Inflation: The Quiet Plague | Independent Newspapers Limited
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Inflation: The Quiet Plague

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Posted: Sep 14, 2016 at 8:44 pm   /   by   /   comments (0)



Nigerians know too well, that sinking feeling when all items on the household shopping list cannot be covered by the regular budget. The options are either to cut down or do without some basic items, or alternatively make do with less preferred but cheaper substitutes. The depressive impact of a continuous price spiral on the average family’s welfare is therefore a very familiar theme.

Even though the impact of Inflation knows no boundaries, it is also recognised that a little inflation may also be necessary to stimulate economic growth; but it becomes a problem when the general price level rises above 5% annually!  In progressive economies, the authorities target inflation rates below 2% to stabilise purchasing power of income earners and preserve social welfare and the value of pension funds.  Disturbingly, however, in our case, the price level has often risen above 10% annually, while inflation rates for food items have generally been much higher!

However, where prices of goods and services rise above 10% annually, a static nominal income of N100, 000 may only be enough to purchase goods that just N10, 000 bought ten years earlier. Consequently, a family’s income must also grow by at least 10% annually in order to maintain their living standard.  Indeed, in progressive economies, the general wage structure is intrinsically tied to prevailing inflation rates so as to sustain consumer demand and prevent an oppressive meltdown of the welfare of citizens.

Conversely, Nigeria’s inflation rates often outstrip static incomes for several years before any attempt to remediate the disparity.  Evidently, the net product of this mismatch is grinding poverty; for example, the N200/month (over $150) minimum wage in the 1980s commanded much more value than the latest increase to N18, 000, or $100 presently (2011).

The pertinent question, however, is why Nigeria’s inflation rate has remained so destabilising to become a primary instigator of deepening poverty, such that, despite fortuitously increasing export revenue and best-ever external reserves for several years, Nigerians are presently listed amongst the World’s poorest nations.  Instructively, the classical definition for inflation is ‘too much money chasing fewer and fewer goods and services’.  Thus, inflation is an expression of the market dynamics of Product/service supply and the available spendable cash for transactions.

Incidentally, the general notion, however, is that Nigeria’s high inflation rate is caused by our lack of productivity; i.e. we are not producing enough goods and services while the supply shortfall is simultaneously confronted with too much money in the market.  This is indeed a true reflection of the definition of inflation. However, a casual observation will confirm that more garri, yams, tomatoes, eggs, etc, are currently produced than 25years ago. So, it is clearly not appropriate to suggest that less and less goods are available, but, it is probably more correct to admit that the increasing output falls below the rate of expansion in money supply.  So, the problem is really that of money supply always outstripping production!!

The critical question, also, is what persistently instigates increasing money supply, such that so much money is always available to chase more, but relatively fewer goods?  The Nigerian monetary authorities become mischievous when their answer to this question is that the three tiers of government are spending too much money. Instructively, however, best practice antidote to flagging consumer demand, rising unemployment, and industrial contraction is in contrast, fiscal expansion, i.e., increased government spending!  Ironically, however, our monetary authorities impulsively, resolve to holdback inflation by discouraging access to the increased money supply allegedly induced by any expansion in government spending.


In its attempt to reduce excess money supply, the CBN would deliberately increase the cost of borrowing with money policy rates that restrain aggressive credit expansion by banks.  Ultimately, as readily admitted in the CBN Monetary Policy Committee Communiqué No. 76 of 24/05/2011, government becomes the major customer of the banks and inexplicably borrows money that it claims to sterilise from use, in order to avert the threat of inflation by reducing the available cash and credit in the market. Disturbingly, nonetheless, over N500bn has been earmarked for servicing such counterproductive government loans in the 2011 budget!  Unfortunately, industrial contraction, increasing unemployment and reduction in aggregate demand, all of which deepen poverty, become the horrid collaterals of such unforced credit restriction and higher cost of borrowing by CBN.

It would, certainly, be more appropriate for monetary authorities to carefully examine the true origin of the perennial claim of ‘too much liquidity’ in the system despite the real sectors’ poor access to cheap funds.  A little sincerity will, however, reveal that CBN’s eternal lamentation of excess liquidity usually follows the payment of monthly allocations to the three tiers of government. Sadly, the same CBN proceeds, soon after, to borrow back and sterilise a large chunk of these available funds in order to reduce the threat of surplus cash and inflation. Consequently, the greater the monthly allocations, the greater also would be the threat of inflation and a higher national debt with its related oppressive service charges. Ultimately, our industrial subsector also becomes more challenged and uncompetitive.

Furthermore, it is apparent that the potential increase in bank credit expansion by the monthly deposits of billions of Naira allocations also induces a supply and demand relationship between the Naira and the dollar that ensures that the dollar will always emerge stronger in the market; inadvertently, the CBN’s subsequent auctions of dollar rations invariably creates dollar scarcity in comparison with the huge Naira surplus and the related credit capabilities of banks. Ultimately, the increasing Naira ‘surplus’ will inevitably also induce a scenario of comparatively less goods and services in the market with higher, and uncompetitive production costs.

`             But, the table can be turned on the dollar and the destructive cycle of persistent excess liquidity and inflation, if government musters 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. The Naira will become favoured, if the dollar components of monthly distributable revenue are paid with negotiable dollar certificates rather than the current practice in which dollar revenue is substituted with Naira allocations 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 deadly plague of inflation and weak consumer demand will be tamed with significant improvement in social welfare.”

The above article was first published on 13/06/2011, when the inflation rate still averaged about 10%, i.e. a sharp contrast from over 17% recently confirmed by the NBS.