Is inflation too big for the CBN to handle? (II)

A loose currency value caused by cost-push inflation means that the local currency’s purchasing power in the international market has become weaker, and the cost of imported products soars.

From the domestic scene, locally produced materials become more expensive since importing materials used for home-based production costs more. Worsened by the scarcity of foreign exchange, the incidence of higher import prices and increased domestic production costs will be passed onto the final consumers.

Sustained elevated prices among the various classes of products in the different sectors of the economy result in inflation, and the citizenry will feel the effect through reduced purchasing power, shredded real income values, and a consequent recalibration of their consumption and savings portfolio.

In the bid to control inflation by reversing the trend of rising prices and depleting incomes, the CBN interfered in several ways that yielded negative returns to the economy. Consequently, the CBN’s undue interference in structural supply-side factors that create high inflation helped exacerbate rising price levels. Such ways in which the CBN has interfered include:

· Granting agricultural loan schemes to farmers to boost food production and reduce domestic food prices is considered a monetary waste. These loans are usually poorly targeted and used to service the personal programmes of the farmers. An example is the loan granted to finance the recently revealed rice pyramids, but it was later discovered that the rice grains were not locally produced but imported.

· CBN’s banning 44 items from access to the exchange rate at the official rate for imports in the belief that local industry will be strengthened. Unfortunately, local production did not respond as anticipated. This also makes the parallel FX market economy boom, causing a wide premium between the official and unofficial FX rates. These combined further worsened inflationary outcomes.

· CBN’s strong support for the land border closure in the belief that smuggling activities will suffocate and local industry will surge. Sadly, smuggling activities boomed, and import prices doubled.

ii. inefficient/poor policy choices

Indeed, inflation can be driven by what the CBN can control, apart from what the central government can. Correctly identifying and using the right policy tools to manage the economy is essential for policy making. On the flip side, not using the right tools or poor timing of certain policy interventions could ruin the overall objective for which the policy move was made. In the bid to curb inflation, the CBN has misplaced priorities in several ways, and for this reason, the situation has remained unsettled:

· The CBN has placed undue emphasis on foreign exchange supply as a tool to slow inflation. However, foreign exchange flexibility is known to have a short-term, transitory effect on inflation, which could be mitigated.

· Undue focus on monetary targeting instead of inflation targeting. Targeting a set rate of inflation helps to keep inflation expectations in check.

· Poor reserve management. CBN’s continuous and excessive financing of the government’s fiscal default beyond constitutionally allowable limits from its reserves leaves little space to absorb shocks, especially in really bad times.

· Inconsistency in policy targeting. CBN targets a 6-9% inflation rate for the economy but believes that only a threshold beyond 12% can hurt the economy. This portrays a fuzzy focus and a seeming lack of commitment to achieve the single-digit goal.

Read also: Is inflation too big for the CBN to handle? (I)

How the CBN can better manage high inflation

The CBN has the appropriate tools it needs to manage exaggerated prices in the country. What matters more is appropriately identifying the right tools and consistently using the same until the desired effect is established. Hence, managing inflation in Nigeria will involve;

· Strict and proactive enforcement of prudential measures by the CBN on banks and other financial institutions on foreign exchange supply limits. On this, the CBN made some effort to address inflationary expectations in the FX market when it challenged the activities and operations of a well-known online FX information channel in the country.

· Minimal intervention in the foreign exchange market to allow market reflective rates to prevail.

· Emphasise and adhere to realistic inflation targets. This helps to keep inflationary expectations in check.

· Better reserve management policies to keep the economy afloat and to maintain liquidity in times of crisis.

· Unification of the exchange rate to discourage round-tripping and undue profiteering among vested interests in the foreign exchange market.

Hence, it is safe to say that inflation is not too big an occurrence for the apex bank to reverse; it only takes the bank to commit to the right policymaking, using the appropriate tools and at the right times. Mimicking the political will to curb inflation without adopting the right policies or using the right tools will be foolhardy. Nigeria’s monetary authorities must learn to properly handle macroeconomic tasks with the right mindset if all must experience economic prosperity.