NIGERIA’S INFLATIONARY SPIKE
Boniface Chizea tasks the authorities to find solutions to the many structural problems of the economy
The National Bureau of Statistics recently released the rate of inflation in the country at the end of September 2023. This rate as was generally expected has increased to 26.72%, the highest rate of inflation experienced in Nigeria for a period of over 20 years now. As a matter of fact, this rate could have qualified as the highest all time but for the rate of inflation which stood at 72.84% with an estimated annual rate of increase at 15.80 in 1995 during the administration of General Sani Abacha when Nigeria faced sanctions from the international community.
A friend, otherwise quite exposed and abreast with developments around the globe did observe after noticing this rate that he hopes that the rates will now start decelerating. I suppose he was prompted by experience elsewhere in making that observation. For instance in America after the rates of inflation reached 39 year high at 8.6% majorly due to external factors; the COVID 19 pandemic and the Russian/Ukraine war, it started coming down to 3.7% as measures were taken to counter the rising trend. But I promptly sent him a reply to say not so fast because the inflationary spike in Nigeria is largely structural and therefore not amenable to quick fix. I made it clear that what we should realistically be concerned with by now is if the rates of increase could be moderated. I make this observation mindful of the fact that the causative factors of inflation in Nigeria is cost push as the costs of factors spiral out of control.
For a long time in Nigeria the rates of inflation increased slowly and even stagnated at some point in time. In fact for a long period the policy target for inflation in the country was single digit in the range of six to 9%. But the rate of inflation spiked due to some ill-advised policy decisions which were not appropriately sequenced. The sudden removal of fuel subsidy was not advisedly handled. There is no factor cost guaranteed to cost a spike in the rate of inflation as allowing the pump price of fuel to suddenly go up and at that rather steeply. Yes subsidy on fuel is bad news for the country because it is simply a misallocation of resources and what is even of greater concern is that the intended beneficiaries do not get its benefits. We ended up in the process subsidizing middle men. A preferred policy choice in the circumstances would have been to move quickly to end importation and therefore banish the word fuel subsidy from our lexicon. And that might not be as farfetched as we might think. We just needed to quicken efforts to get the Dangote Refinery which has been since commissioned in May 22, 2023 to start production and that would displace the need to go on importing petrol. We are hopeful in this regard as we have been informed to expect the operations of this Refinery to come on stream this October, 2023! We have been informed that production will commence with diesel and aviation fuel. Whichever but let’s get some productivity going on for a change.
The other matter which worsened the inflationary spiral is the ill-informed announcement that we are going to merge the exchange rates in the country. Realistically there are hardly any countries in the world where the rate is the same across board. What happens is that the differential in rates are so negligible that they don’t engage attention. But in Nigeria at this point in time, it is a fallacy to talk of single rate of exchange. For as long as we continue to experience shortage of inflow in foreign exchange to that extent will there be multiple rates. What we should focus on is to reduce the spread in rates to curb the tendency for arbitrage opportunities which poses serious temptation for rent seeking behaviors. To realistically tackle the rates, there are really only two options; increase inflow drastically or reduce demand as if we were able to quickly terminate importation of Petroleum products and save at least 30% of priority foreign exchange currently expended in fuel importation.
At this juncture it will be good to revisit some of the measures currently reeled out by the new administration at the Central Bank to probe their rationality. Of all the measures nothing attracted attention as the reversal of the denial of access to official foreign exchange to 43 products which took place in 2015 during the early years of the immediate past administration. We must bear in mind that during that time we did not realistically attempt to embrace the illusive market for the determination of the rate of exchange. The preferred approach then and in my considered opinion probably remains is managed float. But the clamour for the adoption of market determined rates of exchange has been there from the multilateral finance organizations as well as some dye- in- the -wool market economists in our environment.
We cautioned that there is no market for foreign exchange in Nigeria. We are here talking of a thoroughly mismanaged economy with a deluge of bottled up remittances and which does not have any productive base to boast about. Even the major source of foreign exchange inflow – oil is grappling with lots of problems including theft and stage managed leakages which meant that the country is not even able to meet, for a prolonged period its OPEC quota. What we predicted will happen has just done so and if in any doubt visit the social media to find my publicly declared position on this matter. Even as we speak in spite of the unprecedented hardship unleashed on a generality of our population, have we been able to merge the rates? It is a wild goose chase embarking on such mission. It is like addressing the symptoms of a disease while ignoring the fundamental cause of an ailment.
Let’s take look at some of these products now allowed access to foreign exchange; they include tooth picks, plastics, clothing, cellophane papers, rice, etc. What is more this policy measure has been there for almost 10 years and therefore adjustments have surely taken place and agents have simply moved on. I think we should have simply allowed sleeping dogs lie. But the new administration must be in pressing need for headline grabbing news and it surely got it by taking that measure. It also aligns with free market forces thinkers as the measure of denial of access to some products and services is an anti-free market thrust and therefore misaligned with the current wave of allowing market forces to undertake the allocation of scarce resources.
It was good sound bites for the Governor to intone that henceforth measures that infringe on the Laws guiding operations would not be accommodated. I say give that to the marines because I have in mind the ways and means Finance which stood at N23.7 trillion as the immediate past administration bowed out; currency printing! If the fiscal authorities are hamstrung not being able to pay salaries and President asks the Governor to find money to pay as Banker to Government; will he go quoting the law to the President! That again to my mind will tantamount to a situation whereby your house is on fire and you leave it to chase rats! I make this observation to highlight the fact first that ways and means finance is a major causative factors of an inflationary environment and to emphasize the fact that all hands must be on deck for a solution to the many problems of Nigeria.
Development finance is enshrined as one of the duties of Nigerian Central Bank and has been undertaken for a very long time now. For a long time the Central Bank highlighted what it considered as the preferred sectors of the economy and aggressively rolled out incentives to motivate banks to lend to these sectors which are the real sector of manufacturing, industry, farming, mining, etc., as opposed to trade finance. One could argue that lately we pushed at the boundaries of this requirement by literally undertaking the provision of direct finance to rice farmers. It terms of pulling back, there is a point to be made in that respect but the CBN avoiding Development Finance will be in breach of its extant laws. And what is another important consideration is that the Nigerian economy is grossly lacking in productivity and the Central Bank cannot stand with hands akimbo as that undesired situation persists.
The high inflationary environment explains why there is so much poverty in the land. Inflation marginalizes the poor and downtrodden as we are currently experiencing as they are not in position to pass on its crushing effects. The quality of life deteriorates and sometimes people are no longer able to afford the basic necessities of life which is the perfect recipe for insurrection; a hungry man is an angry man. That is why we must applaud the Government for stepping on the brakes by refusing to allow the pump price of fuel to maintain its upward trajectory. It could have been nothing short of a calamity if the deregulation was allowed to continue. And people are shouting that the President has returned subsidy! What options does the President have in the circumstances? The initial mistake has been made which accounted for the traumatic experience the country has experienced in four months in the life of this administration. But it is now time to pull back from the brink and focus on finding solutions to the many structural problems that have undermined the performance of the economy and these problems are many and overwhelming and the early we get down to tackling them the better for the prosperity of Nigeria.
Dr. Chizea is.
MD/CEO, BIC Consultancy Services,
Lagos
