Inflation: The monster we created (II)
However, more attendant causes of Nigeria’s current inflation malaise can be attributed to internal structural defaults and some other external influences. With a highly dented fiscal posture, Nigeria’s borrowing attitude has irked many, and there seems to be no end to the nation’s excessive beggarly disposition. Next is the untold state of disrepair of the nation’s institutional quality. Monetary independence in Nigeria remains a puzzle, and the nation’s monetary authority may not have attained a satisfactory level of operational independence or autonomy as expected since 1959. On this, various governmental and political influences are observed and reported, and the lingering issues of arbitraging and round-tripping in the nation’s foreign exchange market remains preponderant.
With excessive corruption and unchecked impunity practised within the nation’s apex banking atmosphere, Nigeria’s foreign exchange windows remain largely paralleled and biased in favour of rent-seekers while millions of Nigerians suffer the loss from unavailable dollars for trade and travel.
Inflation inertia is another source of high inflation in Nigeria as currently experienced since past regimes of high inflation usually constitute preparedness towards higher future inflation rates. This was the case with the AbokiFX situation when information from the online website usually created jittery responses by the public as foreign exchange hoarding and panic buying created a multiplier of scarcity-driven currency depreciation.
Undesirable movements in the foreign exchange as a result of balance of payment (BOP) disequilibrium is another crucial contributor to Nigeria’s current high inflation tragedy. Excessive imports of consumables over exports of the same within a thin production environment and foreign exchange scarcity have led to imported inflation, which continues to feed into domestic markets. Border closure and importation ban policies made by the government in the hope that domestic production would accelerate and local industry would be greatly enhanced were such a bad idea. While the border closure directive lasted, excessive smuggling activities took over, and domestic production could not inch up as expected. Also, the import ban policies shrank foreign exchange access by importers, and their ability to do business was severely strained. Importers shifted the incidence of strained supply costs on local firms, who further passed the incidence of higher production and supply costs to the final consumers. In this fashion, the general level of prices of commodities began to rise in response to the rising supply bottlenecks and costs.
Read also: Inflation: The monster we created (I)
To see if inflation in Nigeria is indeed a self-created evil, one should wonder who benefits the most from this toll of events. From the rent-seekers and currency arbitragers, the sellers of foreign exchange at the parallel markets, the domestic producers of most of the goods on the ban list, and the category of privileged importers who can secure foreign exchange from uncommon sources to the politicians who hold dollars in large reserves for election racketeering purposes, it would be a fruitless cause to think that the country’s current woes are accidental. A certain class of Nigerians seem to be satisfied with the current status quo, insomuch as it ensures that their palms are well greased and their pockets remain stuffed up with the spoils from their corrupt monetary escapades.
The Central Bank of Nigeria (CBN) has tried to put up some efforts to de-gas the current inflationary disturbance. The most current move is the upward review of the monetary policy rate from 11.5 per cent to 13 per cent. This was done with the hope that higher rates would discourage further expansions in aggregate demand. Also, the move was in solidarity with global central bankers’ response to increasing inflationary pressures experienced worldwide. However, Nigeria’s heavily stressed and distressed economy may not respond favourably to a higher interest rate policy at this time.
To think that higher rates can help curb inflationary pressures in the face of structural cost-push impulses may not work as planned. If the CBN thinks that high interest rates will boost the inflow of foreign capital and promote the integrity of the nation’s currency, especially when structural concerns are largely outstanding, then they should think again.
Nigeria’s policymakers must wake up and address the necessary concerns if policy interventions must work. For example, granting unparalleled access to foreign exchange to all those who need it for their various activities should be prioritised. On this, the apex bank should prevail on banks and other financial institutions to ensure easy supply and access to foreign exchange. Also, the CBN must engage in minimal intervention in the foreign exchange market to allow market reflective rates to prevail. With these in place, the large premium between official and unofficial rates will disappear, and arbitragers will be edged out automatically.
Nigeria’s central bankers should also emphasise and adhere to realistic inflation targets in replacement of the current monetary management system. This will help to keep inflationary expectations in check and ensure that panic-related activities that further fuel inflation are subdued. Also, better reserve management policies are necessary for the CBN to keep the economy afloat and maintain liquidity in times of crisis. This is because optimal reserve management policies help provide ample room to defend the local currency and mitigate any random shocks.
Fiscal recklessness can frustrate monetary efforts in the quest to stabilise the economy. Higher debt levels will usually result in higher inflation rates, and the usual response to this is the devaluation of the local currency. Hence, raising the interest rate while production and revenue levels remain low and debt levels linger may not cut it for Nigeria at this time.
The country must also improve its governance structure so that public trust can be regained. Getting rid of corruption at the various levels and running a decent size of government in a transparent and accountable way is also essential to ensure that political unity is achieved. The nation’s national treasury, if well managed, is enough for all, and it will be in the interest of every Nigerian to assiduously protect the country’s common heritage for the sake of generations yet unborn.