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A summer of higher food prices, limited room for monetary policy

Pressures in the food basket has led to Nigeria’s inflation surging high in the past few months.

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A summer of higher food prices, limited room for monetary policy, Food will be scarce in 9 months but this presents a huge investment opportunity

Headline Inflation has assumed a new pattern over the last three months, primarily driven by pressures in the food basket, reflecting a shock to crop cultivation from covid-19 restrictions and border closures. In addition, more recent developments in currency markets, where the Naira has weakened, as well as the increases in petrol prices following the removal of blanket subsidies have underpinned inflationary expectations. Looking ahead, sizable increases in electricity tariffs which came into effect in September as well as continuing fuel price pressures could see inflation head towards 14% levels in Q4 2020. Given the supply-side driven nature of the inflationary bout as well as the recent pivot to unorthodox monetary policies (which include liquidity tightening measures via CRR debits) it is likely that the CBN will ignore these numbers and persist with its current stance.

Nigeria’s inflation surged in August with the CPI rising 13.22% y/y (July: 12.8% y/y), the highest level since April 2018, largely driven by pressures in the food basket, where prices climbed 16% y/y (July: 15.48% y/y) while the core index (which includes energy prices) expanded by decelerated to 10.5% (July: 10.1% y/y). On a monthly basis, the inflation climbed by 1.34% over August (July: 1.25%) — the highest monthly number since June 2017.

READ: S&P 500 futures suffer longest run of losses since February

Pressures in Food, Utilities and Transport are driving the rising inflation numbers: Disaggregating the inflation numbers, three segments stand out (Food, utilities aka Housing, Water, Electricity and Gas and Other Fuels, HWEGF and transportation) as central to the pick-up in inflation as they accounted for ~80% of the variation in the monthly CPI print. Food was central and I shall set out my thoughts on the drivers later in this report, but on the latter two, pressures are linked to pick-up in fuel prices following the removal of subsidies in March which has seen fuel prices rise by 15% over the last two months.

Figure 1: Component analysis of monthly inflation

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Aug2020CPI

Source: NBS, Authors Calculation

A combination of weaker farming activity, Naira weakness and covid-19 lockdowns are behind the uptrend in food inflation: Looking at food inflation, the big pressures came from the farm produce component which accounts for over 90% of food inflation. August usually marks the start of the main crop harvest season in Nigeria which peaks in September-October and as such in normal years, monthly inflation peaks in July and decelerates thereafter. However, in 2020, monthly farm produce and food inflation readings over the last three months are at levels not seen since 2017 which would suggest factors hurting the supply side. Indeed, most grain and tuber crop prices are moving towards five-year trend levels.

READ: Nigeria’s inflation rate jumps to 12.82%, highest in 27 months

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Figure 2: Component Analysis of Monthly Food Inflation

MonthlyFoodAug2020

Source: NBS, Authors Calculation

In 2017, my thesis then was that a sharp Naira depreciation drove heightened exports of Nigerian farm produce into the wider sub-region forcing an upward adjustment in domestic prices. In 2020, in addition to the sharp shift in the FX rate as well, the sense from reading on-ground sources like FEWSNET is that Covid-19 movement restrictions hurt the flow of labourers from neighbouring countries during planting season. Accordingly, field surveys are indicating that the area under cultivation for most grain and tuber crops is lower than levels in prior years which is pointing towards a subpar crop harvest for 2020. As such, Nigeria is facing a more fundamental supply shock, which alongside the rising transport costs is likely to drive higher food prices.

READ: Sterling Bank reveals N215 billion sequestered by CBN as CRR Debits

The price pressures are likely to be steep in urban centres as is evident in the spreads between rural and urban inflation which have widened since the border closures. Thus, in a departure from prior years, when regional supplies from neighbouring countries moved through the border to temper these pressures, existing blockades imply that limited relief is forthcoming. Solving the price runaway for food items clearly involves a combination of allowing targeted food imports or at least re-opening the borders to allow regional food trade flows to resume. However, Nigeria’s economic managers appear to be on the other side of this fence.

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Figure 3: Rural and Urban Inflation

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UrbRurCPIAug2020

Source: NBS, Authors Calculation

But money supply growth has been restrained by CRR debits in the banking sector: The textbook monetary policy response to accelerating inflation is to raise interest rates to induce a shift away from consumption towards savings in a bid to force inflation to within a target level. This would pre-suppose inflation was driven by an expansion in money supply often through credit growth. A look at developments on this front would rule this out.

As at the end of July 2020, annualized growth in monetary aggregates was mixed with strong growth in M1 (+33%) and M2 (+27%) relative to M3 (+10%)[1]. The muted growth in M3 relative to the narrower measurers of M1 and M2 reflect declines in OMO bills (- 72%) after the CBN elected to proscribe non-bank domestic investors from its sterilization securities sales. This resulted in a drop in OMO bills from NGN8trillion at its peak in November 2019 to NGN3.5trillion in July 2020. As these monies flowed unhindered into the banking system, they spurred an expansion in Demand Deposits (+42% and Quasi-Money (+24%). Although these should ordinarily stoke concerns, a look at the monetary base (M0)[2] throws up evidence of how the CBN has still managed to sterilize liquidity: via the cash reserve requirements. Specifically, bank reserves have expanded at an annualized pace of 132% to NGN11trillion at the end of July or by some NGN4.8trillion – which is more than double than the quantum of growth in Naira terms in M3 (NGN2trillion). Effectively, as many have argued, the entire move to outlaw access for non-bank (and tacitly banks) was essentially targeted at zero cost liquidity sterilization. Thus while there has been growth in money supply from maturing OMO bills, the concurrent expansion in monetary base via CRR debits has effectively drained the financial system of excess liquidity.

From a more structural perspective, money supply growth is often driven by two sub-parts: net domestic assets (NDA) and net foreign assets (NFA). The CBN’s use of CRR debits has ensured that NDA growth over the first seven months of 2020 has been subdued (+1.3% annualized) relative to a faster expansion in net foreign assets (+54%) following the surge in FX borrowings with the IMF loan. In simple terms, the liquidity deluge from OMO bill maturities have been managed away.

Figure 4: Growth in Money Supply

MoneySSJuly2020

Source: CBN

So what gives?

In the near term, my suspicions are that the CBN is set to follow the global trend of ignoring the inflation numbers, which suits its ‘home-grown’ philosophy, that has underpinned a spate of interventions across a host of sectors. These interventions has resulted in the CBN directing credit towards certain sectors (manufacturing, renewable energy, gas-to-power, housing, agriculture etc) at single digit interest rates in a bid to stimulate activity. In combination with the Loan-Deposit Ratio (LDR) policy as well as the arbitrary nature of the CRR debits, which are well above the 27.5% target number, the CBN has been able to force banks to boost loan volumes as a coping mechanism in the face of collapse in net interest margins from lower rates on government securities. Though sceptics remain over the efficacy of supply-side policies on stimulating production among other unorthodox policies such as offering better rates for offshore investors relative to onshore investors, the CBN’s recent policy of lowering minimum savings rate has provided a strong signal of its direction: there will be no reward for risk-free anymore. Will this work or not? We will have to wait to find out. But interest rates are likely to remain lower for sometime.

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And 3 more things…

  • Changing the definition of core inflation: Presently, Nigeria defines core inflation as headline inflation less farm produce which reflected historic stability in fuel prices due to the existence of subsidized regime. With the removal of subsidies and 30-day averaging period, fuel prices now move from month-to-month implying higher volatility. Now is the time to change the definition of core inflation to exclude farm produce and fuel in line with the theoretical meaning. Looking back, the spread between headline and the true core definition which the NBS publishes suggests maybe we should not have tightened policy as aggressive as we did in 2016-17 by focusing communication on the true core number. Economic policies should focus on more lasting structural drivers than transient one-off shocks like fuel & electricity price hikes which tend to have disinflationary base effects afterwards.
  • Adopting a more meaningful inflation target: In Nigeria, that target level for inflation is defined as 6-9% for the headline number. Given the weight of food inflation (55%) in the CPI numbers as well as elements without recourse to monetary policy (like fuel and electricity prices), some (including myself) have argued that the 6-9% target for headline is meaningless. In countries which pursue inflation targeting, the target is more refined with preference for demand-side inflation metrics like core inflation, wage inflation or personal consumption expenditures. Nigeria needs to adopt something similar.
  • Explicitly incorporating FX into Nigeria’s monetary policy reaction function: In theory, the core mandate of central banks is price stability, but this does not preclude the pursuit of other objectives. In the US, the Fed has a dual mandate that explicitly includes unemployment. I believe a proper explicit mandate for the CBN is one that requires that it optimize a reaction function of price stability and an export competitive exchange rate. The price stability mandate should entail lowering some measure(s) of inflation (preferably ‘core’ demand side measures) towards a target band defined as conducive for consumption and welfare in Nigeria over a medium-term period set as 2-3 years. This allows to evaluate the efficacy of monetary policy and provides a good feedback loop. On the other factor, given the importance to policymakers we need to include that the CBN target a competitive exchange rate. The idea in mind is a variant of what obtains in Singapore, wherein the nominal exchange rate must coincide with a REER level that ensures that Nigeria’s non-oil manufacturing exports are competitive. This way, we resolve this obsession for nominal exchange rate stability. Balancing both items and ensuring better communication are the ultimate goals for monetary policy.

Figure 5: Trends in headline and core inflation

HeadCorspreadAug2020

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Source: NBS, Authors calculation

* core (Nig) refers to the present definition of core inflation, Core (True) is the theoretical definition of core inflation. Spread is the difference between headline and True core inflation.

READ: UPDATED: Inflation rate jumps to 12.40%, highest in over 2 years

* REER: Real Effective Exchange Rate is the weighted average exchange rate of a currency with its trading partners adjusted for inflation. In Nigeria, this effectively defaults to the bilateral REER against the USD given the dominance of the USD in Nigeria’s trade basket.

[1] In Nigeria, the operational definitions are as follows: M1 = Currency outside banks + demand deposits, M2 = M1 + quasi-money (time and savings deposits) and M3 = M2 + CBN T-bills.

[2] M0 is defined as currency in circulation and bank reserves. In theory, central banks monetary policy influences the monetary base via bank reserves while banks behaviour and actions influence money supply.


Wale Okunrinboye is a member of Nairametrics Economic Advisory Team

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Guinness Nigeria Plc jostles to improve from its insipid 2020 financial year

In the 2021 financial year, the task before the company is to drive its strategic objectives to bring the company back to profitability.

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Baker Magunda, Guinness Nigeria Plc, Baileys, Why Guinness is a stock to pick - RenCap 

Guinness Nigeria Plc has started its 2021 financial year with a loss, just like the company did in 2020. However, this time, the value of the loss adds up to N841 million for the opening quarter. In 2020, it was N370 million, which set the tone for what eventually degenerated into a truly horrible and uninspiring financial year. A year that saw loss position in the aggregate 12 months period peak at N12.6billion.

READ: Brewery sector: A quarter to forget

READ: Guinness’ parent company expects alcohol sales to improve as restaurants and bars gradually reopen

Apparently, all that could possibly go wrong with Guinness, did go wrong. From what in retrospect, turned out to be an over-ambitious outlook at the start of the year, to the effects of not giving immense attention to controllable costs, rise in inflation with its resultant pressure in decreased consumer spending, and the crippling effects of the unprecedented COVID-19 pandemic; no company could have asked for worse.

However, the horrendous performance was not peculiar to Guinness Nigeria alone. The results from its competitors, such as the International Breweries Plc, and Nigerian Breweries Plc, amid appalling industry figures recorded, proved that 2020 has been a tumultuous year indeed for all companies operating in the brewery manufacturing sector.

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READ: No trophy for International Breweries after bland Q2 results

The analysis of FY 2020

How poor was the 2020 FY performance of Guinness Nigeria and what can be inferred from its Q1 2021 reports? For a company in the habit of declaring dividends especially after the N5.5billion profit in 2019, how did the company move from that profit margin to a loss of N12.6billion just 12months after?

  • Profit declined by 129.1% from N5.5billion Profit after Tax in 2019 to N12.6billion Loss after Tax in 2020. This Steep decline was evident in all arrears from top-line to bottom.
  • Gross profit down by 16.9% to N33.33billion in 2020 as against N40.13billion reported in 2019
  • Revenue plunged 21% to N104.41billion in 2020, from N131.5billion generated in 2019.
  • Cost of sales did show some improvement, moving from the N91.4billion expended in 2019 to N71.1billion in 2020 – a 22% decrease.
  • Administrative cost continued the rising trajectory to N14.3billion in 2020 from N9.9billion in 2019.
  • Finance cost rose to N4.5billion from N2.6billion in 2019, while finance income declined from N750.9million to N301million in 2020.

READ: PZ incurs N1 billion in exchange rate loss 

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Speaking on 2020 results, Mr. Baker Magunda, Managing Director/CEO, Guinness Nigeria Plc said,

“The last quarter performance of fiscal 2020 was significantly impacted by restrictions due to COVID-19, exacerbating the already challenging economic environment. Closures of on-trade premises (bars, lounges, clubs, and dine-in restaurants), which represents the major part of the consumption occasion for our products and bans on celebratory occasions, impacted sales.

“Demand was also impacted by reduced consumer income, unemployment concerns due to the shutdown of a large number of businesses, and increases of VAT and excise throughout the year.”

READ: R.T. Briscoe declares N618.9 million loss in H1 2020, as sales of vehicles fall 

Magunda further explained that, “Distribution was impacted by the ban of inter-state, and in some cases intra-state travel. Although, Management worked diligently with regulatory authorities to minimize the impact, this hampered our distributors’ ability to restock and have our brands available for purchase.”

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The analysis of Q1 2021

In the 2021 financial year, the task before the company is to drive its strategic objectives to bring the company back to profitability. The Chairman, Mr Babatunde Abayomi Savage, recognizes that this would be no stroll in the park, as he affirmed that despite predictions that the coming year will be challenging globally due to the new normal, “we believe we have experienced our full share of the impact and are now geared to go back to profitability.”

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READ: MTN, Airtel, Glo, other Telcos’ operating costs drop to N1.756 trillion in 2019

The opening quarter for 2021 (July-September) saw improvements in sales volumes on the back of eased restrictions from the COVID-19 necessitated lockdown.

  • Revenue posted is N30.02billion, 11.64% increase from the N26.89billion recorded in the corresponding period of 2020.
  • However, Cost of sales worsened by 21.1%, increasing from N18.9billion in Q1 2020 to N23.01billion in Q1 2021.
  • Marketing and distribution expenses, as well as administration expenses, showed marginal reduction, depicting management interest in controlling these variables.

READ: Q1’20: Okomu Oil’s result is more proof that essentials always win

Bottomline

Generally speaking, results for the opening quarter show signs of improvement, but the tax component was the primary factor responsible for masking the progress obtained in Q1 and eroding promising signs.

With the gradual re-opening of its previously closed company buildings in Benin City, and the shift in focus from the largely underwhelming lager segment to investing more in spirits, it will be interesting to see how this impacts volumes and revenue in subsequent quarters, despite the apparent economic conditions.

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Theory of Motivation: Solving immunization and child education challenges

Nigeria should experiment with opening up the RSA and Health Savings to all Nigerians irrespective of age or occupation as a policy to reduce infant mortality.

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Mother and child

Every CEO knows that when you want to improve performance, you track and reward. Every mother knows this as well, you have kids and you want them to wash their dishes, you could threaten them with “no TV until plates are washed”, and they will reluctantly do it. However, if you offer them N10 for every plate they wash – that can be used to buy sweets, they will be motivated to go beyond washing only their own plates, but yours as well.

This simple concept that humans are driven by rewards is the basis for incentive programs in the workplace and marketplace. Airlines offer miles program, where you earn a reward for spending your money to fly with them. Some employers will offer you club membership if you stay with the company for a length of time; thus, rewarding your length of service and taking advantage of your experience. Businesses are happy to invest in these “reward” programs because they create brand loyalty, retain customers, and even create referrals.

The incentive theory is a major theory of motivation. The theory of motivation essentially states that “human behavior is motivated by a desire for reinforcements or incentives.” The incentive theory states that “The greater the perceived rewards, the more strongly people are motivated to pursue those reinforcements.”

Governments have recognized the positive benefits of reward programs, and have sought to reward their citizens for performing certain actions. For example, in Brazil, there is a social welfare program called the Bolsa Familia, which provides aid to poor Brazilian families, but what is unique is that the scheme only pays benefits if the children attend school and are vaccinated.

In this case, the Brazilian Government is seeking to track educational attainment and reward it. If kids from poor families do not attend school, the direct cash payments stop, if they attend and get vaccinated, then each family gets $34 per month. The Government is offering a reward of 17% of the minimum wage as an incentive to motivate and reward poor Brazilians to get children vaccinated and educated.

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In Nigeria’s Kebbi State, The World Bank’s Africa Gender Innovation Lab, in collaboration with Catholic Relief Services (CRS) conducted a study on cash transfers. It found that “cash transfers offered to women from ultra-poor households in Northwest Nigeria have an immediate positive impact on household consumption, as well as female employment and well-being”

Nigeria should experiment with opening up the RSA and Health Savings to all Nigerians irrespective of age or occupation as a policy to reduce infant mortality, promote a saving culture, and create a pool of long term savings in Nigeria.

Imagine if every child born in Nigeria received a one-time deposit of N100,000 into his Retirement Savings Account from the Federation, provided that by the 5th year, the child has been enrolled into a primary school and has taken all immunizations; and the one time Federation contribution cannot be accessed until the child retires or reached the age of 65 -whichever is later.

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This account balance can be transferred to a Nigerian Housing Fund where it can also be accessed if the owner seeks to make a one-time payment for a first-time home purchase. Funds can also go to an education fund and the account owner can continue to make contributions during his working life – tax-deferred.

Clearly, this scheme would incentivize primary enrollment and immunization, and we know there is a direct correlation with education, maternal health, and family income – especially for the girl child. Most importantly, this will create a savings culture for the parents, the children; and in the long term, reduces the societal burden of paying pensions. The tax-exempt status will also allow savings to grow uninterrupted for 18 years minimum – compounding those returns.

The maths is good. If the Federation invested only N100,000 per child and contributed nothing for 65 years, at a very low rate of 2% per year – the return in 65 years (using compound interest) will be N262,252.32. However, if the parents invested just N100 a month (N1200/year) to this same account at the same rate, the payout in 65 years will be a total of N265,399.35.

Remember this is at a 2% annualized rate, what happens if parents contribute N500 a month at say 5%? It is definitely worth considering.

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Covid-19 Palliatives: Implications of looting the strategic grain reserve

Incidences of looting of warehouses have brought to the fore the lack of knowledge of the SGR and the Stockpile of grains kept as a buffer for the nation.

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Covid-19 Palliatives: Implications of looting the strategic grain reserve

Food security has always been an issue for Governments and Policy Makers the World over from the dawn of time.

Food is a basic need of all people and food security is considered a component of National Security especially in the 21st Century. Hence, what to do with surplus food during the season of bountiful harvests and how to manage food in the time of famine is a never ending challenge.

READ: This report explains why Nigerians are bent on leaving the country

READ: Lagos Multi-billion naira rice mill nears completion

In the Bible; the Book of Genesis 41 verses 22-31 and 47 verses 13-27, tell the story of Joseph a young Hebrew Man and how his interpretation of Pharaoh’s dream led to the creation of the first Strategic Grain Reserves in the World.

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Joseph’s ideas in ancient Egypt, helped that Civilization survive the onslaught of famine that affected all other Kingdoms and groups of that time and have been replicated in varying formats since then. The basic idea has remained the same though, and this has become an integral part of food security for Nations.

READ: Covid-19: World Bank discloses when Sub-Saharan Africa will fall into recession

A Strategic Grain Reserve (SGR) is a government stockpile of grain for the purpose of meeting future domestic (and sometimes International) needs. Government sets aside a part of the public funds to enable it buy these grains and invests heavily in building giant Silos that are used for proper storage of the grains.

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In addition to their primary function of ensuring the year-round availability of food in the event of emergencies, the SGR can also be used to help in price modulation. If the price of a particular grain becomes too low as to make it economically unviable for Farmers to produce it, the Government comes and mops up the grains so as to drive up the price, and when it becomes too expensive, the government releases from its stockpile to help stabilise the price.

READ: NCC grants national roaming services approval to MTN, 9mobile

In Nigeria, the SGRs are located in all the States of the Federation (Silos are at different stages of completion and operation) and the grains are released based on the assessment and advice of relevant departments of government.

The National Agricultural Seed Council (NASC) also conserves seeds for onward distribution to Farmers during the planting seasons. Some of these seeds are kept in Silos, but are not edible and therefore separate from the SGR.

Recent incidences of looting of warehouses all around the Nation, have brought to the fore the importance, dangers and complete lack of knowledge of most Nigerians of the SGR and the Stockpile of grains and seedlings kept as a buffer for the Nation.

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The Government of Ekiti State raised an alarm on Saturday that huge quantities of poisonous items, mistaken for food yet to be distributed as COVID-19 palliatives, were looted in warehouses in Ado-Ekiti on Friday according to Premium Times an Online news medium.

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READ: Soybean Futures reach 2-year high, following U.S sales to China 

According to the Paper, the Federal Government’s silos, the ADP warehouse and the State Emergency Management Agency (SEMA) stores, all in Ado- Ekiti, were attacked by hoodlums under the guise of seeking Covid-19 palliatives. Unfortunately, the items carted away were Single Super Phosphate and NPK fertilisers, which they erroneously thought was “Garri’’ (Cassava grains).

Also on Sunday, October 25, 2020, hoodlums broke into the NACS Warehouse in Bukuru, Jos, Plateau State and looted wheat seeds worth millions of Naira. In both instances, Government has appealed to people not to consume these items because they are not fit for human consumption as they have been treated with Agrochemicals and are only suitable for planting.

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Lootings such as these are presently going on in different parts of the nation and the grains so looted would find their way into the Markets and would be sold alongside normal foodstuffs. There is also the prospect of depletion of seeds for the next planting season which was already projected to be hit by floods in some Northern States.

READ: Lagos state moves against fake news and inciting messages merchants

Concerted efforts must now be made to ensure that no further looting of the SGR is experienced, even as Government intensifies efforts to ensure all the ongoing construction/rehabilitation of Silos is completed, so that the idea behind the establishment of the SGR can be realised.

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