The recent ratcheting up of Nigeria’s inflation numbers to 18.17% (highest in 4 years) has got many people worried about what exactly is happening on that front. Why is inflation increasing quarter after quarter in Nigeria and when is the tide likely to ebb? It needs to be noted that the Buhari government has not only seen the nation into two economic recessions (like he did in his first coming in 1984) but also two spikes in inflation, for sometimes in 2017, Nigeria also suffered inflation at 19%. If the current trend continues for two or more quarters, we will most likely set another 15 years record because according to the records, inflation hit 28% in 2006 when crude oil prices hit their highest ever at about $140 per barrel.
At that time, Nigeria backstopped some of the downsides of inflation with fair GDP growth of 6%. What can we do to avert this impending crisis more so as we are in what economists call stagflation (a stagnant, unproductive economy buffeted by galloping inflation)? Yes, this current palaver can be hung on the neck of COVID-19 but that does not tell the full story. Still, if a worse fate can be averted, we need to seize the opportunity immediately.
Inflation is regarded as mankind’s worst enemy especially among liberal economists who advise that economies target inflation and that all else will fall into place once that is done. I don’t fall into that category. However, in simple terms, inflation is the erosion of the value in a country’s currency and by extension, the impoverishment of the majority of the population – if income levels remain static and if the majority are not earning as a result of unemployment. This is one indicator of loss of value but a profound one all the same.
The other indicator – which is also deadly for an economy like Nigeria’s – is the devaluation of the currency vis-à-vis other currencies. Buhari met the Naira at N199 officially to the US Dollar in 2015, and N216 (parallel market). Today, the Naira sits at N413 (officially), and N495 (parallel market) at the time of typing this article, with prospects of an even more precipitous fall. Some liberal economists have been advising that the government (CBN) release the reins of the currency and allow the naira ‘float freely’. I have warned whoever cares to listen that the moment we do that we should forget the economy, and of course the currency. Both will fly away and we may never be able to recover them.
There are several ways in which a country can suffer from inflation and it looks likes Nigeria is presently suffering multidimensionally. There is supply-side-induced inflation (cost-push), by which inflation ensues when sellers of goods and services decide to mark up prices in response to a number of issues – increasing input costs, replacement costs, currency devaluation, etc. These increased prices are borne by consumers at the end of the chain. Closely related to this is ‘imported inflation, which is when it costs more to import goods into an import-dependent economy and importers have to necessarily increase prices just to cover their costs and make a profit.
There is also fiscal policy and monetary policy inflation. Where fiscal policy results in massive borrowing – as it has for Nigeria – the government is under increased pressure to raise taxes from individuals and companies, who in turn increase prices of goods and services to make up (inflation). Monetary Policy inflation occurs when excess money supply leads to people having too much at their disposal, especially such as is not backed by increased productivity. The printing of more money due to interventions (such as in a time like this), or when federal governments overdraw their accounts with central banks, is also a sure cause of inflation. All the conditions
described above are present in Nigeria today and the inflationary pressures we are seeing stem from all of these issues (fiscal, monetary, and cost-push) The misery increases because there is demand-pull inflation, whereby the presence of an excess demand for goods and services causes prices to go up. Readers will wonder why anyone in Nigeria will have extra funds at this time, but some do.
Many Nigerians who are lucky to have good jobs – such as with top parastatals and the oil and gas sector, or even top political leaders – have been earning steadily in the last year with nowhere to spend as they couldn’t travel out. Their expenses are usually quite externalized in good times. Before covid struck, their holidays, children’s education, healthcare, clothing, and even some sundry groceries, were sourced from abroad. So, a certain category of Nigerians have monies that do not currently know how to spend. Then the government has also been spending on incentives of all types, pushing money into society just as their counterparts in other countries. Since neither the salaries paid to sedentary government workers, nor politicians, nor the beneficiaries of palliatives and incentives, come with any commensurate increases in productivity, the spendings done by these categories of people go straight to compound our inflation crisis.
Other sources of inflation include, of course, the Covid-19 pandemic (which can be categorized as an Act of God), which caused a lot of shut-ins on productivity and which has laid some companies prostrate, leaving consumers with fewer producers. We are lucky that covid-19 has not hit us here as much as predicted, but the trauma and dislocation have been significant in the economy. Covid and our perennial problems with physical security have also been fingered as the reasons behind our galloping food inflation, which in itself is the chief driver of the upsurge in our headline inflation. Food prices have been leaping forward at over 20% per quarter. Farmers say they are afraid of returning to their farms because of kidnappers, bandits, marauders, and all sorts of elements who give them sleepless nights.
So, inflation is beating down hard, raining punches in fact, on Nigeria, from several angles. The Nigerian economy is being pummeled by the elements and we are not rising to the occasion by being able to muster some growth on our own, so this looks like a race to the bottom. Perennial economic mismanagement and wanton corruption mean that many public sector workers at the state level are not receiving their salaries in due time. In the private sector, where millions of people have been egged overtime to ‘start something of their own, many are finding it tough to keep up and are laying off workers in droves just as many have shut down altogether.
On the macroeconomic front, there are allegations as to whether the Federal Government has been living beyond its means by leaning hard on the Central Bank of Nigeria to issue new money at will and beyond its statutory mandate. The Central Bank itself has fired all its monetary policy bullets and now encroaches on fiscal functions by having a plan to lend to every sector that matters. The fiscal sector has chunked up Nigeria’s domestic and foreign debt profiles so much that the Debt Management Office has been set on edge. We are in a debt crisis even though the Minister of Finance insists that our Debt to GDP ratio, and not the Debt to Revenue, is what matters. Former CBN governor, Sanusi, like his predecessor, Soludo, recently raised a specific alarm in this area and asked that we focus on the debt to revenue ratio, which is anything between 80% to 95%.
Nigeria is actually plowing through economic depression, not recession. The symptoms of economic depression have always been here – high unemployment, high crime rates, high inflation numbers, low growth, increasing illiteracy levels, the collapse of infrastructure, the collapse of social values, and so on. Just because developed countries have managed to run their economies to prevent all these things and ‘economic depression’ sort of dropped off the economic lexicon does not mean we should not tell ourselves the truth about our situation. If we define the Misery Index as Inflation plus Unemployment, Nigeria racks up about 52%, one of the worst ten in the world. If we include lending rates, we could be looking at 80%! A hard look at, and appreciation of these numbers should alarm us into action.
My thoughts have always been for Nigeria to pursue double-digit growth. Covid-19 makes such thoughts look so distant now, but with these kinds of crazy negative numbers that we are posting, we have no choice but to find economic growth and ensure that this time it is inclusive. The Chinese economy dipped from a 10% yearly growth spanning more than one decade to 6.5%, 6%, and later 3.2% when covid-19 hit. China however announced an 18% GDP growth a couple of days back. That is a resilient economy with focus and resolve. These are what we must find. I will write what we must do to find that inclusive growth in another article.
In my last article, I sampled Nigeria’s top ten imports versus our top ten exports. Roughly speaking, from the 2019 figures, Nigeria’s top ten imports took away $37 billion from our resources (between imported petrol, machinery, technology, plastic, glass, pharmaceuticals, and such), while our top ten exports brought in about $57 billion. The problem is that crude oil and gas is our chief export driver and out of the $54 billion attributable to those two items, only $19 billion (or 35% according to NEITI), belongs to Nigeria. The remaining belongs to private oil producers especially the international ones. The rest of our exports – outside of oil and gas – are cocoa beans, gold, oily seeds, rough wood, and fertilizers). So, we are actually looking at an outflow of $37 billion versus an inflow of $20 billion and that is a recipe for long-term imbalance and even more inflation.
The time for a fundamental rethink of the structure of our economy is now. We have to dump the rhetoric of promising ourselves ‘economic diversification’ and actually set to work on adding value to everything we produce while substituting imports. This is why I support the idea of restricting foreign exchange for some items like Indian candles, toothpicks, eggs, water, and other items. We just don’t have the luxury of time and funds for frivolities. The restriction strategy is also valid as every country has one. The World Trade Organization has a mechanism whereby countries can use tariffs on selected products, for their national security. Liberal economists should do a back of the envelope calculation of our real import and real export values. Perhaps they will be alarmed at the fact that the Nigerian economy is in a cul-de-sac.