The Sobering Presence of Inflation At Christmas By Henry Boyo

Nigerians will involuntarily endure an oppressive and yet invisible guest for this festive season. Sadly, if this formless demon is not exorcised, this enemy of progress may remain the suffocating unseen elephant in our lives, in 2017. Arguably, the primary instigator of the deafening cry of hunger, country wide, is probably the difficult challenge of matching relatively static incomes with the present escalation in the prices of goods and services.

Instructively, the fear of inflation running out of control is the first law in governance. Consequently, successful economies religiously manage inflation well below three per cent. Alarmingly, however, the general price level in Nigeria is gradually approaching 20 per cent and will inevitably bring in its train severe deprivation and social agony.

“Inflation: the quiet plague” is an article first published on this page on February 17, 2012, when inflation rate still averaged 10 per cent in the country, i.e. a sharp contrast from the present almost double rate above 18 per cent. Hopefully, the conscious recognition of the primary cause of the increasingly severe economic trauma may facilitate the exit of this unseen terrorist called inflation before Christmas 2017.

The following is a summary of the mentioned article. Please, read on:

“Nigerians know too well that sinking feeling when the shopping list cannot be covered by the regular budget. The option is either to cut down or do without some basic items, or alternatively, make do with less preferred but cheaper substitutes.

Although the impact of inflation knows no boundaries, it is also recognised that a little inflation may be necessary to stimulate economic growth. However, problem occurs when the general price level rises above five per cent annually! Disturbingly, nonetheless, inflation has in recent years remained above 10 per cent. As a result, a static nominal income of N100,000 may now be required for goods or services that cost just N10,000 10 years earlier. For example, the N200/month (over $150) minimum wage in the 1980s commanded more value than N18,000, or $100 presently (2012). Indeed, in responsible economies, the general wage structure is intrinsically tied to prevailing inflation rates to sustain consumer demand, restrain inflation and thereby prevent a meltdown of social welfare.

The pertinent question, nonetheless, is why Nigeria’s inflation rate has remained destabilising to become a primary instigator of deepening poverty. Instructively, the classical definition of inflation is “too much money chasing too few goods and services”. Thus, inflation is an expression of the market dynamics of the supply of products or services and the total potential demand.

Incidentally, the popular notion, however, is that Nigeria’s high inflation rate is caused by low productivity; furthermore, this supply shortfall is simultaneously, conversely confronted with too much supply of naira. Although this may seem to be so, however, a casual observation will confirm that more goods and services are currently produced than 25 years ago. Consequently, it is clearly misleading to suggest that less goods and services are available, but, it is probably more correct to admit that the increasing output falls below the expansion rate in money supply. So, the problem is really that of total money supply always outstripping output of goods and services!

The related critical question, therefore, is what persistently instigates increasing money supply, such that so much money always becomes available to chase relatively fewer goods to drive a punishing inflationary spiral? The Nigerian monetary authorities and some experts are clearly mischievous when their answer to this question is that the three tiers of government spend too much money. In contrast, however, the antidote to flagging consumer demand, rising unemployment, and industrial contraction is presumably fiscal and monetary expansion i.e. increased spending! Ironically, in response to this dilemma, our monetary authorities impulsively, resolve to hold back inflation by discouraging access to the increasing surge of money supply, allegedly, ironically, induced by an expansion in government spending!

However, in its attempt to reduce the perceived existing distortional excess naira supply and restrain inflation, the Central Bank of Nigeria deliberately raises the money policy regulatory rates rate at which it lends to banks, in order to restrain aggressive expansion in bank credit to customers.

It is therefore expedient that, going forward, we must carefully examine the true origin of the CBN’s perennial burden of ‘excess liquidity’ in the money market, especially when the real sector is simultaneously denied access to cheap funds to sustain or expand their operations. A little sincerity will reveal that the CBN’s eternal lamentation of excess liquidity and its threat to higher inflation rates, usually follow the payment of monthly allocations to the three tiers of government. Sadly, the same CBN, inexplicably, proceeds, soon after the disbursement, to crowd out real sector loans by borrowing back and sterilising a chunk of loanable market funds, in order to reduce the perceived surplus cash and stifle consumer spending, so as to prevent too much money chasing a more modest supply of goods and services.

Thus, the greater the monthly naira allocations, the greater also would be the surge of liquidity and the threat from inflation and a higher national debt burden with its related oppressive service charges. Ultimately, the higher cost of funds deliberately induced by the CBN to keep consumer demand and inflation in check will severely challenge price competitiveness and the survival of the domestic industrial subsector.

Furthermore, a steady increase in money supply from the billions of naira monthly government allocations will similarly induce a supply and demand relationship between the naira and the dollar. The resultant market dynamics will ensure that the dollar rate will always emerge stronger, whenever the CBN turns around to aggressively auction small dollar rations, in a process which invariably creates dollar scarcity in comparison with the huge naira surplus and the expanded credit capacities sustained by relatively low mandatory Cash Reserve Requirements of banks. Ultimately, such a market with increasing naira ‘surplus’ and meagre dollar rations will inevitably propel a cheaper naira exchange rate, as the usual product of the dynamics of market demand and supply. The inflationary spike following the Udoji salary bonanza of the late 1970s is a classic example of the product of too much money chasing fewer goods.

But, the table can in fact be turned on the dollar and the destructive cycle of persistent excess liquidity, high inflation rates and a weaker naira, if government musters the will to change the demand and supply relationship between the naira and our dollar earnings, by stopping the CBN’s distortional hoarding and monopoly of dollar sales. The naira rate will become better favoured, if the dollar components of monthly distributable revenue are paid with negotiable dollar certificates, which should be exchanged competitively against existing naira deposits in banks rather than the current practice in which dollar revenue is unilaterally substituted with freshly minted naira allocations by the CBN.

The erstwhile ever present ghost of excess liquidity will disappear with such a payment reform, while government’s increasing debt and service charges will also significantly reduce. Furthermore, if the rate the CBN pays to borrow and mop up excess liquidity from banks is significantly reduced, interest rates will similarly fall to a single digit, and promote rapid industrial growth. Instructively, if the deadly plague of inflation is tamed and interest rates fall well below 10 per cent, industrial output will expand and unemployment will recede drastically, to further spur consumer demand and job creation. Overtime, more rapid economic growth will also be facilitated with significant improvement in social welfare and government revenue from a more prosperous economy.”

Post script: December 2016.

The question is: Can we escape the scourge of inflation spiralling beyond 20 per cent before Christmas 2017?

The answer remains: Certainly not; if the seemingly eternal challenge of naira liquidity surplus directly and compulsively instigated by the CBN persists!

This is wishing all my readers a Merry Christmas.

Punch