Price Instability: CBN Estimates 14.15% Inflation Rate for 2020
· Structural Reform Necessary to Boost Inclusive Growth
The Central Bank of Nigeria (CBN) said it is expecting inflation rate to hover around 13.97% and 14.15% by December 2020, a wide gap from its single-digit inflation targeting of 6% to 9%.
The CBN made this known in its monetary, credit, foreign trade and exchange guidelines for fiscal years 2020/2021 report.
After 11-month straight increase in average price level, inflation rate for July settled at 12.82% according to data from the National Bureau of Statistics.
However, the CBN noted that monetary targeting framework remains its policy strategy in 2020/2021 fiscal year with implicit inflation targeting.
For fiscal year 2020/21, the CBN said primary objective of monetary policy remains the maintenance of price and financial system stability.
The apex bank however recognised that with the upward trend in inflation from the first half of 2019, lingering uncertainties from the external environment would exert pressure on monetary tools.
CBN attributes rise in headline inflation to supply shocks due to decline in economic activities globally as a result of COVID-19 pandemic that started in China in the fourth quarter of 2019.
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Also, it recognised demand shocks emanating from domestic and international lockdowns; food supply shocks associated with non-tariff border protection; and effect of the implementation of the new budget and minimum wage as driving forces.
In the year, the CBN said it will continue to sustain measures to abate the level of rising inflation through effective liquidity management measures.
The measure aim is to curtail the level of inflation to a level that is conducive for inclusive and sustainable growth.
“The Bank shall continue to be proactive in its oversight function of the banking system to continue to ensure financial system stability”, the report reads.
On the economy, CBN said outlook is mildly optimistic, as its growth trajectory is expected to slow-down in 2020 on account of the tepid global demand, resulting from the COVID-19 pandemic, depressed global aggregate demand and supply, and the oil price war which has resulted in supply glut and decline in crude oil prices.
In this regard, CBN estimated that output growth is expected to lie between -3.1, -1.0 and 0.24 per cent in 2020, predicated on low oil price between US$10 per barrel (pb), US$20 pb and US$30 pb.
“To ameliorate the impact of slow economic activities arising from the COVID19 pandemic, fiscal and monetary policy responses were put in place to neutralize the adverse effects on growth-inducing sectors of the economy”, the report reads.
On the real sector, CBN explained that the measures include the credit interventions in the health sector (N100 billion), Micro, Small and Medium Enterprises (MSMEs) (N50bn) and manufacturing sector (N1 trillion).
“These initiatives are expected to encourage and expand domestic production, improve productivity as well as generate employment opportunities”, the apex bank noted.
Additionally, CBN added that growth in consumer credit by DMBs, propelled by the its policy to raise the Loan-to-Deposit Ratio from 60.0 per cent to 65.0 per cent and Global Standing Instruction (GSI) clause, would improve credit delivery to households and MSMEs.
It stressed further the combination is expected to result to moderate unemployment and sustain the growth trajectory.
The apex bank however added caveat to its expectation, said although these measures are commendable, there are headwinds that may undermine these expectations.
It then listed the headwinds to include increased Federal Government deficits, which the apex bank believes may narrow fiscal space and crowd-out private investment.
Also, underutilization in the labour market due to weakened aggregate demand; and a build-up in inflationary pressures resulting from the increase in Value Added Tax (VAT) and border protection could pose a risk.
In addition, CBN listed the inflation trigger variables to include demand shocks emanating from domestic and international lockdowns; food supply shocks associated with non-tariff border protection; and effect of the implementation of the new budget and minimum wage.
“Sequel to the COVID-19 pandemic, the viability of the external sector in 2020 is expected to deteriorate, given the present worsening current account balance and depletion of external reserves driven, largely, by decelerating export receipts, particularly oil”, the apex bank noted.
Specifically, the degree of external reserves accumulation is expected to decelerate, as outflows are expected to outweigh inflows.
As a result, external reserves are expected to lie between US$29.9 billion and US$34.3 billion at end-December 2020 (predicated on current declining oil price between US$20 and US$40).
The CBN stated that this development, in addition to exchange market pressures, emanating from speculative activities in the BDC and I & E segments of foreign exchange market, is expected to exert pressure on the naira exchange rate.
In addition, increased risk aversion behaviour by investors may negatively impact on capital inflow, as they flee to safe-haven assets.
Also, it is projected that the fiscal space may be limited in 2020, given escalated vulnerability, as a result of sharp decline in oil prices, occasioned by weak global oil demand and price wars between Russia and Saudi Arabia.
This development would undermine the implementation of Government’s capital programmes, impede public investment on infrastructural development and could culminate to higher debt profile and attendant debt service obligations of the Government.
The monetary policy authority stated in the report that if COVID-19 pandemic effects became severe, Government may increase fiscal policy responses to ameliorate the impact on the populace.
In the report, CBN said the financial sector is expected to remain resilient in 2020, on account of the accommodative monetary policy stance, continued efforts by the Bank towards ensuring financial system stability and credit expansion policies.
Furthermore, the renewed policies aimed at enhancing the payments system and cash-less initiative are expected to sustain efficiency, safety and confidence in the Nigerian payments system.
Against this background, policymakers are expected to nurture the fragile phase of the economy with caution and employ appropriate policy instruments to tackle the likely adverse effects that may emanate as a result of the COVID-19 pandemic, the apex bank stated.
It explained that the fiscal space should be optimally utilized, along with the implementation of structural policies to boost growth and welfare over the medium-term.
Furthermore, the report detailed that harmony between fiscal and monetary policy remain crucial to sustain and strengthen growth in the future.
The monetary authority said structural reforms, particularly executing the much-delayed power sector recovery plan, implementing the financial inclusion strategy, and addressing infrastructure gaps remain essential to boosting inclusive growth.
Price Instability: CBN Estimates 14.15% Inflation Rate for 2020