People & Money

Of Inflation and Government by Explanation

Facing the ill-conceived and poorly implemented policy prescriptions of the last 8 years

This unhappy state of the economy, according to the administration’s most recent attempts at making sense of the numbers, was not so much the result of anything the administration did or failed to do. According to the administration’s spokesperson, “Anybody who promotes this kind of thinking is telling the whole world that they either don’t know what is happening all over the world or they are not paying attention to the facts”.

Informed that one’s yard is filthy, the response, “But my neighbor’s yard is no better”, is a variant of the reasoning error also known as “deductive fallacy”. At its most basic, reasoning along this line comes to a false conclusion, even when it’s original premise is true. In other words, the process of the mental transition from a universal premise to the particular collapses on itself. As a way of keeping up with the Joneses, it is a useful ego-stoking process. After all, nothing more than appearances are involved here. But if the intention is to proceed to offer solutions to the problems they seek to address, deductive fallacies always fall way short of their targets.

Also Read: How Inflation Makes Poor Nigerians Poorer

As does the recent attempt by the Buhari administration to explain the relentless rise of the consumer price index. Since November 2021 when the National Bureau of Statistics reported the “consumer price index (CPI) which measures inflation” as having “increased by 15.40 percent (year-on-year)”, the index has risen every month to the 22.22% by which it rose last month. This followed an eight-month period when the index fell from 18.17% in March 2021, until it picked up in November that year. And before then, but for the 12 months ending in July 2018, the trajectory of domestic prices under the Buhari administration has been relentlessly northward.

This unhappy state of the economy, according to the administration’s most recent attempts at making sense of the numbers, was not so much the result of anything the administration did or failed to do. According to the administration’s spokesperson, “Anybody who promotes this kind of thinking is telling the whole world that they either don’t know what is happening all over the world or they are not paying attention to the facts”. And what may these facts be? If the administration is to be believed, “This stubbornly high inflation is a world-wide problem and no nation is immune to it since the global economic downturn triggered by the covid-19 pandemic”.

In those countries where price pressures emerged post-pandemic, the response has been typical ― central banks have hiked their benchmark interest rates. And those economies have seen related market rates ― including for government borrowing ― rise. Admittedly, rising yields on government debt have pushed the price of these instruments down, burdening the balance sheets of the banking sector…

Attractive as this equivalence argument is, even an administration as situationally unaware as the Buhari government is cannot ignore the fact that post-COVID-19, inflation drivers across the world have been as diverse as we have economies. In the United States of America, the stimulus cheques that were handed out to the public to help mitigate the fallout from the pandemic kept consumer spending far higher and for much longer than was good for the economy’s health. In consequence of supported consumer sentiments, labour markets have remained tight. Europe, on the other hand, has been buffeted by the pass through from Russia’s war against Ukraine to energy prices. Following its aggressive response to COVID-19 cases up until December, last year, China has not experienced the same pressure on incomes we saw in Europe and North America from rapidly rising prices.

Also Read: Nigerians feel the pinch as food prices continue to spiral. There aren’t easy solutions

In those countries where price pressures emerged post-pandemic, the response has been typical ― central banks have hiked their benchmark interest rates. And those economies have seen related market rates ― including for government borrowing ― rise. Admittedly, rising yields on government debt have pushed the price of these instruments down, burdening the balance sheets of the banking sector, and driving marginal banks to ruin. But by decreasing the banking sector’s reserves, tighter monetary conditions have also had the effect of cooling both domestic demand and investment. One reason why we are starting to see inflation drop off in those economies.

To be fair, the Central Bank of Nigeria (CBN) has aggressively pushed its monetary policy rate (MPR) up too. But we have not seen a corresponding dent on inflation. Remember that the CBN has a cap on how high interest rates on savings accounts can go ― currently not more than 30% of the MPR. Thus, irrespective of demand and supply conditions in the money market, the yield on a key tool in the management of domestic price movements is relatively inelastic. The CBN’s minimum cash reserve requirement of 37% has bank treasurers looking for investment boltholes to squirrel away deposits ― at below market-clearing rates most times ― rather than have the CBN sequester these away at zero yields.

Domestically, we’ve seen government policies worsen economic conditions ― including through elevated price pressures. The massive public spending that has gutted the treasury and inflated the public debt way beyond the domestic economy’s current ability to service it is especially significant, because it has not led to an increase in domestic productivity.

Add to this the collapse of the inter-bank market, and the one thing the Buhari administration has done is superintend over the implosion of the domestic monetary policy transfer mechanism. Little wonder that the CBN’s nominally aggressive tightening of monetary conditions has neither constrained consumption, nor held back what little investment drive that is left in the economy. And all of this before you add the CBN’s bellicose monetisation of the Federal Government’s fiscal deficit to the pool of original but unorthodox policies.

Domestically, we’ve seen government policies worsen economic conditions ― including through elevated price pressures. The massive public spending that has gutted the treasury and inflated the public debt way beyond the domestic economy’s current ability to service it is especially significant, because it has not led to an increase in domestic productivity. The cash constraint policy pursued with a vigour deserving of a nobler cause in the first quarter of the year, on the other hand, depressed productivity.

Also Read: Nigeria Close to Securing $1.5bn World Bank Loan – Finance Minister

Symptoms off the Nigerian economy may bear external similarities with those of other economies across the world, but none of these economies have suffered the ill-conceived and poorly implemented policy prescriptions that the Nigerian economy has been forced to swallow over the last eight years. Where the Buhari government’s narrative on the economy fails is that it seems to imagine itself a non-participant observer in the design, implementation, and consequences of those policies.

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