Nigerian Economy: The Blind Leading The Blind

By Henry Boyo

A seemingly responsible fiscal plan will become unimplementable, in the modern era, if the underlying monetary indices are out of sync with budget projections. Conversely, the stubborn sustenance of appropriate monetary benchmarks for inflation, cost of funds and exchange rate may still rescue the performance of an otherwise bad budget.

*Buhari 

 Buhari For example, if salaries and other incomes double or triple summarily, as happened during the Udoji salary awards of the 70’s, prices will spiral beyond the comfort level of consumers, as the liberal Naira supply chase the relatively modest output of goods and services on offer. Evidently, if inflation rate for example, approaches 20%, as in our present predicament, then we would all have lost a fifth of the purchasing power of our salaries and incomes.   

The dwindling purchasing power caused by inflation will invariably erode consumer demand for goods and services, and also constrain domestic industrial output, while further investment decisions will ultimately be kept on hold. Thus, in addition to a significant loss in real income values and deepening social poverty, an uncontrolled inflationary spiral will severely challenge the implementation of any fiscal plan that does not accommodate the prevailing rate of inflation; for example, the clearly recklessly ambitious 2016 N6tn budget, has become difficult to implement because of reduced revenue and significant Naira devaluation that has increased local production cost and further spurred inflation closer to 20%.

 For the above reasons, Central Banks, in successful economies everywhere, endeavor to sustain strategies that will keep money supply at an equilibrium level that will not push inflation rate beyond say 3-4%, so as to conserve price stability. Similarly, if foreign exchange is in short supply and auctioned in a market where Naira supply is constantly in excess, the local currency will, invariably depreciate in value, and also make all imports (including industrial raw materials) correspondingly more expensive. Furthermore, the competitiveness of local enterprise will become even more seriously challenged, if CBN’s MPC decides to counter inflationary pressures by increasing the rates at which commercial banks borrow from the CBN to as high as 14-16% as per their recent position in July 2016.

The preceding narrative hopefully explains the need for best practice management of money supply to avert the disenabling and distortional consequences of spiraling inflation in the economy. Clearly, horrendous inflation rates above 20% will seriously challenge any attempt to diversify any economy or foster inclusive economic growth. Indeed, if the inflation rate remains untamed, the Naira’s purchasing power will become seriously diminished and the N1000 note may ultimately be worth less than a dollar. Price stability is threatened and the economy will invariably underperform whenever the CBN readily admits its unending engagement in a very costly battle against perceived systemic surplus Naira.

So the critical questions should therefore be, what causes the evidently systemic excess Naira liquidity and why is CBN losing the battle to wrestle inflation to best practice rates below, say 4% and protect our incomes and industries. Naira supply will obviously increase if government continuously prints more Naira or borrows heavily without caution to fund its budget, as clearly demonstrated in the 2016 budget structure. Furthermore, Naira supply also increases inordinately, whenever government’s forex receipts are directly substituted with fresh Naira supply as allocations, while CBN keeps and auctions the dollars. Fortunately, the CBN also has the option to modulate money supply by establishing appropriate cash levels which banks must retain in relation to their assets.