Wednesday, May 30, 2012
INFLATION HISTORY IN NIGERIA, IMPENDING REMOVAL OF CBN AUTONOMY, AND OTHER ISSUES
It seem like efforts to bring Nigerian inflation rate to a single digit are proven to be in vain, despite numerous promises by the Central bank to achieve that within a target period. At the beginning of last year CBN promised that by 2012 it will 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 higher rate 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? Does the Central bank lost it monetary independence or does it do 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 has never happen. Right from the budgetary statement, the federal government contradicts itself with it so called mantra about fighting inflation, but inflation is every where in the budget.
The history of inflation in Nigeria is full of up and down, for example, in the middle of 1970s when there was an oil boom in the economy the rate of inflation goes out of the way and the military government of that time did not help matters with it inflationary policies such as the Udoji awards, that unnecessarily put money in the pockets of civil servants. The short span government of Buhari tried to bring the rate of inflation down after the excesses of civilian administration of Shagari, but the introduction of structural adjustment program (SAP) by Babangida, despite it much popularized potential benefits left the macroeconomic environment highly destabilizing. 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 his poor budgetary discipline did not help matters. Corruption and death of infrastructures throughout his period have seriously undermined efforts by some few of his cabinet members to restore macroeconomic stability. One noticeable weakness of the current regime of Jonathan is it in ability to maintain fiscal discipline and bring down the current increase in national debt. Already the much higher resort to domestic borrowing by this regime has help in crowding out private sector borrowing and makes the cost of borrowing higher due the increased in the interest rate in the economy. This year budget is bigger in the history of this country and most of the revenue for financing the budget comes through borrowing further putting pressure on the inflation rate. The regime has made this year budget to look like a budget of a country in a war, what you see during the second world war when Keynesian expansionary policies were adopted by European governments, and as a result 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 from the IMF and the immediate past governor of the apex bank, Charles Soludo, warning that doing so will affect the bank ability to perform it monetary functions and seriously affect the performance of the economy. One wonders 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 just as they like. Because of the independence of the apex bank both the executive and legislative arm 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 as back by law. The history of central bank monetary independence did not start with Nigeria, it started elsewhere when the rate of inflation seem uncontrollable and politician continued to temper 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 should 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 demands on them. If they are envious of Sanusi high highness and self worth, there are many ways of dealing with that, for one they can wait until his tenure has expired, just as Soludo found out later when his own expired. The important position held by apex bank governors and how they are respected in society is not only 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 which has help to spur private investments, because investors where able to count on relatively constant prices and interest rate. As the authors of World Bank’s, 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 sacrosanctity of maintaining low inflation rate the better for the economy prospect of making it to the league of 20 largest economies in the world. Policies such as that of run away expenditures will only make matters worst likewise continuing build up of debt. Though, the financial sector of the economy has achieved some level of recovery, and the recovery under way in the Nigerian stock market is moving albeit slowly, much more is needed to be done in order to usher in high rate of foreign direct investment (FDI). The rumor 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; for beginning, 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 wastage of any kind.
The East Asian Miracle: Economic Growth and Public policy, the World Bank, 1993