By Henry Boyo

NIGERIANS know too well, that sinking feeling when all items on the household shopping list cannot be covered by the usual monthly budget. The options invariably become whether to cut down or do without some basic items, or alternatively make do with less preferred but cheaper substitutes. The depressive impact of a continuous price spiral on the average family’s welfare is, therefore, a very familiar theme.

Even though the distortional impact of Inflation is boundless, it is also recognized that a little rise in price level may sometimes be necessary to stimulate economic growth; it however, becomes an albatross when the general price level remains above five per cent annually!  In progressive economies, the Authorities target inflation rates below two per cent to stabilize purchasing power of income earners and preserve social welfare and the value of pension funds. Disturbingly, however, the price level in our case has often remained above 10 per cent annually, while inflation rates for food items have generally been much higher!

Inflation, terrorist

Nonetheless, wherever prices of goods and services rise above 10 per cent annually, a static nominal income of N100,000, for example, may be just enough to purchase goods that just N10,000 bought barely ten years earlier; consequently, a family’s income must also grow by at least 10 per cent annually in order to maintain their usual lifestyle. Indeed, in progressive economies, the general wage structure is intrinsically tied to prevailing inflation rates, so as to sustain consumer demand and prevent an oppressive meltdown of citizen’s welfare.

Conversely, Nigeria’s inflation rates often outstrips 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 in 2011.

The pertinent question, however, is why Nigeria’s inflation rate has become a primary instigator of deepening poverty, such that, despite fortuitously increasing export revenue and best-ever external reserves for several years, Nigeria is now listed amongst the world’s poorest nations. Instructively, 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 Product/service supply and the available spendable cash.

Unfortunately, the general notion, is that Nigeria’s high inflation rate is caused by lack of productivity; i.e. we do not produce enough goods and services, while the supply shortfall is simultaneously confronted with surplus funds in the money market. It is clearly not appropriate to suggest that less and less goods are produced now than 25 years ago, but, it will be more correct to admit that the increasing output falls below the rate of expansion in money supply. So, the problem is really that of money supply always outstripping production!!

The critical question, therefore, relates to the major cause of increasing money supply, such that so much money is, seemingly unavoidably, always available to chase more, but relatively fewer goods? The Nigerian Monetary Authorities invariably are mischievous, when their answer to the challenge of inflation is that the three tiers of government are spending too much money; instructively, nonetheless, best practice antidote to flagging consumer demand, rising unemployment, and industrial contraction is in contrast, fiscal expansion i.e. increased government spending! However, our monetary authorities, inexplicably, impulsively, resolve to hold back inflation by discouraging access to the increased money supply allegedly induced by expansion in government spending.

In its attempt to reduce the inflationary threat of excess money supply, CBN would deliberately, increase domestic cost of borrowing with Monetary Policy Rates that restrain bank from aggressively extending credit. Ultimately, as readily admitted, in CBN’s Monetary Policy Committee Communiqué No. 76 of 24/05/2011, Government, therefore, becomes the major customer of banks and unexpectedly, borrows and sterilizes trillions of Naira from public or private use annually, in order to avert the threat of inflation. Disturbingly, nonetheless, over N500bn has been earmarked for servicing such counterproductive, and idle government loans in 2011. Ultimately, a reduction in aggregate demand, industrial contraction, increasing unemployment all of which deepen poverty, will unfortunately become the horrid collaterals of such forced credit restriction with higher cost of loans for the Government, CBN and the private sector.

Consequently, the anomaly of the perennial claim of too much money (Excess) liquidity, despite the real sectors’ poor access to cheap funds will, evolve. A little sincerity will, however, reveal that CBN’s eternal lamentation of oppressive systemic cash surplus, usually follows the payment of bloated monthly allocations to the three tiers of government; sadly, the same CBN, would inexplicably proceed, soon after, these allocations, to borrow back and sterilize a large chunk of the distributed funds, in order to reduce the threat of surplus cash and inflation. Consequently, the greater the size of monthly revenue allocations, the greater also would be the threat of inflation, and a rising national debt with related oppressive service charges; ultimately our industrial subsector would sadly also become more challenged and uncompetitive.

Furthermore, it is obvious that the potential increase in bank credit expansion instigated by monthly deposits of billions of Naira allocations, also induces a supply and demand relationship, that ensures that the dollar will always emerge stronger in the in the forex market; worse still, CBN’s subsequent auctions of dollar rations, inadvertently, creates a seeming dollar scarcity vis-a-vis the subsisting huge Naira surplus and the related expanded credit capacity of banks! Ultimately, the increasing Naira ‘surplus’ will, compulsively also induce higher and uncompetitive production costs, even when    comparatively less goods and services are on offer.

But, the table can be turned on the dollar and the destructive cycle of persistent excess liquidity and inflation, if government musters the will to change the demand and supply relationship between Naira and dollar earnings, by stopping CBN’s hoarding and monopoly of dollar sales. Arguably, the Naira will, conversely become favored, if dollar component of distributable monthly revenue is paid with negotiable dollar certificates rather than the current practice in which dollar revenue is, first, substituted with Naira allocations by CBN.  Predictably, with such reform, the erstwhile ever-present ghost of excess liquidity will disappear; furthermore, government’s debt and service charges will significantly also reduce; interest rates will also fall to single-digit, so that industries will borrow and expand and, thereby drastically reduce unemployment, while the deadly plague of inflation, and weak consumer demand will become tamed to induce significant improvement in mass social welfare.”

POSTSCRIPT 2019:  The above article was first published on 13/06/2011, as “Inflation: The Silent Plague” when the inflation rate averaged 10%.

Inflation has, however, receded from about 18% to 11.25% lately; nonetheless, the Naira rate has distressfully collapsed, despite celebrated increases in foreign reserves, and we have since ultimately become the World’s Poverty Capital; tragically, the worst is yet to come!!


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