Economic Renaissance by Henry Boyo lesleba@lesleba.com 08052201997
“When we talked about exiting recession in the second quarter of this year, many people did not believe. We are, (however), optimistic that our forecast to hit single digit (inflation rate) by next year will come to pass”
“For a country that grows her population by an average of three per cent, nothing short of going back to the historical levels about six per cent would be considered good”.
– The CBN Governor Godwin Emefiele, speaking to the media, in Abuja on Tuesday, November 21, 2017, after the Monetary Policy Committee meeting
in view of the preceding expression of optimism by the Central Bank of Nigeria Governor, Godwin Emefiele, can Nigerians, now confidently rest assured that the present economic hardship would recede since the principal architect of monetary management has promised that by July 2018, the purchasing power of all naira incomes would only fall, by less than 10 per cent, in place of the deprivation caused by the regrettable 15 per cent+ loss in the purchasing power of naira incomes in 2017. The question is, can Nigerians rely on Emefiele’s promise of a better tomorrow or is this another tale by moonlight?
Hereafter, in the following interrogative format, we will examine some issues that will actually determine the CBN governor’s promise of below 10 per cent inflation rate next year. Please read on.
Why is it necessary that inflation should fall to single digit?
A general rise in prices will reduce the amount of goods and services, that our regular incomes can purchase from one year to the other. If static nominal incomes, for example, can only buy 50 per cent of what the same income bought last year, then, you will be right to claim that inflation “stole” 50 per cent of your income.
Conversely, if Nigerians could buy 50 per cent more this year than they bought with the same income the previous year, then, this would also mean that the average inflation rate has actually fallen by 50 per cent, so that the related expansion in purchasing power should expectedly reduce the anguish and attrition that rapidly rising prices cause in most households.
Best practice inflation rate is usually below three per cent in more successful economies. So, what is the economic impact on consumer demand, if inflation falls to say three per cent?
Invariably, lower inflation, preferably, lower single digit rates will significantly boost the purchasing value of all incomes, so that citizens can at least maintain their accustomed lifestyles and also reduce existential economic pressures.
In practice, sustainable and vibrant mass consumer demand will, significantly, drive industrial consolidation, increase employment opportunities and spur national economic growth, so that government revenue will rise significantly, from an expanded personal and corporate tax base. Conversely, manufacturing and other business sectors will become challenged, if market prices rise rapidly to significantly reduce consumer demand for various goods and services.
So, are you saying that even a 10 per cent inflation rate should not be celebrated?
If average prices rise annually at 10 per cent, every static income earner will lose 50 per cent of the purchasing power of their income every five years to inflation! The dismal economic deprivations and social challenges that pensioners presently endure are direct reflections of double digit inflation rates since 2012.
Conversely, pensioners would maintain the accustomed dignity in their lifestyles, for many more years, if inflation rate consistently remains, for example, below best practice rate of three per cent.
How does inflation affect the competitiveness of local manufacturers and businesses?
In practice, higher inflation rates will reduce demand for goods/services, choke industrial growth and employment opportunities and invariably, also trigger higher interest rates that will reduce profitability of manufacturing and other businesses, which require loans to sustain their operations. Ultimately, Made in Nigeria goods cannot be competitively priced against the cheaper import substitutes which are supported with below seven per cent interest loans abroad.
How does inflation drive higher cost of borrowing?
It is unrealistic that anyone would lend you money at a rate that is lower than the inflation rate. For example, if someone borrowed N100, 000 from you at a rate of 10 per cent when inflation rate is already 20 per cent, this implies that although you will be paid N110, 000 after 12 months, the total goods and services that money can buy will actually be less than N90, 000.
Consequently, if inflation is 20 per cent, the cost of borrowing, from a rational and business standpoint, should normally exceed this rate. Thus, the current inflation rate of 15 per cent+ has invariably triggered the present 20-30 per cent cost of borrowing to local industries and businesses.
So, how do we bring inflation below three per cent, so that inclusive economic activity can be stimulated with interest rates around five per cent?
Predictably, more businesses will flourish and create more employment opportunities and revenue for government, if the cost of borrowing is less than seven per cent, so that special intervention funds at one to three per cent will become applicable for critical sectors, such as the agriculture value chain. The truth is that we can never catch up with the First World, if we refuse to adopt international best practice, monetary and financial standards and principles that drive inclusive growth.
Instructively, however, inflation will be gradually tamed below three per cent, if the CBN succeeds in combating the seemingly, ever present, threat of systemic excess money supply which, invariably, primarily pumps up the rate of inflation.
What is the proof that this inflationary threat from perceived surplus money exists?
Well, the evidence is right there in your face. In 2016, for example, the federal budget was about N6tn, but the CBN, simultaneously also, embarked on borrowing about N6tn in the same year, to remove perceived excess funds, primarily held by banks, to restrict liberal consumer spending and hold back inflation. Furthermore, despite the misguided hope of Nigerians that the bigger N7.298tn, 2017 budget, will improve economic welfare, the CBN may have also, simultaneously, borrowed over N7tn by December 31, 2017, ostensibly to reduce excess money supply and restrain inflation.
Consequently, if the CBN’s strategy for restraining the inflationary impact of systemic excess money supply, correlates with tradition, then the N8.6tn proposed in the 2018 budget will, invariably, provide ever N700bn (“awoof”) easy money to the banks, from interest payments, on Treasury bills, that the CBN will compulsively auction throughout 2018, to reduce excess money supply and consumer spending, so that prices will not spiral out of control.
Invariably, the primary driver of inflation, in every economy, is the systemic presence of much more money, than an economy has the capacity to absorb. Thus, rising inflation is reflected in “a marketplace where too much money chases fewer goods”. You may have noticed the CBN’s “eternal” struggle to control the perceived challenge of systemic surplus money, predominantly in the hands of banks, by borrowing and sterilising these funds from use, so as to restrain the inflationary pressures of excess money supply.
Regrettably, despite the zero social value of incurring these high cost debts by the apex bank, the Money Deposit Banks practically drool on these unsolicited CBN risk-free borrowings, with enticingly and distortionally high rates of interest. Consequently, so long as the threat of inflation rates above 10 per cent persist, regrettably, this counterproductive and retrograde management of monetary policy by the CBN and the Monetary Policy Committee will continue to hold back our hopes for economic growth as usual.
So, there’s no hope that inflation will recede below 10 per cent as promised by Emefiele?
Such an expectation will remain unlikely if the CBN’s traditional counterproductive and financially reckless, failed monetary strategies, which deliberately instigate systemic excess naira supply that drives inflation persist.
Besides, the reported marginal drop from 18.4 per cent by March 2017 to 16.10 and 15.98 per cent by June and September 2017 respectively, may not justify any hope that the inflation rate will plummet below 10 per cent by July 2018.