Couple of weeks back, seated across the table from some bank treasurer friends of mine, the conversation invariably drifted away from how much of a commentary on the banking industry’s health the banks’ recently released year-end results represented. June was a month that that would not stay down. Like an uninvited guest, it would not depart the august gathering, nor would it partake of the repast that was at its core. The Central Bank of Nigeria (CBN) plans its stress test of the industry for around the middle of the year. What to expect? Some big names did not quite pass muster when the US Federal Reserve Bank conducted its last stress test of its industry. Accordingly, there was serious concern around the table of a Nigerian parallel. Not to worry. Invariably, talk shifted on to the inflation outlook. Domestic prices have come to matter for bank treasurers here. As inflation trended up last year, and the CBN remained loth to accommodate it, the policy rate tightened. Moreover, treasuries nudged up.
Unable to create risk assets as fast and profitably as they would have loved to (the economy, despite those mouth-watering growth numbers just does not have as big an appetite for risk its seems), banks have parked a lot of their funds in treasuries. It helps that the rates on offer have been positive (once you account for inflation) for a some time now – this has not happened in a while. So, with so much of their profit prospects running on the outlook for treasuries, and the latter, dependent on the CBN’s reading of the near- to medium-term trajectory of domestic prices, inflation numbers matter. March numbers were not in, permitting the ceaseless investigation of diverse scenarios. In the end, the consensus was that whereas, once, food prices were a major driver of domestic inflation, the effects of government spending on the rest of the economy was going to be the new driver going forward.
Need I enter a small caveat now? It is useful to remember that this same gathering had got the prognosis wrong on the eventual consequence of the January fuel price hike on the general price level. Still, I did not get a sense of the new consensus numbers undershooting as my treasurer friends tried to correct for their earlier bullishness. After all, the consumer price index in February (at 11.9%) had surprised by trending downwards on January’s 12.6%. So, this aspect of the conversation ended convinced that March’s inflation numbers will be slightly down on the February figure. Indeed, that the apex bank has done just enough to hold prices down over the current plan cycle.
Much of the colour commentary after this dwelt on the implications of the ensuing lower policy rates on the cost of servicing the federal government’s domestic debt. Of course, there was no doubt that if inflation expectations wavered, and the CBN cleaved to its tight monetary policy in response to this, the point will be reached where the managers of the fiscal side of the economy would try to muscle in on the monetary side. Committed as we are as a nation to keep borrowing to maintain our high recurrent spend the cost of domestic borrowing would become unsupportable the higher the policy rate moves.
In the event, the composite consumer price index (year-on-year) moved up marginally to 12.1% per annum in March from its 11.9% close the previous month. March-on-February, prices moved by 1.6%. According to the National Bureau of Statistics (NBS), domestic prices are still suffering from what you would describe as the third-round effect of the fuel price increase. Liquidity was tight in March, as disagreements between sub-national governments and the federal government over the size of the fuel subsidy stalled the allocation of the monthly subventions from the federation accounts allocation committee (FAAC). Add to this, the effect of the planting season on food prices, and you have northbound pressure on prices generally.
The problem with all these numbers is that they speak to a volatility in domestic conditions, which the roseate statistics on the economy with which we are more familiar appear ignorant of.