There is no headroom for further monetary policy treatment of Nigeria’s rising inflation, the Central Bank of Nigeria’s Monetary Policy Committee [MPC] declared at its last meeting in January 2020. In the same month, inflation climbed for the fifth month running and advanced by the highest rate in 21 months.
The committee’s declaration and the latest inflation reading indicate that the financial experts have exhausted all known monetary cure for inflation and that Nigeria’s inflation, like the deadly corona virus, has no cure for now.
At 12.13% mark in January, inflation has crossed the lethal mark of 12 percent, which the CBN said cannot support output growth in the economy, based on its empirical evidence. It is a further growth above the bank’s single digit inflation rate target range of 6–9 percent.
The committee therefore referred the case to the fiscal authorities, recommending speedy administration of structural solutions as the only possible remedy to check inflation. By that, the CBN seems to wash its hands off one of its key functions of maintaining price stability and has pushed the problem to the political corridors where the burning issue is sure to hang in a voicemail.
The committee is asking the fiscal authorities to address speedily issues that have remained intractable for years and decades in order to prevent rising inflation from snuffing life out of the economy. MPC seems to forget that the CBN is part of the structural measures through its intervention in agricultural production – as food shortages are the main driver of price increases.
The committee labeled the issues as “legacy structural impediments giving rise to upward-trending price developments.” The impediments, according to the committee, are infrastructure deficit and the long-standing clashes between herdsmen and farmers. It said these issues are constraining domestic production and contributing substantially to the rise in food inflation.
The committee is seen to be asking the fiscal authorities to pass these camel-sized problems through the eye of a needle in no time. The fiscal authorities didn’t fill the gap as demanded as a matter of emergency in January, neither are they responding now nor have indicated any intention whatsoever to do something.
The emerging scenario is understood to mean that the policy making house has lost capacity and run out of ideas. Neither the monetary nor the fiscal authorities presently have what it takes to get ravaging inflation under control. Inflation now has a leeway to continue its rampage.
Consumer prices are rising generally in the economy as incomes are lost or are static and poverty is on the rise. Rising inflation rate means the purchasing power of consumers to buy goods and services keeps deteriorating, the ability of producers to sell weakens, another layer of workers are sent home and the downward multiplier chain continues to gain speed.
Nigeria’s inflation rate rose from the 17-month high in November at 11.85 percent to 11.98 percent in December 2019 and further to 12.13 percent in January 2020 – the fastest growth recorded since May 2018. It is a sustained upward climb for the fifth consecutive month. Rising food prices, of course, is the main driving force of inflation with increases recorded in all the divisions of consumptions that yield the headline index.
Food insecurity has been a long standing problem of the nation even when farmers had no serious clashes with herdsmen. The kids’ glove treatment of the bloody clashes between farmers and herdsmen seems to suggest that the effect of the crisis on food supply was never given a serious thought. Yam bans in Benue State that used to stretch over several kilometers have disappeared. If nobody in the policy making corridors foresaw this disaster coming, then it is apparent that somebody is sleeping on duty.
The MPC affirms that the increase in the food component reflects largely the impact of the continued insurgency in some food producing states. This informed its call on the federal government “to relentlessly seek innovative ways of addressing security challenges across the country in order to boost aggregate food supply”.
Yet it underplayed the seriousness of its call by its stance that the upward trend in prices was only a short-term development. Inflation may not rise as rapidly as it does in off harvest season but that isn’t seen to the issue in question in a situation where inflation has crossed into the territory where it has become a hindrance to domestic production and consumption.
The CBN is expected to pursue relentlessly policies that lead to general price declines rather than be comforted by its anticipated decline in the rate of price increases in the medium-term. Any rise in the price level places a new question mark on the bank’s monetary policy stance – a crash in money market rates that discourages investing and a hike in lending rates that discourages borrowing to produce.
Further clouding the inflation outlook is border closure, which isn’t yielding the results the CBN anticipated before it recommended it. The basis for the border closure was that Nigeria had developed sufficient local rice production capacity and that all that was needed was to force a switch over to consumption of local rice. This has turned out to be a fiction – turning the policy into an inflationary fire.
MPC glossed over this policy error of letting border closure spur an increase in the domestic price level but went defensive to talk of opportunity to ramp up production of domestic substitutes. This means that border closure is positioned as the policy instrument to build food production capacity locally rather than stepping up consumption of what has already been produced. The pain of filling the supply gap in this way carries a label of unwarranted.
The problem is that someone recommended border closure on the basis of the rule of thumb without a study of the adequacy of local production capacity and the consequences of such a policy. The CBN’s development finance initiative in rice production was presumed to be capable of meeting the supply gap of the product in the country. The border closure has tested the efficacy of these claims and found it wanting.
Further concerns arise from recent reports that beneficiaries of the bank’s anchor borrowers fund aren’t repaying the input loans. This means that there is a breach in the established cycle through which the products are to reach the wholesale buyers.
Questions arise as to how are the farmers affected by the clash with herdsmen; what about crop failure for late supply of the inputs and so on. The many hurdles yet to cross in local food production do not align with the claim by the CBN governor that the impact of the border closure on inflation is temporary.
From the outcomes, it has become apparent that the decision to shut out food imports through the border closure was not taken on the basis of tested and proven internal capacity to meet local demand. The test of good policy making is how far it accomplishes desirable public objectives with minimum disruptive effects on society.