People & Money

Aladdins, genies, and policy-making.

Worse still, the policy environment in which all of this is taking place is not reassuring either.

Alas, increasingly, domestic policy making has floated like the fabled lamp into the hands of would-be Aladdins. And these latter are gleefully rubbing away at the lamp, as did the fictional character. Persuaded that as was the case with him, the famous genie will come and wish our many troubles away.

The headline inflation rate in June confirmed what most Nigerians have known for a while now. The cost of living in the country has risen aggressively so far in 2022. Year-on-year, the headline inflation rate was up 18.60 per cent in June. Just a month ago, it was up by 17.71 per cent. You do not have to be a statistician to know that the burden of rising prices falls disproportionately on the poor. Anecdotal evidence abounds of hardworking neighbours literally beggared by prevailing economic conditions. The inflation effect is, again, largely because the poor spend a disproportionately large amount of their income on food items than their richer brethren do. This difference in the component of shopping trolleys across income groups is also a reason why inflation perceptions differ across the economy. Significantly, the food index, which was up 19.50 per cent in May, reached 20.60 per cent in June.

Also Read: Nigeria’s inflation problem and the ‘Gbatueyos’ at the CBN

Our policy makers ought to lie awake at night exercised by how the “poor and vulnerable” are coping with current economic conditions, and what near-term options lie to them. The legion of young able-bodied Nigerians loitering our streets and highways is one outcome. Is worsening insecurity another? Governments at the three tiers should worry about this point too, that more than two-thirds of our compatriots make do with less than US$2 every day, and that the official unemployment rate is at its highest in recent times. In these conditions, the productivity improvements that the economy needs just will not happen.

Back out the food component from the basket of goods with which the inflation numbers are worked out, and worry looms large. The core inflation measure rose from 14.90 per cent year-on-year in May to 15.75 per cent in June. Clear evidence of general price pressures across the different sectors of the economy bely the tendency to seek exogenous explanations (COVID-19, Russia’s invasion of Ukraine, etc.) for what is self-evidently an idiosyncratic problem.

If, therefore, one were to read Nigeria’s central bank’s inflation target, of 6-9 per cent, against the current level of inflation, the temptation is to assume that the central bank will need to pursue aggressive increases in its benchmark rate over the next 12 months, if we are to herd the current domestic price trajectory in the direction of the central bank’s inflation target.

If inflation was a worry in June, optimists would be forgiven for looking for signs of a tapering, as global prices begin to soften on fears of a recession induced by less accommodating monetary policies in the world’s leading economies. More so, with the rate-setting committee of the Central Bank of Nigeria (CBN) having seemingly pledged to do everything necessary, now, to rein rising prices in. However, the price momentum last month did not offer any such reassurance. Month-on-month prices across the country rose by 1.82 per cent in June, having risen by 1.78 per cent in May.

Also Read: How Inflation Makes Poor Nigerians Poorer

Worse still, the policy environment in which all of this is taking place is not reassuring either. In those economies where the monetary authorities have responded to price pressures, including in places like Brazil, where the response anticipated the effect on global financial portfolios of increases in rates in the U.S., there are clear inflation targets: 2 per cent in the U.S. and the U.K., below 2 per cent in the euro area. For these economies, these targets are the inflation rates at which the respective economies perform (output, unemployment, etc.) optimally. The difference, therefore, between where inflation is at any point in time and this target determines both the nature and intensity of monetary policy responses. On the other hand, understanding this process means that the markets can anticipate policy responses, and participants arrange their affairs accordingly.

If, therefore, one were to read Nigeria’s central bank’s inflation target, of 6-9 per cent, against the current level of inflation, the temptation is to assume that the central bank will need to pursue aggressive increases in its benchmark rate over the next 12 months, if we are to herd the current domestic price trajectory in the direction of the central bank’s inflation target. Except that as with most things Nigerian, the central bank’s inflation target is the kind of result you get when a Nigerian leader, beached on a faraway island, encounters a genie offering him three wishes. Tales from the Arabian Nights aside, Nigeria is not a low inflation economy. The baksheesh economy, the slow motion criminal justice system, and the decrepit infrastructure base all raise business costs economy-wide.

…there is far less distance between the rate that policy makers should target for inflation and where the inflation rate currently is, than there is between the central bank’s current target and the pace at which domestic prices are rising.

I have not run into much domestic research on the topic. But a friend who is competent to do such research (and has), estimates the rate of inflation that balances the economy’s growth needs with “full” employment at around 12 per cent. In other words, there is far less distance between the rate that policy makers should target for inflation and where the inflation rate currently is, than there is between the central bank’s current target and the pace at which domestic prices are rising.

Also Read: US January Inflation Rises to The Highest Level Since 1982

Small consolation, this. All it does is reinforce the conviction that there is a huge gap in the outcomes from a fact-based process and those from a process based on wish-fulfilment. Alas, increasingly, domestic policy making has floated like the fabled lamp into the hands of would-be Aladdins. And these latter are gleefully rubbing away at the lamp, as did the fictional character. Persuaded that as was the case with him, the famous genie will come and wish our many troubles away.

Related Articles

Back to top button
Arbiterz

Subscribe to our newsletter!

newsletter

Stay up to date with our latest news and articles.
We promise not to spam you!

You have successfully subscribed to our newsletter

There was an error while trying to send your request. Please try again.

Arbiterz will use the information you provide on this form to be in touch with you and to provide updates and marketing.