June 27, (THEWILL) –Â There is no doubt that the inflation rate in the country has been ravaging, to the chagrin and discomfiture of all. The inflation rate of approximately 18 per cent, which kept rising for over one year, is unfamiliar and alarming, to say the least.
Until the last two months (April and May) when a modest reversal was witnessed and the rate of increase was for the first time in a long while below 18 per cent, as it settled at 17.93 per cent, the situation gave much cause for concern. This situation is most certainly not supportive and it is totally injurious to the well-being of a generality of our population.
What makes inflation unacceptable is the fact that it affects more of the marginalised poor amongst the population who are not in a position to pass its effect on, but bear the full impact as it undermines their purchasing power, increases the misery index in the land, undermines capacity utilisation and therefore, erodes Gross Domestic Product growth rates. But the recent reversal, which we hope could signify a turning point, is most certainly not Uhuru yet as some critical sectors, such as food inflation, has not witnessed any reversal but maintained a rising trend. Therefore the respite, which a generality of the population are seeking, is a dream yet deferred.
So what are the causes of inflation? There are two main sources: One is when you have excessive demand in the economy due to the injection of massive liquidity, which we have witnessed lately through the extension of palliative funding to combat the impact of COVID-19 in the economy. This type of inflation is referred to as demand pull inflation. This reminds us of the argument by Governor Godwin Obaseki of Edo State that the Federal Government was printing more currency notes, which he cautioned could be damaging to the future prospects of the economy.
Although his caution was timely, the fact remained that at the material point in time, there were hardly any alternatives, if we must maintain a semblance of peace in the polity. Demand pull reminds one of the classic definitions of inflation, which describes inflation as a situation in which too much money is chasing available quantities of goods and services.
The other component, with regard to the cause of inflation, is cost push. This explains a situation whereby there are increases in the costs of factors of production, which are, in turn, passed on to the consumer through general increases in prices. The reality of the situation in Nigeria today is that there is no product or service that has not recently witnessed an increase in price and it is tough for a generality of the population. One of the major causative factors in this respect is the falling value of the exchange rate of the naira.
Despite the best efforts of the Central Bank in supporting the rate of exchange, it has been so difficult because of lack of productivity in the country, which got worse in the pandemic environment as the Central Bank of Nigeria remained the only supplier of foreign exchange in the economy.
Nigerians also have formed the habit of consuming what the country does not have the capacity to produce, which piles up demand pressure on foreign exchange. The fact that the country at this point in time has to import refined petroleum products, which makes a priority claim on available foreign exchange, imposed considerable demand pressure on the available supply of foreign exchange.
There is also food inflation, which is worsened by insurrection in parts of the country, particularly the food basket regions of the Middle Belt as farmers are not able to go to their farms. What are the solutions? There are no quick fixes in this connection except we can find the political courage to end subsidy on the petroleum products, which is very difficult as it remains a veritable hot potato to grapple with. The one saving grace is that Dangote Refinery is projected to commence operations in the first quarter of next year 2022. Such a development, no doubt, will ameliorate the nightmare in this regard.
The new kid on the block at the Economic and Financial Services Commission, Abdulrasheed Bawa, seems to have got off to a roaring start. Indications are that he hit the ground running, going by the humongous sums of money, which he recently reported that the agency has recovered in his short time at the helm. But he must guard against the syndrome of early and premature celebration of success, which tends to divert needed and focused attention if positive results are to be achieved in a sustainable manner.
Corruption in any economy distorts the incentive system as it encourages a get- rich-quick mentality. It also subverts the value system in the economy as it undermines the values of hard work and fosters a mindset of instant gratification. In the Nigerian situation, corruption piles up demand pressure on the exchange rate as most ill-gotten monies seek refuge in the US dollar. Also, while we are at it, we are reminded that the 2023 general elections are around the corner and very soon large sums of money will start making the rounds. It is common knowledge that dollars are the preferred means of exchange in this regard.
The reduction on the scale of insurrection in the country will help in this respect. The victory recorded by our military against killer bandits who abducted pupils of a government owned secondary school I Kebbi State and the reversal of the abduction albeit at considerable loss of lives also comes quite handy. If we can make more progress of this nature that could impact positively as farmers return to their farms, thereby giving some respite to rising food prices as supplies improve, there is no doubt that the rate of inflation will be positively impacted in an overall improved corporate governance environment with improved infrastructure availability to enhance productivity. For a long time, the monetary authorities maintained a target of inflation rate, which is a single digit in the range of six to nine percent. We must work hard to achieve this target. It will give delayed respite to our impoverished population. But achieving this target will most certainly not be a walk in the park; it will demand sustained and focused efforts on the part of all stakeholders.
•Dr Chizea is an Economist and Chief Executive Officer, BIC Consultancy Services.
