Inflation hit a four-year high of 18.17% for March 2021 and everyone is trading the blame game, with the federal government at the centre of it all. I think it is unfair to put the entire blame of inflation on the federal government, and there are solid reasons for this. Before that, the implication of an 18.17% inflation rate includes negative sentiments in the fixed income market, high cost of living, fall in the real wage of fixed income earners (most Nigerians are in this category), higher possibility of capital projects getting stalled and growth in consumer misery.
Quite right, everyone believes the government is not doing enough to keep inflation in check, but the reality is that the government is even unsure of what strategy to adopt. If the CBN decides to use OMO to mop up excess liquidity, they cannot afford to sell T-Bills at rates that will encourage domestic and foreign investors. This is because their debt portfolio already attracts high debt servicing. If the CBN hikes the monetary policy rate, overall credit in the economy will slow down. Fragile manufacturers who need loans have to hold back, cut production, lay off staff, and other adjustment mechanisms.
There is so much the government can do to reduce inflation, but the average Nigerian will bear the effect of it. A few years back, the Egyptian government decided to float their currency in a bid to manage external shocks and inflation. Consumers in Egypt absorbed the impact by paying huge prices for products and services. By 2020, the Egyptian Pounds had appreciated so well that inflation trended in single digits. Ghana is one of the African economies that have a success story of a single-digit inflation rate. The supporting factor was Ghana’s manufacturing forte, largely supported by economic reforms and infrastructural development, especially electricity.
Having established the fact that the hands of the federal government are tied by the federal government itself, it is a veracity that consumers (you and I) are culpable in the 18.17% inflation reported for March. We all love foreign products, and that is the starting point. If estimated, imported inflation will probably account for no less than 30% of Nigeria’s inflation. A large fraction of consumers in Nigeria would rather spend their income on foreign trips, foreign goods, foreign consultants, and everything foreign.
Another big question to ask is how much of the salaries of fixed income earners go into savings and investment. Of course, rates are low currently and only high-risk investments like bitcoin can return fantastic yield for investors. However, a strategy to tame inflation is to cut back on consumption and give demand a holiday. To achieve this, consumers in Nigeria, including the government, must save and invest more. Imagine a country where 60 – 70 percent of income goes into consumption and domestic production is low, inflation will continue to soar. Policymakers will find it excruciating trying to keep inflation in check. This is a scenario playing in Nigeria currently.
Again, pointing the fingers at consumers, Nigerians are not naturally predisposed to subsistence farming. To affirm this, how many families have a small plantation of tomatoes, pepper, and vegetables in their backyard? Since large-scale commercial farming is not at the levels expected to accommodate domestic demand, subsistence farming is the only alternative. Nigerians build and buy houses, fence the perimeter, and concrete the entire space; leaving no soil to cultivate minor crops that can be used at home. With this practice, food will remain imported and prices will remain high; even if the CBN fosters the import restriction list
Besides, why is there little investment in agriculture from the wealthy individuals in Nigeria? of them wants to be in oil and gas and manufacturing, but agriculture is primary. It feeds into every other sector. Understandably, the yield may be lower for agriculture and that may be a justification for these wealthy investors, but it means inflation will remain as it is, on the same trajectory
In summary, everyone is to blame for the 18.17% inflation rate. Pointing fingers at the federal government and trading blames has never solved the problem and it still will not solve the problem. Understanding the points highlighted and putting all hands on deck to address them in our personal, little way may be the saving grace for inflation in Nigeria.
Picture credit: Dreamstime
Written by Michael Ogunremi
Michael is an economist with a big-four consulting firm in Nigeria