By Babajide Komolafe
Analysts at the Financial Derivatives Company has described unrealistic the inflation target of six to nine percent (6-9%) by the Central bank of Nigeria, given the threat of stagflation confronting the economy. Describing stagflation as low economic growth combined with high inflation, the analysts, said “Nigeria is not in a stagflation state but could be inadvertently moving in that direction.”
Writing in the FDC Economic Bulletin issued on Friday they stated, “The recent National Bureau of Statistics (NBS) data showed a contraction in economic growth to 3.96 percent in first quarter of 2015 ( Q1’15) from 6.21 percent in the corresponding period of 2014. Also, the inflation numbers released for April showed the 5th consecutive increase to 8.7 percent. Hence, this is not stagflation but just a recipe or a start of the curve.
“In order to stimulate growth, the government is likely to spend more through increased borrowing and advocate for a lower interest rate. This reduces unemployment and boosts growth but is likely to result in a higher level of inflation rate. Nonetheless, if the level of economic growth achieved by the accommodative policy is significant, the impact of a high rate of inflation may be muted.
The current CBN inflation target of 6-9 percent is unrealistic with the current fundamentals in play. Targeting an inflation band of 10-13% allows the CBN more room to tinker with the interest rates to stimulate growth. “Encouraging bank lending to specific sectors of the economy using subsidized interest rates alongside a more practical inflation target helps to address the looming issue of stagflation.
“If policy measures by the new administration are aimed at reviving productivity and improving returns on investment, the real sector will have the incentive to lift capital expenditure. Hence, Nigeria will be on the transition path from stagflation to higher and sustainable real economic growth.
“Buhari is obsessed with development and long-term competitiveness of the Nigerian economy, aimed at improving the welfare of Nigerians. He will have to deal with some trade-offs especially allowing for some inflation whilst investing significantly i.e. 10% of GDP in infrastructure to jump start the economy. There are no easy options, there are only hard choices”.