The National Bureau of Statistics (NBS) released the inflation report for January 2017 last week with headline inflation trending further northwards. CHIMA NWOKOJI in this report investigates consequences of beginning a New Year with high misery index.
Mr Kayode Omole is a petty trader in Lagos. He takes pleasure in saving N1,000 every trading day of the week. Omole with a family of four is optimistic that by the end of February 2017, when it will be his turn to receive the total contribution of N24, 000, he would buy a bag of rice to at least ensure there is something to cook at home. This will enable him have a balance of about N8, 000 to give his wife while hoping for better days ahead.
However, with a bag of rice at N17,500 in Lagos and N21,200 in Onitsha as against N16,000 a year ago, he has no option than to consider buying less than one bag. Wondering why this is happening, Omole like millions of Nigerians, did not know that inflation has wiped away 18.72 per cent (or N4,492.8) of the value of his hard earned money, leaving him with N19,507.2.
Omole is not alone in this dilemma. With the fluctuating dollar rate, increased fuel price and the double digit inflation, life in Nigeria is anything but easy. Nigerians struggle to go through their daily activities as the salaries and wages they receive have not increased despite the rising food prices. Salaries are still being owed despite the bailout funds given to state governments.
A herd of analysts have said that the country’s rising misery level may well be an alarm bell to government and the relevant agencies to do something urgently to lift the country out of the current economic recession.
Nigeria’s rising Misery Index ranking
Recent figures from the National Bureau of Statistics (NBS) indicate that Nigeria occupies the fourth position on the global index which shows the misery levels of citizens in different countries of the world. By this position, Nigerians can be said to be fourth in the global ranking of citizens living in misery.
The Misery Index is an indicator of the economic well-being of citizens of a specified economy, computed by taking the sum of inflation, unemployment and lending rates, minus year-on-year (y-o-y) per capita Gross Domestic Product (GDP) growth.
A higher ranking on this index indicates a worsening economic climate in any country. Nigeria’s ranking on this index in August, 2016 was 47.7 per cent, according to NBS data.
With inflation now at all-time high of 19 per cent, lending rate at about 30 per cent, unemployment at 13.9 per cent, underemployment at 19 per cent and poverty level, 62.6 per cent, it is not surprising that it has now spiralled to 49.5 per cent.
But analysts at a Lagos-based research and investment company, Financial Derivatives Company (FDC) Limited estimates that Nigeria’s misery index was 52.15 as at December 2016. They used the third quarter 2016 unemployment and underemployment rate of 13.9 per cent and 19.7 per cent (the most recent published figures), and December’s inflation of 18.55 per cent, to compute Nigeria’s misery index at 52.15 per cent.
Now that January’s inflation has reached 18.72 per cent, it means the index has added 0.17 per cent to a record high of 52.32 per cent.
To this end, the analysts in their bi-monthly economic report for January 2017, pointed out that Nigeria’s misery index had risen for the last six quarters, stating that if the movement persists, consumers would be hit hard.
In addition, it noted that consumer may be faced with deeper dwindling purchasing power, as their incomes would only be able to buy less of their usual consumption basket. Similarly, the poor will become poorer in real terms, and the middle class will thin out.
Globally, any country with a ranking of eight per cent and below on the Misery Index is considered to be doing well. Those which rank up to 16 per cent are believed to be performing averagely.
For instance, in 2015, the country with the highest misery level on the index was Venezuela, at 214.9 percent. It was followed by Ukraine, 82.7; Brazil, 67.8; Argentina, 60.0 and Jamaica, 34.4 per cent. Today, Jamaica is trailing Nigeria in fifth position. The countries with the lowest misery rankings are China, Japan, Thailand, Hungary, Netherlands and Germany.
Monetary policy trajectory in response to inflation
At its next meeting, the monetary policy will have to factor certain macroeconomic statistics in its decision-making process. These include Quarter four (Q4) 2016 GDP numbers, February inflation numbers (as the Monetary Policy Committee (MPC) meets towards the end of March) and the Purchasing Managers’ Index.
Analysts, FDC believe that depending on the outcome of the data, the MPC will either consider embarking on an accommodative monetary stance agenda or holding off until a later period.
FDC noted that Money supply (M1) remains a challenge to the Central Bank of Nigeria and it is growing at an increasingly fast pace relative to other monetary aggregates. Thus the CBN is tasked with not only controlling the supply of narrow money but also reducing the velocity of circulation to avoid further exaggerations in the price level.
“In the near term, in the month of March, the central bank will have the opportunity to simultaneously curb high financing costs in the private sector and induce spending for increased economic activity. With the government borrowing at an effective interest rate of 20 per cent, private sector firms will have to offer higher rates to compensate for higher risks. In terms of consumer spending activity, higher interest rates on a riskless asset like T/bills dissuades spending in order to capture gains from a high interest rate environment. The success of the Eurobond road show could offer CBN the resources needed to settle government debt which will help clamp down on these high interest rates.
Outlook
All hope is not lost as analysts at an international investment research company, Renaissance Capital (RenCap) remained optimistic that inflation is likely to slow in the nearest future. They said that the discontinuation of central bank financing (monetisation) of the budget deficit will help ease inflationary pressures in 2017.
According to RenCap, base effects will also help as over 50per cent of foreign exchange (FX) transactions take place in the parallel market, by one estimate. This implies inflation is already reflecting a large part of the 90per cent depreciation of the naira on the parallel FX market in 2016. Households are adjusting their spending patterns, according to the statistics office, by buying fewer imported items. This may partly explain the slowdown in month on month (MoM) inflation to 1.1per cent in December, from a 2016 peak of 2.8 per cent in May.
The NNPC has however announced that it will tackle hike in prices of kerosene and diesel due to scarcity by …“immediate importation of three additional Automotive Gas Oil (AGO) cargoes before the end of February; and an order for massive 250 trucks per day loading of AGO and DPK, from across the three NNPC refineries in Port Harcourt, Kaduna and Warri”.
Analysts at an investment banking and research company, Afrinvest West Africa Limited believe that if the statement from the NNPC is backed by action, “we expect an improvement in supplies and drop in prices of these products towards the end of Q1:2017. However, if the fragmentation and liquidity challenges in the FX market linger and the Naira is further devalued as anticipated in the near term, energy and imported food prices would further be pressured during the year. Regardless, our near term outlook for inflation rate remains benign as high-base-effect fully kicks in from February. Hence, we expect a more accommodative monetary policy by H2:2017.”
In the investment space the company stressed, asset allocation strategy for 2017 remains biased for fixed income securities, with preference for short-dated T-bills and long duration bonds. Companies with low FX-based cost with the ability to withstand inflationary pressures on margins or FX denominated cash flow also represent good investment prospect from an equity perspective.