Nigeria’s economy is something of an enigma. It is contracting precipitously. That suggests that demand is low in the face of consumers’ dwindling disposable income. That however is the truth. Ironically, the other truth is that inflation rate is surging even as consumers purchasing power wanes and pushes the economy perilously close to recession. Nigeria’s inflation rate is in a slow but steady climb and there are fears that it might hit 15 per cent before the year runs out. Inflation and recession are not known to be friendly bed-fellows. They normally move in opposite directions. But Nigeria’s economy is known for throwing up strange behaviours because its managers are known for their disdain for conventional economic solutions.
The Central Bank of Nigeria (CBN) is worried about the odd combination of surging inflation and impending recession. That economic enigma threw the monetary policy committee (MPC) of the CBN into dilemma during its meeting a forthnight ago. Everybody in the committee knows that the cheapest way to push an economy out of impending recession is to stimulate growth by expanding liquidity and cutting the cost of funds to encourage investors to borrow, invest and create jobs to stimulate demand.
However, that is text book economics which men like Campbell R. McConnell are known for. Unfortunately, the managers of Nigeria’s economy have to device ways of stimulating growth without increasing liquidity because any such move would push inflation through the roofs. That is precisely what the MPC did. The committee reduced the cost of funds with the hope that it would encourage investors to raise loans and invest in projects that would create jobs and push the economy out of the imminent recession.
The committee however drew the breaks on money supply by holding down the cash reserve ratio (CRR) and liquidity ratio at 27.5 per cent and 30 per cent respectively, while it lowered the monetary policy rate (MPR), the rate at which the apex bank lends to banks, by 100 basis points to 11.5 per cent.
With that strange combination, the CBN would maintain a firm grip on a chunk of deposits mobilized by banks thus restraining the amount of risk assets to be created by banks as it expects the banks to reduce the cost of funds to fund users. Members of the PMC expect the strange combination to achieve its multiple goals of taming inflation and triggering economic growth at the same time.
There are fears that the MPC is gambling with MPR. The cut in MPR might not reduce the cost of funds, but might be a disincentive for savings as MPR drops below inflation rate. No one is sure of the outcome.
Nigeria’s economy is difficult to manage because the trending inflation rocking it is not caused by demand in a situation where huge sums of money is chasing few goods in the market. It is caused by structural defects that push up production cost phenomenally.
The surging food inflation is a clear case in point. Nigeria’s agricultural sector grew by 2.5 per cent during the COVID-19 lockdown in the second quarter of 2020. That suggests a bumper harvest that could drive down prices of food items.
Ironically the reverse was the case in Nigeria. While headline inflation is in a slow but steady growth from 12.8 per cent in July to 13.22 per cent in August, food inflation is surging. It stood menacingly at 16 per cent in a month when new yam and other food items flooded the market.
The new yam is everywhere in the market as the growth in agricultural sector in the second quarter suggested, but very few can afford them. Nigeria’s 102 million people toiling below poverty line dare not price yam in the market at the moment.
A medium size tuber of yam carries the dreadful price tag of N1, 500, up from N700 in 2019. Nigerian rice is no longer affordable.
The price has surged from N17, 000 in May 2020 to N28, 000 now.
The cheapest imported rice now trades for something close to N35, 000 for the 50kg bag. Even garri is no longer for the poor. A 50kg bag of grade-one garri now sells for N17, 000, up from N8, 000 in 2019.
The escalation in the price of maize has thrown Nigeria’s fledgling poultry industry into chaos. The price of a bag of high quality maize suddenly jumped from N8, 000 to N25, 000.
When poultry farmers raised alarm over the sudden price hike the federal government responded by ordering the release of thousands of tons of maize from its strategic reserves to contain the crisis.
Ironically what was released from the federal strategic grains reserves cannot feed the chickens in the industry for a month. Nigeria is the world’s 10th largest producer of maize. It produces 10.2 million tons of maize per annum. However, it consumes 18 million tons yearly.
The deficit of 7.8 million tons of maize is usually accounted for through imports especially from the Unites States of America which produces 360 million tons of maize annually. No one can legally import maize now.
Nigeria’s economy is facing the odd combination of surging inflation and impending recession because the CBN has reached its limits in the strange trend of foisting monetary policy solutions on fiscal problems.
The rising prices of food items in the midst of a bumper harvest is caused by the rising cost of production in the fields and the high cost of evacuating food items from Nigeria’s inaccessible rural communities to the markets in rural slums.
The roads are deplorable where they exist at all. In some instances, they are just not there. Transporters who take the risk of hauling food items from such inaccessible communities charge fares higher than the farm price of the items.
The tumbling value of the naira has tripled the cost of maintaining the rickety vehicles that risk the journey to the rurals for evacuation of food items. The higher cost of maintenance is transferred to consumers by way of higher price tags on the food items.
Nigeria’s worsening security crisis is another factor escalating the cost of production and fueling both food and headline inflation. With armed robbery, banditry and kidnapping reigning supreme and seemingly intractable, the extra security provided to business executives is priced and added to the cost of goods and services provided by different companies. Consumers grudgingly pay for them as they have no options. That ironically is at the root of the surging inflation.
The CBN expects headline inflation to climb close to 15 per cent by the end of 2020. If that happens, food inflation might defy the expected end-of-year bumper harvest and stand menacingly at 20 per cent.
Inflation would continue to rise even if the CBN drops MPR to 0.5 per cent. What is needed is fiscal, not monetary policy solution.