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Wednesday, May 30, 2012


    It seems like efforts to bring inflation rate to a single digit by authorities are proven to be in vain. This is despite promises by the Central bank of Nigeria to achieve single digit within the target period. At the beginning of last year CBN promised that by 2012 it would be able to bring inflation rate to a single digit. Though, numerous factors can be pointed out as the culprit for this failure such as the January fuel price hike and huge liquidity injections into the economy by federal government, analyst tend to put aside the contribution of foreign exchange as insignificant. But, before I discuss that let revert back to the current inflationary condition in the economy. The current inflation rate is put at about 12.90% a much higher rate than what obtained at the same period last year. In an economy that grows at about 7% inflation rate of about 13% is not a sign that things are good. This indicate that profit and growth rate have to move at high momentum for investors to feel comfortable or the inflation rate has to come down, either way it looks like the Nigerian authorities are not ready for these scenarios as the contradictory government policies in the last five month has shown. Let compare inflation rate across emerging economies enjoying higher growth rate like Nigeria. Turkey 10.78%, South Africa 6.2%, China 3.4%, India 7.23%, Brazil 5.10%, and Indonesia 4.5%, all have lower inflation rate than Nigeria. The question is what goes wrong? Did Central bank lost it monetary independence or that it behaves as the politicians want it to do? The fact that election has come and gone with it inflationary spending gave hope that inflation is going to come down this year, but half way into the year that didn't happen. Right from the budget statement, federal government contradicts itself with its mantra about fighting inflation. But, inflation is every where in the budget. 

    History of inflation in Nigeria is filled with its own ups and downs. For example, in the middle of 1970s when there was an oil boom in the economy the rate of inflation went out of it way. The military government of that time did not help matters with its inflationary policies such as the Udoji awards that unnecessarily put money in the pockets of civil servants. The short spanned military government of Buhari tried to bring the rate of inflation down after the excesses of civilian administration of Shagari. But, the later introduction of structural adjustment program (SAP) by Babangida, despite it much popularized potential benefits left the macroeconomic environment destabilized. Despite the apparent economic benefits of return to democracy in 1999, the rate of inflation in much of this period has remained high, further undermining government efforts to entrench macroeconomic stability. The debt reduction policies of Obasanjo from 1999-2007 have to some extent help to reduce the hike in the inflation rate. But, Obasanjo's poor budgetary discipline did not help matters. Corruption and death of infrastructures throughout this period have seriously undermined efforts by few of his cabinet members to restore macroeconomic stability. One noticeable weakness of the present regime of Jonathan is it in ability to maintain fiscal discipline and bring down current increase in national debt. Already the habitual resort to domestic borrowing by this regime has help in crowding out private sector borrowing and makes cost of borrowing high due to the resulting increased in the interest rate in the economy. This year budget is the biggest in the history of this country. Most of the revenues for financing the budget comes through borrowing, further putting pressure on the inflation rate. Federal government has made this year budget look like budget of country in war. What you see during the second world war when Keynesian expansionary policies were adopted by European governments. Thus, inflation become uncontrollable. But, Nigeria is not in war. Therefore, this inflationary budget is not justifiable. 

   Currently, there is a motion in the national assembly whose objective is to cut the powers of the Central Bank and with it reduces it independence. Already, there are warnings coming from the IMF and the immediate past governor of the apex bank, Charles Soludo. They warned that removing CBN authonomy will affect the bank ability to perform it monetary functions and seriously affect the performance of the economy. One wonder what the national assembly want to achieve with this agenda. Are they envious of the central bank governor current independence, unlike other government institutions where the national assembly interfere with their functions as they like? Because of the independence of the apex bank both the executive and legislative arms of the government cannot unnecessarily summoned the apex bank governor and ask him why he does what he did. Unlike with say the chief of army staff or the inspector general of police, who does not enjoy such immunity. The history of central bank monetary independence did not start with Nigeria, it started elsewhere around the world when rate of inflation seem uncontrollable and politicians are tempering with it in order to achieve electoral victories. Today, most of the central banks in the world enjoyed independence in term of monetary policy implementation including the Federal reserve of the US and the Bank of England. My advice to the national assembly is that they shall leave the apex bank alone so that their personal interest and envy will not affect the longer term prospects of our great economy. No nation develop when it policy makers and others that matters cannot separate their personal feelings from what their professional ethics demand. If they are envious of Sanusi high highhandedness and aristocratic gestures, there are other ways of dealing with that. For start, they can wait until his tenure has expired, as Soludo found out later when his own tenure expired. The important position in government held by apex bank governors and how they are respected in society is not unique to Nigeria, the same is obtained in other countries of the world. 

    One of the clear lessons from the East Asian success stories was their abilities to bring inflation under control. This has help to spur private investments, as investors were able to count on relatively constant prices and interest rate. As the authors of World Bank THE EAST ASIAN MIRACLE observes, “low inflation is a corollary of fiscal prudence: East Asian governments never had to rely heavily on the inflation tax because their deficits were within financeable limits’.  Low inflation rate helps to keep the rate of interest low for these countries, thereby helping to spur rapid investments in the economies. Fiscal prudence and low inflation also help in controlling the movements in the foreign exchange rates in these countries in most of the period of their rapid growth. Uncertainty about the future of inflation and monetary authorities’ inability to fight it generally has negative effect on country’s macroeconomic stability. The earlier Jonathan administration learn to value the sanctity of maintaining low inflation the better for the economy prospect of making it to the league of 20 largest economies in the world. Policies such as run away expenditures only make matters worst, likewise continued build up of debt. Though, the financial sector of the economy has to some extent recovered, recovery in the Nigerian stock market is moving slowly. More need to be done in order to usher in high inflow of foreign direct investment (FDI). The rumored removal of the remaining subsidy on fuel will further increase the inflation level in the economy just like it happened during the last January increase. Nigerian authorities have a lot to learn from the Asian Tigers. First, let start with inflation control, is single digit inflation rate achievable this year? The answer to this depend on many factors not least of which is government commitment to fighting corruption in all it forms and reduction in wastages.

The East Asian Miracle: Economic Growth and Public policy, the World Bank, 1993