CBN’s new inflation war, by Jerry Uwah

The tacticians in the antiinflation war room of the Central Bank of Nigeria (CBN) might have finally discovered a rather obscure factor behind Nigeria’s rampaging double digit inflation rate.
Nigeria is probably the only economy of its size in the whole globe that has ignored a debilitating scarcity of lower denomination currencies for decades.
The crisis dates back to the 1990s when an acute scarcity of coins hit the economy as inflation gradually stripped coined, lower denomination currencies like 5kobo, 10kobo, 50kobo and eventually N1 of their purchasing powers.
There was a time when 50kobo and N1 were in currency notes.
Unfortunately, as inflation reduced them to high velocity medium of transaction and escalated the cost of producing them as the notes wear out rapidly, the CBN decided to coin them.
The problem of the lower denomination currencies was just beginning.
Inflationary attacks on their purchasing power persisted even as they metamorphosed into coins.
That attack exposed them to a new set of enemies: jewelry makers.
With persistent attack by inflation, the purchasing powers of the newly coined lower denomination currencies suddenly dropped below their intrinsic value thus making them attractive to jewelry makers who melted them for use in making ear rings.
The attack of the jewelry makers created an acute scarcity of coins that stripped the economy of lower denomination currencies.
The CBN responded to the jewelry makers’ sabotage by minting coins that could not be melted in local foundries.
The coins were so heavy that they became a burden to users who responded by abandoning the coins thus forcing banks to stop circulating them.
With inflation still on rampage, the CBN had at a certain point toyed with the idea of coining N5, N10 and N20 denominations to reduce the cost of printing the paper money which was fading fast due to rapid use.
An acute scarcity of the lower denomination of the currencies occurred when the apex bank dumped the plan to coin them.
Last week, the CBN said it had resumed direct supply of N5, N10, N20, N50, N100 and N200 notes to merchants, shopping malls, stores, supermarkets, toll gates, market men and women.
The apex bank said the disbursement which started in Abuja has been extended to Lagos, Kano, Enugu, Onitsha, Ibadan, Yola, Gombe and Katsina.
Industry sources contend that the scarcity of those vital currency denominations was engendered by the high cost of printing them as frequent transaction in them coupled with abuse of the currencies drastically reduced their lifespan.
The CBN’s decision to step up the volume of lower denominations in circulation is apparently informed by the inflationary effect of their scarcity.
Besides the incessant quarrels between sellers and buyers of various goods and services over lack of N5, N10, N20 and N50 change during transactions, scarcity of the lower denomination currencies has fueled inflation.
The marketing manager of a leading soft drink company in Nigeria once lamented that there was an instance when his company decided to increase the price of its products by N1 but could not do so because of lack of lower denominations of the currency.
He said the company later decided to increase the price by N5 because that was the most popular denomination in circulation.
If the apex bank succeeds in stepping up the supply of the lower denominations, it would have succeeded in quelling the incessant quarrel among traders and their numerous customers over change during transactions.
However, the fight against inflation might just have started.
The federal government has been locked in grueling negotiations with labour unions over the thorny issue of minimum wage.
The unions want a “living wage” that would compensate for the sharp reduction of purchasing power of the naira since the CBN introduced its flexible exchange rate that plummeted the official exchange rate of the naira from N199 to N305 to the dollar in the middle of 2016.
The labour unions want a minimum wage of N66,000, up from the current N18,000 which was negotiated almost a decade ago.
The old minimum wage can only buy a bag of rice at the moment.
There are strong indications that the federal government might grudgingly push minimum wage above N30,000 in a bid to calm frayed nerves.
As workers anticipate a new minimum wage which might be announced this month, the tacticians in the CBN anti-inflation war room are panicking over a fresh wave of inflation that the new minimum wage would almost certainly unleash on the economy.
The new minimum wage could not have come at a more turbulent period for the antiinflation warriors.
Campaign for the 2019 general elections would kick in next month in earnest.
Nigerian politicians who know no limits on campaign spending would unleash huge sum into the economy during the campaigns.
Economy watchers are worried that an odd combination of minimum wage hike and election-year naira rain would dwarf whatever gains could be wrestled from the increase in the quantity of lower denomination currencies in circulation.
Given the thick cloud in the currency horizon, CBN’s projection that inflation would soon drop to single digit might be just too ambitious.

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