measured by the NBS in its estimates of inflation numbers, farm price pressures should have a disproportionate effect on consumer prices going forward.
How disproportionate? Good question, this. Remember, though, that questions are “good” often because there are no easy responses to them. In estimating how much pass-through the floods will have on consumer prices, it is useful to recall that January’s increase in pump-gate prices for petrol did not show up in movements in consumer prices. The increases associated with the implementation of the multi-year tariff order for electricity also had next to no effect on domestic prices. And only recently, tariff increases on imported rice and wheat washed off the back of domestic prices (even though bread prices did jump 20%). Thus, it is hard to say by how much domestic prices will respond to a supply shortfall in agricultural production because of the floods.
This absence of clarity in the numbers is the only reason why I think the MPC meeting will adopt a “wait and see” approach at today’s meeting. Too much is unclear in the outlook. However, there is strong reason for government to push for a lowering of rates. Although formally similar in the manner in which the argument is presented, this has nothing to do with the clamour by manufacturers for lower lending rates. How much of business borrowing is sourced from formal financial services providers is information that would help the manufacturers’ argument for lower rates. If, as we suspect, this is not as much, then it is dubious by how much higher bank rates may be hurting manufacturing. The government’s case for lower rates is slightly stronger, though. It has being borrowing increasingly large amounts locally, and it would help if this cost were trending down, not up.
By far the bigger question on the economy today, though, (and I have this on good authority) is dollar liquidity. Previously, for every dollar the CBN sold at the Whole Sale Dutch Auction System (WDAS), it received in payment a corresponding amount of naira. Now, with the rather large recent inflow of foreign portfolio investment (FPI), and the CBN’s unwillingness and or inability to sterilise this fully, demand pressure for foreign exchange has dropped at the WDAS ― there are autonomous sources, after all. The backwash of this development is the question “How will the economy react to the fact of so much money sloshing around?”. In the event, this is, arguably, a less troubling query than the one about how prepared we are for a rapid reversal of the current capital inflow in response to a shock (internal and/or external) to the economy.