I believe we can tackle our soaring inflation without continuing to spike interest rates, but that will require us to discombobulate where our 22.41 per cent inflation is coming from. First off, growing the economy much faster simply means getting rid of inefficiencies, ensuring that people actually get productive for whatever salaries they are paid, improving capacity utilisation in industries, getting companies to grow, encouraging new productive ventures, and generating considerable productive buzz in an economy.
We can look at other economies that have achieved this to be able to get an idea of what it takes. Many such countries – like China, India, and even other African nations which have grown at about eight per cent for some years, such as Cote D’Ivoire, Senegal, Egypt, Ethiopia – saw real investments in infrastructure, evidencing eight per cent enhancing healthy growth rates.
I believe a focused leadership, resolute in enforcing a level of discipline, punishing and rewarding promptly to signal its direction, and with adequate performance monitoring of all sectors and its targets, can put Nigeria on this same track.
The Central Bank of Nigeria, through its Monetary Policy Committee (MPC), has adopted an orthodox approach permanently, by continually increasing interest rates. Perhaps that’s the best the CBN can do, else it be accused of extra-monetarism.
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The textbooks say once general interest rates are increased, inflation will slow down because people are better incentivised to save money, and to borrow less, thus money in circulation reduces and inflation follows suit.
However, in our recent case, the higher the MPC increases rates, the higher climbs inflation. Some of us have been telling the believers in orthodox ideas that there is a need to consider the peculiarity of an economy, and indeed the peculiarity of circumstances, in making economic policies.
Also, there is a need to assess policies and change course where necessary. At the end of the day, manufacturers and borrowers in general are having to pay more for funds and are finding every way of passing higher costs to hapless final consumers.
It has been documented that by taking such an approach, a central bank could actually instigate an economic recession. If interest rates continue to climb, rather than slow down inflation, it increases inflation, it gets to a point where the spiral becomes uncontrollable, and the economy is thrown into a panic.
We may thus see mass layoffs, higher unemployment, company closures, among other symptoms of an economic recession. My advice in this regard is that the MPC slows down on this unworkable orthodox policy and looks elsewhere in a more empirical manner.
Below are other options, some of which I don’t believe we are using yet, or using effectively in Nigeria:
- Moral suasion and logic. On April 26, 2023, Huw Pill, the Chief Economist of the Bank of England made a controversial statement that the British should accept already that they are poorer. He said people should stop demanding for pay raises and that companies should stop passing increasing fuel costs to consumers just because they can. He faced some backlash, but what he intended to address is that inflation in the UK, which is at 10.1 per cent still, is feeding on itself like a monster.
Even the former Governor of the Bank of England – Andrew Bailey – had said such a thing before. What is important to note here is that irrespective of interest rate increases, inflation can feed on itself through the actions of economic players – in this instance anxious workers and retailers, even manufacturers.
Is there value in persuading economic players not to be too reactionary and for retailers not to take undue advantage by gouging prices in an economy like ours? I think there is. But nobody is talking to this kind of issue presently. Nigeria is a place where bus drivers increase fares by 100 per cent because government adds 10 per cent to fuel prices.
We don’t do things in bits but in leaps and bounds. Even the Buhari Government – in the middle of all the revenue tightness – was mulling (or has already commenced depending on which media you read), a whopping 40 per cent in the salaries of civil servants, many of whom don’t even show up for work.
The Trade Union Congress is asking for minimum wage of N200,000! That will be a seven-fold leap. The Bank of England Chief Economist as well as its former Governor called this phenomenon ‘pass-the-parcel’. As much as people have excoriated them, no one has disagreed with the logic that the inflation Ponzi must stop at some point in time.
We have to stop digging the hole we are all in at some point. The obsession of central banks with interest rates though stems from the idea pushed by Milton Friedman, the economics guru who died in 2006, when he asserted that ‘Inflation is always and everywhere a monetary phenomenon’. Ehmm…no, it is not. We have to think hard to solve our problems.
- If we consider where Nigeria’s inflation is coming from – with a major portion stemming from food inflation – we will most likely conclude that we have a cost-push inflation. This means that sellers are passing on the higher cost of bringing goods to the market.
However, if we are honest, we will find that Nigeria’s inflation is multi-variable phenomenon – cost-push, illegal money in the hands of many people, bad data as a result of a large informal economy, inflation from our import-intensive economy, and of course, price gouging by those who can exploit consumers.
We should understand that Nigeria’s economy is a very loose system where people get away with all sorts. So, is there any direct intervention that can be made in the agric sector to slow down food inflation? That will require a careful and deliberate walk through of the entire value chain.
It is not enough to throw money at the problem by way of intervention funds, a lot of which goes to waste. A multi-sectorial approach is required, with strong executive leadership. We have no excuse for food inflation to be so high on a month-on-month basis.
If we could intervene and begin to work down food and other inflation, this will have an immediate effect on our overall headline inflation numbers.
We cannot afford to leave every sector to the shenanigans of players in such a growing economy. Perhaps direct government interventions to assuage the agonies of our farmers and transporters will help to tame general inflation.
To be concluded next week
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