This event took place more than 40 years ago. I was in my teens. And along with my friends, was playing 5-a-side-football on the back lawn of one of the would-be Mario Kempes’ house. It was odd that our host’s mum would ask to see any of us at the time. Worst case scenario, she would surreptitiously call in her son to shoo all that peskiness home. It was so outré, therefore, that the summon was for all of us. What could be worse than a comprehensive play ban? Contemplating the metaphorical guillotine, you could not have beheld a brood of wetter hens. What was the problem?
Our friend’s mum had just returned from pilgrimage to Jerusalem the previous evening. On her way back she detoured through London. There she bought groceries. Incidentally, according to her, this was exactly a decade after her first pilgrimage to Jerusalem. Ten years ago, she had similarly come back through London. And she had bought off the same grocery list. Her gravamen? She had only just woken up before summoning us. In the interval she had compared what was left over from her grocery shopping list ten years ago with her latest shopping list. She was shocked to find that the list price on the tins of food she bought ten years ago was no different from the list price on the shopping basket she had come back with.
“Is the U.K. economy not growing?”, was the question she would have the football team provide answers for. Our challenge? To explain how rampant inflation in an economy is not synonymous with growth. Too much inflation, what Nigeria is currently experiencing, hurts economies. It forces economic actors to front-load purchases (pushing prices up). It messes up investment plans. And by drilling holes in consumers’ pockets, it washes out domestic demand. Falling prices, on the other hand, make debt repayment more expensive, and drives unemployment higher, while pushing incomes down. How to square the circle between excessive inflation and deflation. The literature (economics) insists that there is a level of price increase that is consistent with an economy’s growth.
Around this rate, central banks in economies such as the U.K. have organised their price stability work. There are targets and rules. The NAIRU (the non-accelerating inflation rate of unemployment), for instance, describes how low domestic unemployment levels can reach before rising wages begin to push general prices up. Then, there is the level (the neutral rate) of the central bank’s policy rate that neither drives domestic economic expansion, nor holds economic growth back. On the other hand, the Taylor rule says that price stability is readily realised only when the nominal interest rate is higher than the rate of growth in general prices, and vice versa. The thing is that both targets and rules do not lend themselves to linear causal relationships; and the more sophisticated the economy, the more varied the variables and involved their interactions.
But that is why central banks have a battery of economics and statistics PhDs. Over the years, however, central banking in Nigeria has taken place on the back of gut decisions, a useless process that reached its apotheosis in the 8 years that Mr. Godwin Ifeanyichukwu Emefiele ran the place.
How do we then nudge Nigerians away from the conviction that rising prices are the hallmark of a growing economy? Put differently, how do we anchor domestic inflation expectations? Arguably, the easiest response is to ask that we run a professional central bank — i.e. one with a clear inflation target, capable of using market-based tools to achieve the target, and one that appreciates forward guidance (transparent and open communication of direction and tools) in the management of monetary policy.
It matters, therefore, that under its new leadership, the Central Bank of Nigeria is committed to bringing inflation down; and is convinced that higher (than inflation) nominal interest rate is the way to go. Of course, choking domestic demand in a bid to throttle rising prices was always going to redound negatively on the economy. But that is for the circa 18 months that it will take interest rate increases to feed into lower prices. With the right domestic environment, the stable prices that will result from tighter monetary conditions should boost both planning and investment in the economy.
This might be a wee bit late to assuage my friend’s mother that many years back. But it might mean a less volatile operating environment for her grandchildren.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
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