“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”. (CBN Gov. Godwin Emefiele, speaking to the media, in Abuja on Tuesday 21st November 2017, after the Monetary Policy Committee meeting).
In view of the preceding expression of optimism, 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 fall by less than 10%, in place of the deprivations of the regrettable 15%+ loss in purchasing power of Naira in 2017.
Hereafter, we will, in the following interrogative format, examine some issues, that would actually determine Emefiele’s promise of below 10% inflation rate; please read on.
Why is it necessary that inflation should fall to single digit?
A general rise in prices would 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% of what the same income bought last year, then, the inflation rate may be deemed to have eaten up 50% of your income.
Conversely, if Nigerians could buy 50% more, this year, than they bought with the same income the previous year, then, this would also simply mean that, the average inflation rate has actually fallen by 50%, so that the related increase in purchasing power should expectedly reduce the anguish and attrition caused in most homes by rapidly rising prices.
Best practice inflation rate is usually below 3% in more successful economies. So what is the economic impact on consumer demand, if inflation falls to say 3%?
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 reduce existential pressures.
In practice, sustainable and vibrant consumer demand will, significantly, drive industrial expansion, create more employment opportunities and spur national economic growth, with more government revenue, from an increasingly wider personal and corporate tax base. Conversely, manufacturing and other businesses sectors will become challenged, if rapidly rising market prices, significantly reduces consumer demand for various goods and services.
How does inflation affect the competitiveness of local manufacturers and businesses?
Firstly, lower inflation rates will increase consumer demand and therefore encourage and drive industrial activities with rising job opportunities to boot.
In contrast, 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 may require loans to sustain their operations; ultimately, ‘Made in Nigeria’ goods cannot be competitively priced against cheaper import substitutes, which are supported with below 7% interest loans from 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 inflation rate. For example, if someone borrowed N100, 000 from you at a rate of 10%, when inflation rate is already 20%, this implies that, although you will be paid N110, 000 after 12 months, but the total goods and services that this amount can buy, will actually be less than N90, 000.
Consequently, if inflation is 20%, the cost of borrowing from a rational and business standpoint should normally exceed this rate. Thus, the current inflation rate of 15%+ has invariably triggered the prevailing 20-30% present cost of borrowing to local industries and businesses.
So how do we bring down inflation below 3%, so that inclusive economic activity can be stimulated with interest rates around 5%?
The severe economic stress from endlessly failing to balance, individual household budgets will expectedly ease, if annual inflation rate falls to 3%. Besides, pensioners with static incomes, will be able to maintain an accustomed dignified lifestyle for much longer than before.
Furthermore, more businesses will also flourish, if the cost of borrowing is less than 7%, across board so that special intervention funds at 1-3% will become applicable for critical sectors, such as the agricultural value chain.
Instructively, however, inflation will be gradually tamed below 3%, if CBN succeeds in combating the seemingly, ever present, threat of systemic excess money supply which invariably pumps up the rate of inflation.
What is the proof that this inflationary threat from perceived surplus money actually 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 curtail liberal consumer demand 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 before December 31st 2017, ostensibly to reduce excess money supply to restrain inflation. Consequently, If 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 also attract additional easy money to the banks, from the interest payments probably in excess of N700bn they will charge on Treasury bills that CBN would compulsively auction to reduce money supply and halt the threat of inflation spiraling 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, held by banks, by borrowing and sterilizing these funds from use, so as to restrain the inflationary impact 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’s risk free borrowings, with enticingly high rates of interest. Consequently, so long as the threat of inflation rates above 10% persists, regrettably this counterproductive and retrograde management of monetary policy by CBN and the monetary policy committee will continue to hold back the chances of economic growth as usual.
So there’s no hope that inflation will recede below 10% as promised by Emefiele?
Such expectation will remain unlikely if CBN’s traditional counterproductive and financially reckless, failed monetary strategies, which deliberately instigate systemic excess Naira supply persist.