- Supply-side policies – policies to increase the competitiveness and efficiency of the economy, putting downward pressure on long-term costs – At the end of the day, competitiveness and better regulation of sectors within the economy, is what guarantees the strength of an economy. Deregulation of markets is not the application of laissez faire policies where anyone does what they like, but better, more transparent and more scientific policies and regulatory approaches. This will then ensure that sellers in an economy think twice before playing games.
Overall, too, the leaders in an economy have to be able to reduce the rat race by which people chase more money and more advantages for themselves no matter whose ox is gored. In most of Europe, people have since got to that level. Ditto in America. I also recently ran into a young friend who japa-ed to nearby Rwanda. He arrived with $50 and today is finding his feet better than he did here. He is helped by the Nigerian can-do spirit which comes with a large dose of desperation. But he also talks of how the average Rwandan is quite content. He is finding out that the blind race we run in Nigeria may not be worth much. There has to be a midpoint. Here we are in Nigeria and our young ones daily bash the country and everyone is seeking to outdo the other. Perhaps we have a problem with the underpinning philosophy that guides the country. Life is short. It cannot be all about acquiring money by every means.
- Fiscal policy – a higher rate of income tax could reduce spending, demand and inflationary pressures. This is another approach at curbing inflation. Whereas Nigeria may not raise taxes at this point, what I propose we do is to get serious about enforcing government revenue. The CBN is increasing interest rates in a desperate but thus far futile bid to slow down inflation, whereas the fiscal sector merely wrings its fingers at our low revenue to GDP ratio. I believe the former minister of finance must have given up since no support came from a disinterested president.
There is a large room for tax compliance in Nigeria. And we are not talking about just taxes, but every revenue accruable to government – rents, rates, duties, fees, fines, levies, and what have you. We cannot run such a slack society and expect glory to abound. Also, there is no basis for reducing government expenditure at this point. Our people’s standard of living is yet so low, such that government must have a mindset to spend more – education, health, security, infrastructure, electricity, rail networks. However, the efficiency of these spendings is what matters. Are we getting value for money? Are those spendings getting to the people? Are we empowering Nigerians? If viewed this way, we will not be powering up unproductive inflation, but rather growing the economy (GDP).
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The real problem we have had in Nigeria is low growth and very high inflation. Growth must ramp up, while inflation goes down. As difficult as it may look, this is the only way forward that can be achieved through sincerity and deep thinking.
- Reduce expectations – According to Lee, Powell and Wessel (2020), writing for the Brookings Institute, ‘A key determinant of inflation over time is inflation expectations. If people expect inflation next year, firms will put up prices and workers will demand higher wages. This expectation tends to cause higher inflation. If the Central Bank and government can effectively reduce expectations by making credible threats to bring inflation under control, this will make their job easier’. This is related to the moral suasions mentioned above, as it deals with the psychology of inflation. Information and expectation management is key, not just firefighting after the fact. However, the government must not only be heard giving ‘credible account of what it intends to do, it must be seen to be acting rightly too, for enhanced credibility’.
- Reform the Tax Code to Raise More Revenue: In Nigeria, this is a core imperative. One of the factors driving inflation is the large informal economy, and the fact that government is unable to properly trace in whose hands the liquidity is. We run an incredibly loose economy where everything goes and people easily ignore their obligations to the state. Of late, the government is struggling to reform aspects of the tax laws. Not only does Nigeria need the revenue for infrastructural development, but we also need to tighten tax laws, make taxes more progressive to benefit the more vulnerable in society, rein in government revenue of all types, in order to slow down the velocity of bad money in the economy and thereby tame inflation. So, in this manner, fiscal policy helps monetary policy to slow down inflation rate.
- Promote Work, Savings, and Investment: Increased labour supply, capital supply, productivity, and personal savings can help to reduce inflationary pressures. Nigerian government and indeed her peoples, tend to focus only on ‘graduate unemployment’. But usually, that is like treating symptoms. We should promote work with our teenagers, and also incentivize companies to employ people. Whereas this looks like pushing more money out through salary payment thereby increasing money supply, this will help in reducing the impact of inflation on the most vulnerable in society and in lowering inflation rates faster. ‘Good’ money velocity is great for an economy. At the same time, if government is able to expand employment, it should also promote savings and investments say by issuing more domestic bonds, which will help to mop up excess money in circulation. The upshot of this is to create economic vibrancy, not just to lock down the economy by pursuing inflation. Indeed, my position is that growth and development should be our objective, and in achieving growth, we must have to necessarily see inflation spike.
- Government must also do what it can to influence general price levels within its purview. This includes helping to lower energy costs by promoting alternative sources of efficient energy. Electricity has been rightly noticed – even fetishized – as the main issue facing Nigerian businesses. Even banks say that their interest rates are so high because of cost of energy! As we can see in the American example, energy cost is one of those costs that permeate into every other price increases, and a good excuse for spiking inflation. It needs to be wrestled down. Further, the government must urgently deal with insecurity which adds considerably to the final prices that consumers pay for everything, reducing tariffs on essentials, promoting local production of basic essentials, and import substitution. A focus on infrastructure – like roads, rail systems and inland waterways helps to reduce cost of transportation of people and goods, and thus sellers have fewer excuses to keep increasing prices in the name of recovering costs. Of course, governments have been investing in infrastructure from time immemorial, but corruption and inefficiencies mar the gains for the people.
Also, communication has been inefficient. Governments usually forget to link infrastructure to the lowering of inflation. They forget to ask citizens to take a medium to long-term view of their efforts as part of the expectation management strategy.
I think the essence of this article is to get us to have a broader view of the phenomenon of inflation and for government operatives to adopt a multidimensional and multisectoral approach towards taming the problem. For now, it looks like only the monetary approach is being utilized out of all of the above, and it clearly is not delivering.
Concluded
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