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Inflation: The quiet plague

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Nigerian housewives know too well, that sinking feeling when all items on the household shopping list cannot be covered by the regular budget.  Our womenfolk have since become past masters (or mistresses) of the rigours of creative adjustment.

The options are well defined; either cut down or do without some of the basic items in the food basket or make do with less preferred but cheaper substitutes.  The predicament of the men folk is no different, as they balance the purchasing power of their relatively static incomes against a plethora of needs with steadily rising nominal values; the depressive impact of continuous price spiral on the welfare of the average family is a very familiar theme.

Nigerians below thirty years are often bemused by stories of brand new (tear rubber) cars such as the Peugeot saloon costing less than N5, 000 before 1980!  It is no wonder that with the current price of over N12,000 for a single spare tyre (without the metal rim) our younger citizens are hard pressed to believe that Nigerians ever had it so good.

They groan in disbelief that a crate of minerals (x24 bottles) only cost N2.40, while N1.00 would buy 10 fingers or more of plantains and N300/month would fetch you a comfortable three-bedroom flat in most suburbs of Lagos, while a flight return ticket between Lagos and Port Harcourt would cost less than N30!

Countless other examples of stupendous variations in prices of goods and services in 1980 and today exist and the bountiful experience of yesteryears sounds like fairy tales today.

Inflation knows no boundaries and indeed, it is recognized that a little inflation is also good to stimulate economic growth, but the problem arises when the rate at which the general price level (of goods and services) rises above 5% every year!

In progressive economies, authorities would aim to keep inflation rate below 2% to stabilize purchasing power of income earners and preserve their welfare and value of pension funds.  Alternatively, in our case, the general price level has often risen above 10% annually, while inflation rate for the average family food basket has generally been much higher!

Let us briefly illustrate the impact of such spiraling inflation on income.  In an environment for example, where prices of goods and services rise 10% every year, static nominal annual income of N100, 000 after ten years may only be adequate to purchase what less than N10,000 bought ten years earlier.

Thus, for a family to maintain its lifestyle within those ten years, it would be necessary for its annual income to grow by at least 10% every year!  The critical mass of Nigerians, unfortunately, does not have such luck!  In progressive economies, the general wage structure is intrinsically tied to inflation rate so as to prevent a meltdown of social and economic welfare of its citizens.

Regrettably, this has not been so in our case, as inflation rate often outstrips static income for several years before any attempt to remediate the disparity.  The net product of this mismatch is abject and grinding poverty.  For example, the minimum wage of N200/month (over $150) in the late 1980s commanded much more value than the recently awarded N18,000, which is equivalent of just over $100, in spite of annual average inflation rate of about 10%.

The used car a.k.a. Tokunbo market presents a powerful illustration of the inevitable trade down caused by inflation.  There was little visible evidence of a used car market in Nigeria thirty years ago, as most car purchases were 'tear rubber' brand new, which were replaced every 3 - 4 years and eventually found their way into neighbouring countries.

However, massive naira depreciation of the 1980s changed market dynamics as new cars became unaffordable for erstwhile car owners.  In order to bridge the gap, government permitted importation of second hand cars
, which were not more than five years old; however, some years thereafter, the age limit of imported second hand cars was widened to 10 years, as further naira devaluation and consequent inflation, priced five years old automobiles beyond the reach of the average Nigerian!

The collateral economic liability of acquiring junks and rejects from abroad notwithstanding, the age limit for car imports has once again lately been further extended to 15 years to accommodate those Nigerians, who could no longer even afford used 10 year old models; further depreciation of the naira and the attendant inflationary spiral may eventually induce acceptability of 20 year old cars for those Nigerians, who, about two decades ago, patronized only the latest models!

The same trade down can be observed also in many other consumer products segments, particularly TV sets, fridges, computers, etc, and it has become clear that we have become dumping ground for rejects and products with redundant technologies from abroad, where the disposal of such products present environmental challenges.

The pertinent question, however, is why Nigeria's inflation rate has remained so destabilizing and become a primary instigator of deepening poverty, such that, in spite of increasing export revenue over the years, Nigerians are listed amongst the World's poorest nations, even when we built up best-ever external reserves.

Well, the simple universal definition for inflation is 'too much money chasing fewer and fewer goods and services'.  To the layman, this can best be illustrated by the recognition, for example, that the market price for mangoes will fall during the harvest season, when mangoes are literally two a penny!

However, mangoes could easily double or triple in price if demand remains the same or increases while supply is static or diminishing.  Thus, inflation is an expression of market dynamics of supply and demand for any two exchangeable products; in other words, if mangoes are to be exchanged for oranges (in place of money), the same effect would become apparent; the more mangoes in the market compared to oranges would result in more mangoes being offered for less oranges and vice versa.

However, the general notion is that the high inflation rate in Nigeria is caused by our lack of productivity; i.e. we do not produce enough goods and services and that the inadequate supply is confronted simultaneously by too much money in the system.

This is largely true and would be a true reflection of the classical definition of inflation.  However, a casual observation would confirm that more garri, yams, cassava, pepper, tomatoes, eggs, etc, are currently being produced in Nigeria than 25 years ago; so, it is not admissible to say that less and less goods are available.

It is probably more correct to admit that the rate of output falls below the rate of expansion of money supply.  So, the problem is that of money supply always outstripping production!!

The critical question, therefore, is what instigates increasing money supply, such that so much money is always available to chase increasing but relatively fewer goods?  The Nigerian monetary authorities are enmeshed in mischief when their answer to this question is that the three tiers of government are spending too much money, when the tested antidote to rising unemployment and the creation of demand and revitalization of industry is fiscal expansion or increased government spending!

In their strategy to subdue the perceived villain of too much money injection into the system by government, our monetary authorities set out to discourage access to the increased money supply induced by government spending.

To this end, CBN endeavours to instigate higher cost of borrowing and hamstring credit expansion by banks.  Ultimately, as admitted in the CBN Monetary Policy Committee Communiqué No. 76 of May 24, 2011, government becomes the major customer of the banks and borrows money that it claims to sterilize from
use, and thereby reduce available cash and credit; but for such loans, over N500bn is earmarked for debt service in 2011 budget!

The collateral of such credit restriction and higher cost of borrowing is also industrial contraction, increasing unemployment and reduction in aggregate demand, all of which make for abject poverty in the land.

In the light of this destructive framework, it would be more appropriate for monetary authorities to examine the true origin of the claim of perennial 'too much money' in the system.  A little sincerity will reveal that CBN's lamentation of excess liquidity usually follows payment of monthly allocations to the three tiers of government by the same CBN, who proceeds soon after to borrow back and sterilize a large chunk of the funds to reduce available cash in the system.

Thus, the greater the monthly allocations, the greater are our national debt and higher also the service charges and the more challenged is our industrial subsector!

However, it is not rocket science to deduce that this framework will get us nowhere, and that 80-90% of monthly allocations is derived from dollar earnings from crude oil export.

Thus, the fortuitous event of increasing dollar earnings must be decried under the circumstances, as CBN's unilateral substitution of naira for dollar revenue before allocation creates a destructive ripple on our economy and the social welfare of Nigerians, as it amongst other things, significantly fuels an outcome of too much money in the economy, and thus becomes a precursor of abiding spiraling inflation.

Meanwhile, it is apparent that increased bank credit expansion made possible by the deposits of hundreds of billions of naira monthly allocations induces a supply and demand relationship between naira and dollar that ensures that the dollar will always emerge stronger, as the CBN controlled dollar supply to the market creates dollar scarcity in comparison with the huge naira and credit capabilities of the banks, just like the case of mangoes and oranges earlier discussed in this article.

A weaker naira in the midst of increasing naira 'surplus' in the market will inevitably induce a scenario of comparatively less goods and services in the market and higher uncompetitive production costs.

But, we can turn the table on the dollar and the scourge of excess liquidity and inflation once we muster the will to change the demand and supply relationship between the naira and our dollar earnings by stopping CBN's hoarding and monopoly of dollar sales, by paying the dollar component of monthly distributable revenue with negotiable dollar certificates rather than the current practice in which dollar revenue is substituted with naira by CBN.

The erstwhile ever-present ghost of excess liquidity will disappear, government's debt and service charges will significantly reduce, interest rates will fall to single digit, industries will blossom, and unemployment will also fall drastically, while the plague of inflation will be tamed with significant improvement in social welfare.

First published June 2011; National Economic Management Team, nota bene.

By Les Leba