“Inflation destroys nations and societies as surely as invading armies do. Inflation is the parent of unemployment. It is the unseen robber of those who have saved. No policy which puts at risk the defeat of inflation—however great its short-term attraction—can be right.” Margaret Thatcher, October 10, 1980
Upon gaining power in 1979, the Margaret Thatcher administration made the defeat of inflation in the UK its number one priority. The 1970s were a difficult time for Britain inflation-wise. Inflation, which peaked at 25 percent in 1975, was driven by increased wages, the oil price shock in 1973 and high public spending. Mrs Thatcher understood the damage the inflation did and was willing to do anything to stop it, even at the risk of increasing the country’s unemployment figures.
With Nigeria’s food inflation at 21.79 percent and headline inflation at 17.3 percent in February 2021, the CBN does not appear to be dealing with the issue of rising consumer prices with the urgency that it deserves. The headline index in February, according to the NBS, was at a four-year high, while the food sub-index – which accounts for more than half the inflation basket – was the highest in more than 12 years.
The consumer price situation is compounded by low-output growth and high unemployment. If all this persists, the country could add stagflation to its challenges.
Despite the CBN’s key mandate of ensuring monetary and price stability, one of the major inflationary pressures over the last few years has been the apex bank’s capital controls
Despite the CBN’s key mandate of ensuring monetary and price stability, one of the major inflationary pressures over the last few years has been the apex bank’s capital controls, which it imposed to conserve scarce dollars. Since 2015, the CBN has banned access to foreign exchange for the importation of an ever-growing list of items.
One problem we have in Nigeria is that we never do much by way of assessing the impact of policies. For example, President Buhari has now admitted the 15-month border closure measure was ineffective. What he did not say, but what most observers know, is that the border closure was a huge factor in the food price increases.
The CBN has tried to fund agricultural exploits in the country, through initiatives like the Anchor Borrowers Programme, but agricultural productivity in Nigeria remains low for a variety of reasons. Agriculture is undertaken by mostly smallholder farmers who lack the means to mechanise their activities. When there is drought or insufficient rainfall, farm output is affected due to lack of irrigation. Flooding in some parts of the country also leads to the destruction of crops.
A growing number of farmers have abandoned their farms due to rising insecurity caused by Boko Haram attacks and conflicts between farmers and pastoralists. As far back as six years ago, I spoke with farmers who had stopped going to their farms in Benue, as well as in neighbouring Nasarawa, because of attacks by herders. Last month, Benue’s Samuel Ortom said he was attacked by armed herders when he visited his farm.
Confirming the low-income status of the Nigerian economy, a study by SBM Intelligence showed that 63 percent of Nigerians spend 59 percent of their income on food alone. This scenario just highlights the enormous impact high food inflation has on the Nigerian population as the rising cost of food, which is the most basic essential, will impact on all other expenditure. At the state level, the February inflation data showed food inflation was highest in Kogi (30.47 percent), followed by Ebonyi (25.73 percent) and Sokoto (25.68 percent).
The IMF has called for a reform of the CBN’s monetary policy operational framework as a means of tackling inflation. Key among the Fund’s recommendations is for the CBN to curtail its financing of the government’s budget deficits. As the government’s revenue plunged in recent years, the CBN scaled up its Ways and Means facility (WMF) for funding government budgets. Fitch goes further than the IMF in its warning, saying the increase in the use of the WMF raises macro-stability risks and limits the CBN’s ability to control inflation.
The way out is in tax revenue, but to mobilise that effectively to fund its budgets, the government needs to create a stable macroeconomic environment for private enterprises to thrive and create jobs, and for businesses and workers to pay their taxes. But a country with 33.3 percent unemployment rate will struggle in terms of generating tax revenue. Its economic productivity will also be muted as the capacity of citizens to work, spend, save and invest is reduced. Just as important, the ability of the government to bring more people into the tax net will be severely impacted.
The time to stem the downward spiral of the Nigerian economy is long overdue. Following the end of the border closure, it’s also time for the president to end his support of the CBN’s capital controls and other anti-free-market policies. The government’s prime macroeconomic objectives – which will also help in defeating food inflation – should include pursuing economic growth that benefits all Nigerians, achieving food security by protecting farmers and promoting sustainable agricultural strategies, reducing poverty through more effective social investments, and prioritising human capital development. The country is in dire need of a restoration of public trust in government.
Nwanze is Lead Partner at SBM Intelligence
