Inflation Drops but Concerns Persist
Over the weekend, it filtered into the Nigerian newswires that year-on-year inflation rate had dropped from 12.8% in the month of July to 11.7% in the month of August, 2012. That should be good news; good news that the Nigeria has been able to absorb the hit of the partial fuel subsidy upheaval without undue economic stress. Just a few days ago the Central Bank of Nigeria (CBN) database also show that foreign reserve has hit the $40 billion mark, a 29-month high. The growth in the reserves has been attributed to oil prices that held steady above the $110 for weeks on end while foreign investors rushed into Nigeria after JP Morgan announced that it was going to add the Nigeria Government Bond Index into its International Government Bond Index. The world took note.
But there are problems.
The excess crude account which is supposed to feed off the difference between the global oil price and the budgetary benchmark of $75 per barrel has refused to grow as Governors continue to raid the account. If economic shock hits, Nigeria may not have a good buffer to rely on. We still need to understand what the Governors do with the withdrawal from the excess crude account as accountability remain opaque at that level of governance.
Over the past one week, the German highest court gave approval for Germany to help fund the permanent bailout fund, which is expected to be spent to stabilize the euro-area. The Fed also announced their quantitative easing programme codenamed QE 3, which will be used to purchase mortgage securities at the rate of $40 billion per month. This is expected to pump cash into the economy and stimulate growth. The stock markets reacted positively to these news as they went into a bullish mode globally.
The euphoria was cut short prematurely today as the 27 finance chiefs across the euro-zone got deadlocked on the way forward for the area. All major global equity indexes were halted abruptly. The US market that touched a 5-year high erased all the gains and closed in the red in response. This reversal is expected to continue in the coming days until the euro comes up with something to assure investors about reaching a compromise to move forward.
This sudden turn in events may have an adverse effect on Nigeria as the skittish global funds may decide to take a walk and put the Naira under pressure. A weakened Naira may erase the expected gains from the lowering inflation rate as it reverses and the CBN may resort to raiding the foreign reserves to stabilize the Naira.
Meanwhile, the CBN started the MPC meeting today and it is expected to finish tomorrow. Whatever ideas they had when the meeting started this morning has definitely changed with the sudden turnaround of events. So if we were counting on a reduction in the MPR due to the lowering inflation, that hope has certainly vaporized..