Inflation, Nigerians And The CBN: A Wrong Prescription.

HARUNA Y. SA’EED.

Prices have continued to rise and our ability to pay for basic and essential items has continued to fall, so are our wellbeing and our prosperity. Investment for the future by firms and individual households are on the decline. Every person on the street accepts that we are faced with inflation. So, the Central Bank of Nigeria, CBN, cannot be wrong in saying same. It is also not wrong in deciding what to do when the economy is faced with uncertainty as to affect the value of our naira as a store of the overall value of wealth. This is a key role as enshrined in the Act establishing it. We know that every player in a soccer game is expected to work toward scoring goals for his team for its pleasure and that of the team’s fans/country. A disaster sets in where we have an “own goal”, where displeasure sets in. Similarly, if a doctor gives a wrong prescription or fails to diagnose correctly, cure will fail to be achieved or even fatality, death, may arise.

We doubt not of the fact that the proper functioning of money is extremely valuable in terms of promoting economic efficiency. Thus, the CBN tries to always regulate the supply of money so that it is sufficiently scarce that it can serve as a store of value. Sometimes however, it does so forgetting that money must, yet be, sufficiently abundant that there is enough for it to service all the desired transactions. Therefore, the banking sector, the CBN system tries to regulate, must be sufficiently robust and stable. It must provide, (and be seen to be doing so) proper incentives for lending to go to viable and plausible projects, rather than wildly risky ones.

The CBN might have, or obviously, looked at the situation as resultant of cash supply, whether from the banking system or whichever source a control of the banking sector can also stem. As a cure, therefore, the CBN raised its rate from 12% to 14%. However, this prescription, we believe, is wrong. If such a prescription has any effect on our financial system, even though Gen. Ibrahim Babangida, the then President, once said that our economy has defied all economic principles, will only worsen our travails.

The source of the inflation killing us today is not money supply. It is not also prosperity. It is recession, as we see with the IMF’s forecast reversal from a positive to a negative (-1.8%) growth.

There seems to be consensus on the real causes of the current inflation, at least outside the CBN. The foreign exchange has seen changes within this period more than ever, in both official under the CBN and in the private markets; Banks and Bureau de change. The dollar has moved from N196 and N230 to about N282 and N413 respectively. With our near total dependence on imported goods, the translation in the rise in their prices is obvious. The pump price of petrol has moved from N86 to a cap of N145. Transportation of persons and goods has to absorb this through their prices. Prices for services of, even, business centres and barber shops saw rises. What we pay for electricity also moved by about 85%, affecting everything on its way. Added to this, capacity utilization in our remaining factories shrunk affecting quality supplied to the market. Again, the positive control of our boarders against smuggling meant fewer good across the border translating into higher prices to cover drop in quantity and increased risk. So, a cocktail of these factors have come together to raise our inflation level and not money supply.

The government, right from the campaign, has made it very clear that a priority would be placed in getting cost of borrowing down, to a single digit. This, it is believed, will bring the cost of doing business and owning assets down. On the side of the banks, this will also stem the incidence of default and bad debts, thus strengthening their balance sheets and confidence in the financial institution. The economy is in recession and cash strapped. The Minister of budget and planning pledged that, with what the government has planned to do, the economy will come out of the recession by the year end. This is saying that what is contained in the budget, will, if adequately implemented, give adequate injection into the economy as to stimulate it to come to life. Therefore, stimulation is another key objective of government now. To date, what we see are only advertisements for the expansion spending. When the jobs are eventually rolled out, spending toward execution will see money changing hands, enhancing both demand and supply – leading to increased production and growth. We can then expect a resultant inflation as a result of this, as growth comes with some level of affluence. Even then, the least the CBN should do is to take action that limits availability of loanable fund. Further contraction of the financial system will further worsen the already bad liquidity contraction situation. The focus of government, and indeed, the CBN is, in the overall, and should be, to loosen the belt for people to take in air freely, or at least more comfortably.

When Monetary Policy Committee (MPC) at its 251st sitting, and the CBN announced the increase of the benchmark interest from 12 to 14 percent, the governor said it was part of the measure to attract foreign capital and check headline inflation. However, it is doubtful if any of the two objectives can be met. Foreign capital is attracted to, all things being equal, profitable environment, while inflation controls are only effective if they attack the root cause of the inflation. Interest rate measures are aimed at controlling money supply – which we have seen earlier as not the cause of this inflation. Rather, we see possibility of it negatively pushing the economy in a number of ways. One such is shifting the objective of the Government in bringing the lending rate further away from the desired single digit to a likely region of 27% – 28%. This will surely bring more hardship to people and organizations already liable to banks – the practice of banks being to adjust rate without recourse to borrowers. Business will hardly cope with additional cost thus, worsening their profitability. Poor income and balance sheet affect stock price. Thus, this action will have a weakening effect on foreigners’ interest in Nigerian businesses. New loans will be less attractive (in line with the objective of the policy), thereby killing, weakening expansion and growth. Inversely, the drop in production with rising demand may push the inflation further up.

Second, as a consequence to the falling activity above, the already bad unemployment situation may further worsen as firms disengage staff while at the same time enjoying high prices for small quantity produced.

Third, jobs or contracts already executed with borrowed funds and not paid for may turn out to be unprofitable leading to possible defaults and bad debts. The spread allowable for jobs is usually around 30% and often not paid for over a period of one year. With interest compounding monthly, the final cost is better only imagined.


– Sa’eed, former Accountant General of Kaduna State and the Pioneer ES, NEITI, wrote from Kaduna
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