Inflation jumped to 11.28 percent in November from the previous position of 11.26 percent. The consequences of not properly managing the fearsome beast are either to be voted in or out of government because of the effect on bond prices and overall welfare of the people.
Economic history has it that the Inflation Rate in Nigeria averaged 12.50 percent from 1996 until 2018, reaching an all time high of 47.56 percent in January of 1996 and a record low of -2.49 percent in January of 2000.
At this slow motion pace of deceleration, consumption and savings would be restricted; interest rates will remain high, bond prices will stay low while yields would look down on investors from higher grounds, indicating waning confidence in government’s ability to meet with its debt/ bond obligation.
Developed markets are acutely aware of these stifling effects of high inflation that is why they do everything possible within the monetary and fiscal sphere to achieve single digit inflation. There were times that when unconventional monetary policies were applied to achieve macroeconomic stability.
The average inflation rate for the euro area for instance is 1.4 percent year-on-year as of March 2018; the rate of inflation across the UK fell to 2.7 percent in February 2018 from 3 percent in the previous month while consumer prices in the United States increased 2.4 percent year-on-year in the same period.
A concomitant effect of low inflation is low lending rates as the following examples show. The ECB held its benchmark refinancing rate at 0 percent on March 8th as expected; the Bank of England voted by seven to two to keep the Bank Rate at 0.5 percent on March 22nd; and the Federal Reserve, meeting for the first time under Chairman Jerome Powell, raised the target range for the federal funds rate by a quarter point to 1.5-1.75 percent.
Low inflation helps in ramping up the twain of consumption and savings. In Nigeria, in addition to poor wages, high inflation rate contributes to limit consumption and savings. Inflation makes goods and services dearer and eats into the disposable income of households. Consumption in Nigeria was N1.06 trillion in the last quarter of 2016, down from N1.15 trillion in the previous quarter. The drop was mainly due to the economic trough or recession that the economy slipped into in the period. Propensity to save also gets battered during high inflation because people allocate more of their disposable income to consumption than savings.
Where savings are low, investments are low. Meaning also that capital formation is slow. Gross Fixed Capital Formation in Nigeria was N238.04 trillion the fourth quarter of 2016. This is less than N287.33 trillion accumulated in the second quarter.
We had observed that where inflation is low, rates are low, which is good for stimulating economic activity like manufacturing and industrialisation. Under such benign conditions businesses can easily borrow from banks and other financial institutions and thrive. Imagine borrowing at close to zero percent as in the Euro area. The situation in Nigeria is that borrowings are done at above 17 percent. This is really harsh for business.
Suffice it that all the analyses point to the need for the Central Bank of Nigeria (CBN) to continue the onslaught on inflation. The central bank can use monetary policy to maintain a low and stable rate of inflation otherwise called Inflation Targeting (IT). Beyond the interest rate effect noted earlier, inflation targeting can help achieve wealth effect and net export effect.
Wealth effect means that rising inflation has a deleterious effect on our consumption pattern; it disrupts it and further impoverishes households especially in developing countries such as ours. The interest rate effect means businesses can only invest little because of a rise in interest rates and business loans. Remember, interest rates are always higher than the rate of inflation. The net export effect may not apply because we are an import dependent economy; the net export effect holds that as domestic prices fall or rise, the price of foreign goods rise or fall in reaction. The level of Inflation can make or mar the economy, leaving the CBN with no choice but to actively manage it.
But a look at the major sources of inflation indicates that the CBN alone may not have all the answers to bring down inflation. As observed earlier, the main drivers for inflation in the last couple of months are “a slowdown in prices of food and housing and utilities”. These are factors that are completely under the control and influence of fiscal policy. So apart from the CBN rate setting, what can fiscal policy do to temper inflation?
Abundant food production and the resultant drop in prices can be achieved with sound agric policies targeted at better yield from research to improved seedlings, financing and ready market for produce. At another level, and at the risk of repeating age old prescriptions, government needs to aggressively open the hinterlands via railroads and roads so food produce can find their way to the city centres. This should be done along with ensuring better storage facilities to keep seasonal food available all year round.
Government’s aggressive investment in housing is also encouraged in order to achieve affordable housing. It also behoves of government to relax harsh laws around property acquisition like the land use charges and other levies that make housing prohibitive. This also applies to policies affecting building materials and levies.
A well thought out and well coordinated application of monetary and fiscal policies can help put inflation under control. The sooner government agencies realise this and get a handle of the situation, the earlier the rate of inflation will be better managed towards single digit. Nigerians will appreciate this gesture and would be more amenable to cast their votes for whoever can steer the apparatus of governance in that direction.
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