Tame This Inflation Threat
— Mar 20, 2016 4:26 am | Leave a comment
Recently, the National Bureau of Statistics (NBS), announced that consumer inflation rate rose to 11.4 per cent in February. Unlike the Central Bank of Nigeria (CBN) which envisioned that inflation would oscillate between six and an upper limit of nine per cent this year, NBS expects inflation to end the year at 10.6 per cent.
The indices are self-evident. With years of neglect of social infrastructure, general mismanagement of the economy, rising cost of fuel, absence of alternative sources of power and surplus Naira in circulation which weakened it against foreign currencies, it is clear that inflation will soar. Speculative currency dealings were a major cause of the current inflation as Naira lost as much as N90 to the dollar in February 11 alone.
NBS stated that about 176 basis points pushed inflation rate to a three-and-a-half year high. It is sad that growth rate did not enjoy a complementary rise. It slowed to 2.8 per cent last year, the weakest level since 1999 and down from 6.2 per cent in 2014. Food prices, which account for the bulk of the inflation basket, climbed by 11.3 per cent compared with 10.6 per cent the previous year. These are signs that the economy is getting out of control and dictate that drastic and serious interventions be made to stem the precipitous slide.
Now that crude prices have slumped more than two-thirds since $100 per barrel in mid-2014, Nigeria is exposed and our dollar reserves currently stand at a low $28 billion – $20 billion less than in April 2013. This is only enough for five months imports for a country heavily dependent on foreign goods. It is clear that the CBN’s pegging of the currency in the past year has failed to stem inflation. Lowering the benchmark interest rate by two percentage points to 11 per cent by policy makers in November to help support an economy hit by plunging oil prices also may not have worked well. It suggests that the CBN, in its next rate decision needs to factor in the debilitating realities of our current experiences.
While high inflation is bad because of its adverse effect on economic performance, we are not oblivious of the fact that zero inflation is equally harmful because it will lead to eventual stagnation of the economy since its presence at a mild level is needed for economic growth. The problem of inflation is not peculiar to Nigeria. It defies territorial delimitations. Nigerian policy makers only need to align with global best practices by tweaking the economy towards industrialisation and empowerment of small and medium scale businesses. We also need to consciously diversify to solid minerals, agriculture and discard penchant for imported goods and services.
Since the challenge of inflation also has embedded in it prospects for economic growth, fiscal discipline becomes a desideratum for public procurements and other expenditures. Instead of spending billions of naira in servicing debt, the government should “inflate away her debt”. America did the same during the Great Depression, Second World War and in the 1970s debilitating recession. There is no better time than now for government to tackle what could become the long-run effects of inflation by exploring the possible benefits of inflation and making efforts to reduce its rate to a single digit.
The indices are self-evident. With years of neglect of social infrastructure, general mismanagement of the economy, rising cost of fuel, absence of alternative sources of power and surplus Naira in circulation which weakened it against foreign currencies, it is clear that inflation will soar. Speculative currency dealings were a major cause of the current inflation as Naira lost as much as N90 to the dollar in February 11 alone.
NBS stated that about 176 basis points pushed inflation rate to a three-and-a-half year high. It is sad that growth rate did not enjoy a complementary rise. It slowed to 2.8 per cent last year, the weakest level since 1999 and down from 6.2 per cent in 2014. Food prices, which account for the bulk of the inflation basket, climbed by 11.3 per cent compared with 10.6 per cent the previous year. These are signs that the economy is getting out of control and dictate that drastic and serious interventions be made to stem the precipitous slide.
Now that crude prices have slumped more than two-thirds since $100 per barrel in mid-2014, Nigeria is exposed and our dollar reserves currently stand at a low $28 billion – $20 billion less than in April 2013. This is only enough for five months imports for a country heavily dependent on foreign goods. It is clear that the CBN’s pegging of the currency in the past year has failed to stem inflation. Lowering the benchmark interest rate by two percentage points to 11 per cent by policy makers in November to help support an economy hit by plunging oil prices also may not have worked well. It suggests that the CBN, in its next rate decision needs to factor in the debilitating realities of our current experiences.
While high inflation is bad because of its adverse effect on economic performance, we are not oblivious of the fact that zero inflation is equally harmful because it will lead to eventual stagnation of the economy since its presence at a mild level is needed for economic growth. The problem of inflation is not peculiar to Nigeria. It defies territorial delimitations. Nigerian policy makers only need to align with global best practices by tweaking the economy towards industrialisation and empowerment of small and medium scale businesses. We also need to consciously diversify to solid minerals, agriculture and discard penchant for imported goods and services.
Since the challenge of inflation also has embedded in it prospects for economic growth, fiscal discipline becomes a desideratum for public procurements and other expenditures. Instead of spending billions of naira in servicing debt, the government should “inflate away her debt”. America did the same during the Great Depression, Second World War and in the 1970s debilitating recession. There is no better time than now for government to tackle what could become the long-run effects of inflation by exploring the possible benefits of inflation and making efforts to reduce its rate to a single digit.
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