Taming Inflation in Nigeria 

By

Victor E. Dike

vdike@cwnet.com

Inflation has unrelentingly been moving upward in Nigeria because of years of neglect of the social infrastructures and general mismanagement of the economy. Currently, inflation is double-digit and the surplus Naira in circulation, scarcity of food and fuel are part of the problem. And the economic team does not appear to have the tools to building a viable economy where local resources would enhance economic growth. This is a preview of difficult times ahead if nothing serious is done to tame inflation in Nigeria

Industrial inputs are becoming very expensive and the Consumer Price Index (the main inflation gauge) shows that cost of living is skyrocketing. In organized economies costs are volatile and susceptible to “supply shocks and acts of nature” and price would settle after the forces that instigated the increase were resolved. That is not the case in Nigeria where prices keep rising without obeying the law of gravity. Currently, liter of fuel is about N75-N85 1in some parts of Nigeria and the price of food went up by 35.6% in July and to 36.1% in August.2

Businesses watch changes in the costs of inputs and fuel and electricity are the economy's most visible input. The ordinary folks feel the pain every day even if they don't buy fuel because they buy food every day. Therefore, if prices for food and fuel, which are among “the vital necessities of life,” rise the people feels the pinch of inflation.3

Part of the problem with the economy is that the Naira has been falling against the dollar and other major currencies and most observers expect the slide to continue. The surplus Naira in circulation is a contributing factor because the value of anything tends to fall, ceteris paribus, if the commodity is in surplus supply. The CBN in its Economic Report (August 2005) notes that aggregate money supply grew by 39.8% during the period, as against the targeted growth of 15% for Jan 2005. This is a sign of a larger trouble! A depreciating Naira puts pressure on the price of imported goods. The only benefit in this is that it improves the global competitiveness of Nigerian made goods. The problem though is that Nigeria does not seem to have any products competing in the global market. As this is out of the equation Nigeria is holding an empty bag!

The recent increase in the prices of petroleum product (and this did not improve its availability) shows the political leaders are yet to understand that any spontaneous increase in the price of fuel would push up inflation and impacts negatively on the entire economy. The powerful US Federal Reserve Chairman, Allan Greenspan, warned recently, that continued increase in fuel costs would slow down global economic growth.4 The unregulated and unbudgeted spending by the managers of the three tiers of government (federal, state and local) also put pressure on inflation. For example, Chief Obasanjo Obasanjo told the world that the NPRC would cost N932m but he spent about N2 billion on the rancorous “talk shop.”5 Recently, the International Monetary Fund (IMF) expressed worry over rising inflation in the society, as inflation was put at about 26% in July 2005.6 Thus the IMF advised the leaders to grow Nigeria’s non-oil sector of the economy.

The inflation problem has been going on for a while; and the menace may continue because the CBN is yet to study the causes of inflation in Nigeria7.  The Federal Office of Statistics (now National Bureau of Statistics) note in the fourth quarter of 1998 that annual inflation was 8.2% in Sept 1998, showing a 0.9 point increase over the month of August with inflation rate of 7.3%.  And average retail prices declined by 2.2% between August and Sept 1998, which was attributed to the improvement in farm harvest.8 The economy has since been riddled with a combination of high inflation and unemployment (stagflation).

The United Nations Development Program (2004b) put Nigeria’s unemployment figure at 15%, but some independent observers believe that current unemployment figure is around 20-30% of the labor force. This view is guided by the fact that Nigeria is yet to move away from the reform programs to rebuilding the economy. While the FOS believed that the nation’s inflation figure for Dec 2003 was 14% (up from 13% for Nov 2003) the CBN had the Dec 2003 inflation figure at 13.8%.

Inflation stood at 15.0% and went up to 16.5% in Feb 2004, 17.8% in March, and 18.5 in April and 19.4% in May 2004. Inflation was up to 17.7% in the third quarter of 2004, as against the 3.4% in the second quarter of the year. According to the National Bureau of Statistics inflation hovered around 18.2% and 19.4 % in 2004, went down to 14% in Jan 2005 and 12.9% in Feb and 12.5% in March. It went up a bit to 12.6% in April and to 12.9% in June,9 but escalated in the months of July and August hitting 26% in July and 28% in August 2005.10 The increase was attributed to the growth in money supply because there was a 24.7% growth in banks’ credit to the domestic economy. Excessive government spending, high cost of production inputs (fuel, electricity, transportation, etc) and food were among the culprits.11

Another part of the problem with the economy, however, is that bank credits are not put in productive venture, such as establishing cottage and small-scale industries that could enhance the economy, create employment and improve the people’s living standards. Many of the loans are often spent on frivolous activities, like acquiring unlimited traditional titles, funerals and conspicuous consumption. Report shows that non-performing loans rose to 21.27% in 2002 from 16.90% in 200. And it was estimated that about N 178billion (about US$ 1.37billion) was lost to loan defaulters by the end of 2002.12 Some dubious bank directors are known to been involved in bad in-house loans and other unethical practices. Recently, the EFCC arrested Mr. Marc Wabara (CEO), Hallmark Bank, regarding the $58million of Joint Development Zone trapped in his bank.13 Because of lack of dire consequences for defaulting on loans non-performing loans are expected to rise.

On the paper, Nigeria’s economic problems appear easy to resolve, as the NEEDS shows, but in practice it is a different ballgame. As Jack Welch says “Leaders [should] make sure [that] people not only see the[ir] vision, they live and breathe it.” 14  Sadly, the CBN has not been able to figure out why inflation is spinning out of control, as all the prescribed medicines have not been effective.15 The Apex bank should do a bit of “economic engineering”16 by adjusting the interest rate and scooping off the surplus Naira in circulation, but it cannot affect the price of oil by manipulating interest rates only. As Michael F. Bryan puts it, "there's nothing the central bank [even the powerful FED] can do about that [oil prices], unless it figures out how to produce more oil.”17 The problems facing the economy include the dilapidated social infrastructures (roads, water, electricity supply, ailing and idling refineries, etc). As long as the infrastructures remain in their present sorry state no amount of monetary policies will correct the anomalies in the system because they will continue to distort the policies and keep the economy wobbling. Sadly, crude politics, corruption, selfishness and greed have not allowed the political leaders to fix the ailing institutions that are commanding heights of the economy.

Therefore, since high inflation saps the peoples’ purchasing power and retards economic growth the managers of the economy should concentrate on improving food production because food prices seem be moving beyond the reach of many Nigerians18.  Also solutions to the menace of inflation involve fixing the old refineries and building new ones and thus introducing genuine competition in the oil sector. This is by no means novel a idea but improving the refining capacity of the refineries and modernizing the distribution channels will surly bring down the costs of fuel, food and transportation and therefore tame inflation. Finally, for the value of the Naira to appreciate the CBN must mop up the surplus money in circulation.

Notes