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The Asset
Management Corporation of Nigeria (AMCON) will ease current credit
crunch but it may also trigger inflation in the economy. Experts who
reviewed the situation insist that unless the Central Bank comes up
with adequate measures to check the increase in money supply that will
follow, the economy may be faced with cost-push inflation in the
immediate term.

The AMCON Bill,
which has been passed by the National Assembly and is awaiting
presidential assent before it becomes operational, is expected to buy
the toxic debt of banks and free up their books and encourage lending.
The company will start with a minimum of N20 billion capital.

Currency in
circulation which has been on a steady decline in the last six months
is expected to rise with the floating of the AMCON. Currency in
circulation which peaked at N1.18 trillion in December 2009 dropped by
N1.05 trillion in May 2010, a decline of over 11 per cent.

Money supply

Razia Khan,
regional head of research, Africa, Standard Chartered Bank in a recent
paper entitled “Nigeria – Assessing Inflation Risks” said AMCON
creation and plans for increased government spending ahead of elections
in 2011 will both add to money supply which may trigger inflation.

Ms. Khan noted
however that with growth below potential output, inflation risks are
unlikely to be as magnified as they would be in a healthier growth
scenario.

“Of course, for
Nigerian inflation, structural bottlenecks remain important. The extent
to which reform is successful in relieving structural bottlenecks will
determine the extent to which favourable liquidity adds to growth,
rather than merely feeding through into higher prices,” She favoured a
deliberate firming of the naira as a guard against inflationary trends
that might follow. In an email response to further questions, Ms Khan
said efforts to improve the value of the naira remain the best
safeguard when it comes to keeping inflationary pressure in check. “It
is more a question of whether the CBN can commit to strengthening the
naira (if that is what it takes) to keep inflation under control,
without running down FX reserves.”

It may become worse

Felix Oboagwina,
director of publicity of the Democratic Peoples Alliance (DPA), said
the situation could become worse as the National Assembly members are
currently demanding for a rise in their allowance. According to him,
the demands of the law makers are not realistic.

“What they are
asking for and the manner these funds will eventually be spent will
have consequences on the economy. It means we will have a lot of money
chasing limited goods and this can lead to hyperinflation. Are these
demands realistic, from N27 million quarterly allowance to N40 million
in a country where minimum wage is N7, 500.” Mr Oboagwina said the
problem is not the amount of money that would be released into the
system but the fact that this will be at the expense of the real sector
of the economy. “The real sector has been dwarfed by the activities of
these politicians and so we have seen a total collapse of the middle
class.” He added that beyond the effort of the CBN to control the
situation, there was need for the National Assembly, governors and the
presidency to come together to look at some of these social issues that
have led to the rising unemployment and crime in the country.

The Central Bank raised similar concern in its communiqué at the end of the May 2010 Monetary Policy Committee (MPC) meeting.

The communiqué which was signed by Lamido Sanusi, CBN governor,
noted that monetary expansion in the next quarter may be driven by
increased government spending, the purchase of toxic assets by the
AMCON and recapitalization of distressed banks. “These expansions may
translate into the risk of higher inflation, asset price bubbles or
pressure on exchange rate and foreign reserves,” he said.