The Cost of Inflation

Amidst current inflationary pressures occasioned by rising prices of goods and services in the country, the government must intensify efforts towards arresting the drivers of inflation, particularly insecurity and fine-tune its policies to boost the economic well-being of Nigerians, writes James Emejo

The World Bank has stated that inflationary pressure in Nigeria has pushed about seven million Nigerians below the poverty line in 2020 alone.

In its latest assessment of the Nigerian economy particularly, the wellbeing of the common man, the World Bank may have last week stirred up controversy when it claimed that rising prices or goods and commodities had pushed seven million Nigerians below the poverty line.

This was obviously at variance with President Muhammadu Buhari’s claim in his Democracy Day broadcast that his administration had lifted 10.5 million Nigerians out of poverty in the past two years.

In its Nigeria Development Update (NDU) report, the multilateral institution also reiterated the need for the federal government to set policy foundations for a strong recovery as well as to tame inflation.

Separately, the World Bank’s Country Director for Nigeria, Mr. Shubham Chaudhuri, while speaking on ‘The Arise Xchange,’ a programme of ARISE NEWS Channel, the broadcast arm of THISDAY Newspapers, added that lack of economic opportunities was contributing to the rising crime cases and insecurity in the country.

Among other things, the update stressed the need for critical reforms by the government to reduce inflation and accelerate the recovery.

According to the Bretton Woods institution:”While the government took measures to protect the economy against a much deeper recession, it would be essential to set policy foundations for a strong recovery.”

The NDU, titled “Resilience through Reforms”, pointed out that in 2020 the Nigerian economy experienced a shallower contraction of -1.8 per cent than the -3.2 per cent, which had been projected at the beginning of the pandemic.

It observed that although the economy started to grow again, prices are increasing rapidly, severely impacting Nigerian households.

“As of April 2021, the inflation rate was the highest in four years. Food prices accounted for over 60 per cent of the total increase in inflation. Rising prices have pushed an estimated seven million Nigerians below the poverty line in 2020 alone.”

The NDU acknowledged notable government’s policy reforms aimed at mitigating the impact of the crisis and supporting recovery particularly steps taken towards reducing petrol subsidies and adjusting electricity tariffs towards more cost-reflective levels, both aimed at expanding the fiscal space for pro-poor spending.

It, however, advised both the federal and state governments to cut non-essential spending and re-directed resources towards the COVID-19 response.

Also, the World Bank admitted that public-sector transparency had improved, especially around the operations of the oil and gas sector.

The report, however, noted that despite the more favorable external environment, with recovering oil prices and growth in advanced economies, a failure to sustain and deepen reforms would threaten both macroeconomic sustainability and policy credibility, thereby limiting the government’s ability to address gaps in human and physical capital which is needed to attract private investment.

Commenting on the report, Chaudhuri said, “Nigeria faces interlinked challenges in relation to inflation, limited job opportunities, and insecurity.

”While the government has made efforts to reduce the effect of these by advancing long-delayed policy reforms, it is clear that these reforms will have to be sustained and deepened for Nigeria to realize its development potential.”

True to the observation of the bank, Nigerians are presently groaning under the burden of high inflation as market prices of food and commodity prices have tripled in recent times, affecting their purchasing power as the real value of the naira is also eroded. And this is particularly disturbing because whenever prices go up in the country they hardly come down.

Inflation rate is one of the critical macroeconomic indices used to ascertain the health and well-being of an economy and is considered to be harmful to an economy when the rates are deemed to be significantly high.

Among other things, the Central Bank of Nigeria (CBN) has the mandate to ensure monetary and price stability and also promote a sound financial system among other functions by employing the Monetary Policy Rate ( MPR) to anchor short-term interest rates, and to rein-in inflation expectations.

Although the CBN had set an inflation target of between six to nine per cent in its five-year policy thrust (2019 -2024), the economy remained under significant inflationary pressures for obvious reasons.

But the apex bank had been absolved by experts, who believed that the bank had done enough to curtail the rise in the headline index, pointing out that the factors that currently fuel inflation which stood at 17.93 per cent in May, were beyond the control of the CBN.

If anything, inflation which had strengthened for 18 consecutive months before slowing in April and May – had largely been fueled by rising food prices caused by insecurity as farmers are unable to engage in farming activities due to the activities of armed bandits and terrorists across the country as well as the continuing farmers-herders clashes.

However, in its recommendations to the federal government, the World Bank proposed near-term policy option organised around three priority objectives.

These are to reduce inflation by implementing policies that support macroeconomic stability, inclusive growth, and job creation; protect poor households from the impacts of inflation; facilitate access to financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.

The World Bank Lead Economist for Nigeria and co-author of the report, Marco Hernandez, noted that, “Given the urgency to reduce inflation amidst the pandemic, a policy consensus and expedite reform implementation on exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection would help save lives, protect livelihoods, and ensure a faster and sustained recovery.”

It, however, came as a relief to Nigerians when the Consumer Price Index, (CPI) which measures inflation dropped to 17.93 per cent (year-on-year) in May compared to 18.12 per cent in the preceding month.

According to the National Bureau of Statistics (NBS), the 0.19 per cent decline in the headline index, makes it the second consecutive month that the rate had sustained its downward trajectory after 18 months of inflationary pressures on the economy.

According to the CPI figures food inflation dropped to 22.28 per cent from 22.72 per cent in April.

Price moderation was recorded in bread, cereals, milk, cheese, eggs, fish, soft drinks, coffee, tea and cocoa, fruits, meat, oils and fats and vegetables.

On month-on-month basis, the food sub-index declined to 1.05 per cent in May from 0.99 per cent recorded in the preceding month.

On the other hand, core inflation, which excludes the prices of volatile agricultural produce rose to 13.15 per cent from 12.72 per cent in the review period.

On month-on-month basis, the core sub-index increased by 1.24 per cent, the NBS noted.

The highest increases were recorded in prices of pharmaceutical products, garments, shoes and other footwear, hairdressing salons and personal grooming establishments.

Others are furniture and furnishing, carpet and other floor covering, motor cars, hospital services, fuels and lubricants for personal transport, equipment, cleaning, repair and hire of clothing, other services in respect of personal transport equipment, gas, household textile and non-durable household goods.

Commenting on the development, analysts in separate interviews with THISDAY, however, proffered the way forward for the economy.

An Associate Professor of Agricultural Economics at University of Port Harcourt, Anthony Onega, said the way forward was to tighten monetary policies and genuinely support the Micro, Small and Medium Scale Enterprises (MSMEs) by providing them with an enabling environment.

He said the focus should also be on advancing credit for infrastructure development; attraction of Foreign Direct Investment (FDI), restructuring of the health and educational sector/as well as investment in COVID-19 vaccines and restrictive monetary policies.

Onoja also advised the federal government to concentrate on national projects that are capable of creating job opportunities and increasing access to social protection schemes.

He said the World Bank report implied that the “Nigerian Economic Sustainability Plan is not having the desired impact for now.

“The recent record high rise in Nigerian inflation in 2021 is a reflection of the recessive trend of Nigerian economy since 2020 whose recovery time appears indeterminate.

“The year 2020 came with unusual developments such as COVID-19 pandemic, a record level rise in insecurity, restricted export and import market regimes as evidenced from a prolonged border closure.

“To worsen these, poor harvests from farms, low prices of oil, erratic macroeconomic policies and diminishing production capacity utilisation in the various economic sectors compounded the rate of inflation in Nigeria in 2020 which could not abate even by May 2021”.

Managing Director/Chief Executive, Dignity Finance and Investmemt Limited, Dr. Chijioke Ekechukwu, offered quick fixes that could stimulate the economy again.

He said the country’s inadequate revenue base coupled with huge drop in foreign direct investments (FDI) constitute major setbacks for the economy adding that increased revenue base will bring down the exchange rate.

He said increased in FDI as well as the ability of the government to tackle insecurity will be a game changer for the economy.

He added that exchange rate also constituted a major cause of the high inflation rate experienced in the country as well as the huge current trade deficit.

Ekechukwu said, “ Inflation will continue to reduce quality of life and standard of living as disposable income of Nigerians continues to deplete.

“Value of local currency held in banks continue to lose value. All these continuously increase poverty level of Nigerians.

“One major cause of inflation is insecurity in the country, unfortunately it is only within the control the federal government and therefore neither the monetary nor fiscal policy can control insecurity.”

On his part, Managing Director/Chief Executive, Credent Investment Managers Limited, Mr. Ibrahim Shelleng, said the only solution to current economic challenges was for the country to resort to local production and export.

“There is no cheat method to our current situation. The only way is for us to fix ourselves internally, begin to produce in-house and eventually process and export,” he said.

He noted that the major driver of inflation had been due to supply side constraints occasioned by multiple issues including insecurity, poor infrastructure, inconsistent monetary and fiscal policies.

He said, “Unfortunately, the government has not been able to tackle these issues effectively. The interventions that have taken place so far have been more of a fire brigade approach rather than a consistent policy directive to tackle the issues.”

Shelleng said, “Government spending has essentially been the main reason why the country has maintained positive growth in recent quarters but productivity in the real sector has been stalled.

“High cost of material importation due to scarce foreign exchange, high cost of finance and inadequate infrastructure greatly diminishes the productive capacity of the private sector.

“Unless these factors are addressed, the economy may continue to slide and cause more hardship for the population.”

According to him, “There has to be synergy between monetary and fiscal policy. The CBN has essentially taken on some aspects of fiscal policy in its attempts to provide low cost funding to critical sectors of the economy, but with other mandates such as maintaining a steady FX rate and tackling inflation, it has spread itself too thin and this has largely affected the economy.”

On his part, however, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, pointed out that the policies of government implemented by the CBN in the last two months had been having impact in the reduction in the inflationary trend.

He said the apex bank had also maintained a sustainable interest rate in its MPR as well as increased circulation of forex into the economy.

According to him, “They have increased access to US dollars for payment of school fees abroad, PTA and BTA, thereby reducing the strain on the Naira.

“The federal government has also commenced intervention funds disbursement to SMEs, Anchor Borrower Programme through CBN and COVID-19 relief loans to people affected by the pandemic.

“The key areas of improvement in the ease of doing business is also been addressed by the government.”

Gbolade added that there had been a show of commitment to tackle insecurity by the government adding that all these measures would tend to return investor confidence and lift the economy on the long-run.

However, he said, “The government has claimed recently that it has lifted 10 million Nigerians out of poverty in 2020 contrary to the world bank report that additional seven million Nigerians have been pushed into the poverty index.

“The federal government intervention cannot be statistically proven to have been effective because we have not been able to measure it and also the reality on ground does not show that this government’s assertion is true.

“The federal government should have involved non-governmental organisations and other multilateral organisations to measure the government’s performance in these areas to ascertain its effectiveness.”