What Nigeria can really do to tame inflation, By ‘Tope Fasua
The main point of this article is to encourage everyone to have a more extensive perspective of inflation and for government officials to take a comprehensive and inclusive method to control the issue. Currently, it appears that only the financial strategy is being used out of all the available options, and it's evident that this isn't working.
I started writing this article but put it on hold for a while to focus on other things. Recently, I read an interesting piece by Zachary Taylor in The New Yorker called "What if We Are Thinking About Inflation All Wrong?” It gave me some new ideas and confirmed some of my earlier thoughts about the need to broaden our approach to managing inflation. In Nigeria, we've only been using the traditional method of increasing interest rates to manage inflation, but it seems like it hasn't been working well. Despite a 5.5% increase in the Monetary Policy Rates in the last year, inflation has steadily risen to 22.22%. It looks like we need to try some new strategies.
The blog post I am discussing was written about the work of economist Isabella Weber. During the height of the Omicron/COVID-19 pandemic in 2021, Weber wrote an article in The Guardian suggesting that countries might want to implement some type of strategic price control, similar to how they did during and after World War II. Weber argued that the conditions during the pandemic were comparable to those during a world war. Academics did not appreciate Weber's article due to her heavy reliance on history and her lack of consideration for the current economic climate. Nobel laureate Paul Kruger described her article as "truly stupid," while others criticized it for being poorly grounded in reality. Weber highlighted the high demand for goods, increased corporate profits, and production bottlenecks that exist when the world is trying to recover from a global crisis, which occurred both after WWII and during the COVID pandemic. In my opinion, African countries like Nigeria are in a similar position of instability, and should not be prescribed the same solutions given to more developed and stable Western countries. For instance, a widespread belief that tweaking interest rates could reduce inflation has not been successful.
During a certain period in America, the Office of Price Administration prevented companies from raising their prices beyond a certain level to gain a better perspective. Companies that did increase their prices were at risk of being prosecuted or worse. Montgomery Ward, a department store chain, had its chairman, Sewell Avery, removed by the National Guard for his refusal to comply. The attempt to manage inflation through interest rates had failed during this time resulting in increased unemployment, decreased productivity, and a shortage of equipment/supplies for the military. Instead of causing damage to companies, the price caps motivated them to increase production to meet their profit goals. Consequently, they hired more employees which helped to keep the economy strong during the remainder of the war. America's inflation during wartime remained stable at 2%, compared to World War I when it escalated out of control.
According to Weber, post-COVID, many important industries are still implementing the same strategy. For example, the European Union is controlling the cost of natural gas, the Biden Administration is regulating petrol prices, and the G-7 is enforcing a limit on the cost of petroleum products produced in Russia to support Ukraine. Zachary Taylor's article suggests that inflation in the western world is slowing down, and the labour market is the strongest it has been in 25 years. The European Union has also introduced a price cap on natural gas for the entire Eurozone, while the G-7 implemented a global price limit on Russian oil in an effort to maintain energy supplies to developing nations and prevent the Russian government from profiting too much. This has led to a 40% decrease in Russian oil revenues in the first few months of 2023.
Weber's investigation was focused on what she named "sellers' inflation". According to her study, even though Trump had spent 4 trillion dollars on COVID-19 and Biden had added another trillion, the majority of the inflationary pressure resulted from the sharp increase in the prices of certain specific products and commodities such as natural gas. As a consequence of the prolonged chip scarcity, the year 2022 witnessed the lowest new car sales in over ten years. Nevertheless, car manufacturers managed to increase their earnings, and they were the highest in six years. How were car companies able to earn more money despite selling fewer cars?
She also stated that when there is a disruption in the supply chain at higher levels, it has a greater impact on consumers. For instance, if the price of electricity or oil goes up, everything becomes more difficult to produce or move. The same is true for chemicals, metals, lumber, and other basic goods that are needed to make more complex products. If governments could somehow control the prices of these items, they could prevent inflation from happening. It is now widely accepted that corporate profits are a major contributor to inflation. Researchers at the Kansas City Federal Reserve have determined that more than half of the inflation experienced by the United States in 2021 can be attributed to corporate price markups.
If the interest rates keep rising, it can lead to a situation where inflation is not curbed but rather fueled by the increased cost of production as it is passed on to consumers. This can create an uncontrollable spiral that can cause panic in the economy. This can manifest as mass layoffs, higher unemployment rates, and companies closing down - a clear indication of an economic recession. Therefore, I suggest that the MPC adopts a different approach and avoids this orthodox policy that is not feasible.
Weber's fortunes have taken a positive turn. Presently, she is being celebrated and recognized by a multitude of prominent entities such as Bloomberg, the US Congress, Financial Times, the Washington Post, and the European Central Bank. Additionally, in January of 2023, Paul Kruger offered her a public apology.
I've included significant quotes from the article because I anticipate that some readers might not take this fresh area of research seriously. However, it's undeniable that a lack of understanding of history has negatively impacted economics, especially in nations like Nigeria.
Next, let's explore additional tactics aside from managing interest rates that we can employ to address our rising inflation. This issue is expected to become even more pressing after the elimination of fuel subsidies, which often leads to price hikes beyond the actual increase in fuel costs by companies and retailers.
Apart from controlling interest rates, there are other tactics that can be used to influence economic growth. These strategies may include government spending, tax policies, and regulations on businesses. By adjusting these factors, policymakers can potentially impact the overall economic environment. It is important to consider all of these tools and how they can be utilized to achieve economic goals. Therefore, policymakers must weigh the pros and cons of each strategy carefully. In summary, there are various ways of managing economic growth and stability, and policymakers should be knowledgeable about all of them to make effective decisions.
While a healthy matured economy can sustain 2%-4% inflation, our economy can handle up to 6%-8% without panic. However, the Central Bank of Nigeria's target is anything below double digits, or 9%, which means we are currently 13% above this target. We need to find a way to decrease inflation without limiting our GDP growth rates, which tend to be high when inflation is high. In my opinion, we should aim for much higher GDP growth rates than the depressing 2%-3% projection we currently have. Can we accept slightly higher double-digit inflation as a trade-off for more significant GDP growth? The new administration aims to achieve 8%-10% GDP growth rates, but how can we achieve this without further increasing inflation?
I think it's possible to achieve a lower inflation rate of 22.22%, but it'll require us to identify where the problem is coming from. First of all, we need to improve our economy by eliminating inefficiencies, ensuring that people are working productively in relation to their salaries, increasing industrial capacity, promoting business growth, encouraging new businesses, and generating excitement about productivity in our economy. We can look to other countries that have achieved this and learn from their examples, such as China, India, and several African nations like Cote D’Ivoire, Senegal, Egypt, and Ethiopia who have seen growth rates of around 8% over the years thanks to investments made in their infrastructure. I believe that a determined leadership, focused on enforcing discipline, rewarding success and punishing failures promptly, and closely monitoring all sectors and targets, can help put Nigeria on the same path towards success.
The Central Bank of Nigeria's Monetary Policy Committee has been increasing interest rates in an attempt to slow down inflation. This is a traditional method that holds up in theory but, in Nigeria's case, hasn't been effective. People are still borrowing and spending, and the inflation rate keeps going up instead of down. Some experts have been advocating for the CBN to consider the unique circumstances of Nigeria's economy and adjust their policies accordingly. The consequences of this orthodox approach could lead to a recession if it continues. Manufacturers and borrowers are already struggling to pay higher costs, and these costs will inevitably be passed onto consumers. To avoid mass layoffs, closures, and high unemployment rates, the MPC should consider alternate policies that are more empirically sound.
Inflation is being fueled by various reasons, including the huge unregulated market and the government's incapability to trace the flow of money. Our economy is extremely uncontrolled, and people often neglect their responsibility towards the government. Recently, the authorities have been having difficulties in modifying certain tax regulations. Nigeria requires the funds for improving infrastructure and to improve tax regulations.
There are several alternatives listed below that we may not be utilizing adequately or at all in Nigeria according to my understanding.
In my opinion, the main point of this blog is to encourage us to have a more extensive perspective on inflation and for authorities to use a comprehensive and diverse approach to control the issue. Currently, it seems that only the monetary method is being employed, and it's not producing the desired results. Therefore, we need to consider other approaches to address this problem.
You can get in touch with Tope Fasua, who's an economist, a writer, a blogger, a business owner, and a former presidential nominee for the Abundant Nigeria Renewal Party (ANRP). To reach out to him, send an email to [email protected].
"Stand By Reliable Journalism: Sponsor PREMIUM TIMES"
Blog section: Are you in need of expert advice on business development? Look no further than Willie! With over a decade of experience in the industry, Willie has helped countless businesses reach their full potential. Don't let the struggles of entrepreneurship get you down. Willie offers practical solutions and valuable insights to help your business grow and thrive. So, why wait? Give Willie a call today at +2348098788999 and start your journey toward success. Remember, every successful business owner had a mentor or advisor along the way. Let Willie be yours.
