Much of the debate ahead of the Federal Government of Nigeria’s surreptitious removal of the “subsidy” on the pump-station prices of petrol at the beginning of the year concentrated on the inflationary effect of the subsidy removal. There were those who argued that petrol comprised a dwindling share of domestic consumption and to this extent, any price increase was likely to have minimal impact on the domestic price level. Most of this latter argument centred on the “fact” that diesel, the fuel of choice for the transport industry and for manufacturing, had long since been deregulated. There was also argument to the effect that in the previous instances where petrol price hikes had fed into domestic prices, the effect had been short and very sharp.
Consequently, informed estimates for domestic price movement this year ranged from between 200 basis points (a basis point being a hundredth of a percentage point) to 500 basis points. On the street though, there was a sense of prices rising by as much as a 100% for basic food and related household items as soon as the “subsidy” was removed, and even after its adjustment in response to concerted pressure from the street. Not surprisingly, therefore, we all looked to the official inflation figures for January to tell us how much of an impact the “subsidy” removal had.
In the event, the truth lay somewhere in the middle of the various estimates. According to the National Bureau of Statistics, owing to “partial removal of the subsidy on the Premium Motor Spirit (petrol) that pushed up prices of many food and non-food items as a result of the increase in transportation costs”, the composite consumer price index rose by 230 basis points (year-on-year) from 10.3% in December last year to 12.6% in January this year. Thus, of the two shibboleths that adorned the fuel subsidy debate, the inflation figures lay at least one quietly in its grave: the petrol price does matter for this economy.
Now, whether the push effect of rising fuel prices is a temporary blip or a long-tailed event remains to be seen over the current plan period. Nonetheless, it is in this sense going to be important for how the Central Bank of Nigeria (CBN) responds at the next meeting of the Monetary Policy Committee (MPC – its rate-setting committee) in March. At its first meeting this year the MPC had adopted a “wait and see” approach.
Having “seen”, do we “wait” further?
A lot on the CBN’s side would depend on how quickly the central government is able to implement its planned movement to a treasury single account model. If this happens rapidly, then the resulting withdrawal of public sector funds from commercial banks will have as much effect on liquidity in the market as a hike in the policy rate.
The problem, though, is that this administration is notoriously short on execution effectiveness.
Still, this will not stop the central bank from hoping for a deux ex machina. My sense is that having tightened rapaciously last year, the apex bank may have lost its appetite for further tightening. Besides, with the debt-to-GDP ratio nearing 30%, and a lot of this domestic, tighter monetary conditions would only push up the debt service cost; making the finance minister’s job that much harder.