Inflation: The quiet plague

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

Even though the impact of inflation has no social boundaries, it is also recognised that a little inflation may also be necessary to stimulate economic growth; however, it becomes a problem when the general price level rises above five per cent annually! Disturbingly, however, in our case, the price level often rises above 10 per cent annually, while inflation rates for food items have generally been much higher!

However, where prices of goods and services consistently rise above 10 per cent annually, a static nominal income of N100,000 may only be enough for the basket of goods that cost just N10,000, 10 years earlier; consequently, in order to maintain their living standard a family’s income must grow by at least 10 per cent annually. Indeed, in responsible economies, the general wage structure is intrinsically tied to prevailing inflation rates so as to sustain consumer demand, restrain inflation and prevent an oppressive meltdown of the welfare of citizens.

Conversely, Nigeria’s inflation rates often outstrip static incomes for several years before any attempt to remediate the disparity. Evidently, the net product of this mismatch is grinding poverty; for example, the N200/month (over $150) minimum wage in the 1980s commanded much more value than the latest increase to N18,000, or $100 at present (2011).

The pertinent question, nonetheless, is why Nigeria’s inflation rate has remained so destabilising to become a primary instigator of deepening poverty. It is ironical that Nigerians are presently listed amongst the world’s poorest people, despite our fortuitously increasing export revenue and best-ever external reserves for several years. Instructively, however, the classical definition for inflation is ‘too much money chasing fewer and fewer goods and services.’ Thus, inflation is an expression of the market dynamics of the supply of products/services and the total available spendable cash for transactions.

Incidentally, the general notion, however, is that Nigeria’s high inflation rate is caused by our lack of productivity; i.e. we are not producing enough goods and services while the supply shortfall is simultaneously confronted with too much Naira in the money market. This may be a true reflection of the definition of inflation, however, a casual observation will confirm that more tonnes of garri, yams, tomatoes, eggs, etc, are currently produced than 25years ago; consequently, it is clearly misleading to suggest that less and less goods are available, but, it is probably more correct to admit that the increasing output falls below the rate of expansion in money supply. So, the problem is really that of total money supply always outstripping production of goods and services!!

The related critical question, therefore, is what persistently instigates increasing money supply, such that so much money is always available to chase more, but relatively fewer goods to drive the inflationary spiral? The Nigerian monetary authorities and likeminded pseudo experts are mischievous when their answer to this question is that the three tiers of government spend too much money; instructively however, in contrast, the best practice antidote to flagging consumer demand, rising unemployment, and industrial contraction is actually fiscal expansion i.e. increased government spending! Ironically, in response to this dilemma, our monetary authorities impulsively, invariably resolve to holdback inflation by discouraging access to the increased surge of money supply allegedly induced by an expansion in government spending!

However, in its attempt to reduce the perceived excess money supply and restrain inflation, the CBN would deliberately increase the cost of borrowing with higher money policy regulatory rates that would restrain aggressive credit expansion by banks. Furthermore, as readily admitted in CBN’s Monetary Policy Committee Communiqué No. 76 of May 24, 2011, government becomes the major customer of the banks and inexplicably borrows money that it claims to sterilise from use, in order to avert the threat of inflation; thus, such CBN intervention with higher MPRs is projected to reduce the available cash and credit in the money market; disturbingly, nonetheless, over N500 billion has been earmarked for servicing such counterproductive government loans in 2011! Unfortunately, overtime industrial contraction, increasing unemployment and a reduction in aggregate consumer demand, all of which deepen poverty, become the horrid collaterals of such unforced credit restriction and the higher cost of borrowing deliberately imposed by CBN.

It is, therefore, expedient that, going forward, Nigeria’s monetary authorities must carefully examine the true origin of CBN’s perennial claim of ‘excess liquidity’ in the money market especially when the productive real sector is denied access to cheap funds to sustain or expand their operations.

Furthermore, it is apparent that the potential increase in money supply from hundreds of billions of Naira government allocations also induces a supply and demand relationship between the Naira and the dollar. The resultant market dynamics ensures that the dollar will always emerge stronger in the market, when CBN subsequently aggressively auctions small dollar rations, in a process which invariably creates dollar scarcity in comparison with the huge Naira surplus and the related credit capabilities of banks. Ultimately, a market with increasing Naira ‘surplus’ will inevitably also induce a cheaper Naira exchange rate, similar to the product of the market dynamics in a market with comparatively less goods and services and increasingly surplus Naira liquidity, as witnessed for example after the Udoji salary bonanza of the late 1970s.

But, the table can be turned on the dollar and the destructive cycle of persistent excess liquidity, inflation 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 CBN’s distortional hoarding and monopoly of dollar sales. The Naira rate will become better favoured in the market, if the dollar components of monthly distributable revenue are paid with negotiable dollar certificates rather than the current practice in which dollar revenue is substituted with Naira allocations by CBN.

The erstwhile ever-present ghost of excess liquidity will disappear with such payments reform, while government’s increasing debt and service charges will also significantly reduce; furthermore, if CBN’s borrowing is significantly reduced, interest rates will similarly fall to single digit, to support industrial growth. Furthermore, the deadly plague of inflation will be tamed and unemployment will also fall drastically, to spur consumer demand and job creation, and overtime promote significant improvement in social welfare.”

The above article was first published on June 13, 2011, when the inflation rate still averaged about 10 per cent, i.e. a sharp contrast from the over 17 per cent recently confirmed by the National Bureau of Statistics. Ultimately, also, if the inflation spiral continues, N1,000 may not buy one finger of plantain. Incidentally, media reports already suggest an increasing rate of suicide incidents generally instigated by the widening gap between income and the prices of goods and services in the market.