Surging inflation has stampeded the Central Bank of Nigeria (CBN) into a monetary policy manipulation that would even worsen a bad situation. Headline inflation surged to a five-year record of 18.3 per cent in June as food inflation stands menacingly at 20.6 per cent.
CBN responded to the surging inflation by inching up its monetary policy rate (MPR), the rate at which it lends to banks, by 100 basis points to 14 per cent.
The apex bank expect the hike in lending rate to moderate money supply and probably halt the naira’s disorderly retreat in the foreign exchange market, thus reining in inflation rate.
That measure works in developed economies where practically all the money in circulation is in the banking system. In Nigeria there is more money in unholy places in individual homes than in the banking system.
Two weeks ago, the sum of N1.8 billion was recovered in someone’s house in Abuja. There are trillions of naira hidden in hundreds of homes of corrupt politicians and top civil servants.
Consequently, when the CBN takes steps to reduce money in circulation, it ends up punishing the banking system with financial asphyxiation while the money outside the banking system keeps inflation surging.
The hike in MPR would raise lending rates by at least five per cent. In an economy where prime lending rate is already above 20 per cent, high risk borrowers in the micro, small and medium enterprises (MSME) range will be getting funds at anything from 35 per cent.
The arm of the economy with the potential to create more jobs to reduce Nigeria’s alarming unemployment would take the greatest pounding from CBN’s decision to hike lending rates.
Embattled firms in the troubled segment of the economy would be choked out of business while raging unemployment worsens insecurity.
Food inflation is largely responsible for the surge in headline inflation. Food inflation is primarily instigated by factors outside the control of MPR.
Though the country’s food importation with a depreciating naira could be seen as a cause of food inflation that could be controlled with lending rate hike, food inflation emanates primarily from scarcity.
Nigeria’s primitive means of farming does not produce enough food for its teeming population.
Ukraine is listed number-87 in global gross domestic product (GDP) ranking where Nigeria towers above as number-27. Ukraine produces a sixth of the world’s grains while Nigeria with vast arable land imports grain from Ukraine.
Nigeria is still toiling to attain self-sufficiency in rice production when less developed countries like Vietnam exports large quantity of rice. Nigeria is reluctant to adopt mechanised farming which is the solution to food insecurity.
Insecurity is another cause of inflation. Islamic lunatics fighting western education in the north-east have worsened the food supply crisis by driving thousands of peasant farmers from the fields with slashing of the throats of rice farmers. That has drastically reduced rice production and is partially responsible for Nigerian rice selling at N34, 000 per 50kg bag.
Fulani herdsmen march their cattle into farms everywhere in the country and feed them with crops cultivated with backbreaking implements.
When the peasant farmers complain about the herdsmen’s wickedness, they raid their villages at night and slaughter the complainants, rape their women and raze their huts.
Consequently, many have abandoned farming. That explains why the little food items getting to the market carry atrocious price tags.
The import ban on food items like palm oil and maize is counter-productive as it borders on putting the cart before the horse.
Architects of the ban believe that scarcity would encourage local production. But insecurity discourages investment in the sector.
The ban on maize import has crippled the nation’s fledgling poultry industry and driven up prices of chicken and eggs while local production remains static because of insecurity. Mechanised farming can reduce the asphyxiating scarcity and drive down prices as the market is saturated.
Nigeria must also adopt modern method of cattle rearing not only for safety of food crops, but for high milk yield from the cattle. That would conserve the $1.5 billion spent last year on milk imports.
CBN’s hope of halting the shameful depreciation of the naira by reducing banks’ ability to create risk is a wild goose chase that would be counter-productive in a highly dollarized economy.
Nigerian politicians buy votes in dollars because the naira equivalent of the bribe would be too bulky to carry. During the last primary elections, each of the delegates of the two major parties went home with a minimum of $50,000.
The equivalent of that in naira can only be delivered to all the delegates in a bullion van. That would be too conspicuous for the Economic and Financial Crimes Commission (EFCC) to ignore.
Politicians consequently raided the parallel market for dollars. That explains the inexorable depreciation of the naira in the parallel market to N658 to the dollar. No amount of lending rate manipulation can save the naira from the merciless grip of corrupt politicians.
Nigeria’s national power grid now collapses like an epileptic patient. Power supply has become so erratic that some communities remain in darkness for 20 hours daily.
The power outages worsen at a time when diesel sells at N1, 000 per litre in many parts of Nigeria. Manufacturers and service providers fuel their diesel-powered generators at outrageous cost. They factor the high cost of power supply into their cost of production and end up fueling inflation.
That again cannot be controlled with a hike in lending rate. What is needed is a stable power supply that would put the diesel-gulping generators on stand-by.
Nigeria’s eternal darkness doubles the cost of production making Nigerian goods and services unacceptably expensive. It is a major cause of inflation which cannot be addressed by manipulation of monetary policy instruments.
The recent escalation in the cost of diesel cannot be blamed fully on the war in Ukraine. It is primarily caused by Nigeria’s inability to produce the refined petroleum products it consumes.
If Nigeria’s four refineries were not crippled by inordinate corruption, locally produced diesel cannot be more than N300 per litre even with crude oil price in triple digits.
With diesel at N1, 000 per litre, the cost of hauling food items and other goods would rise by at least five per cent. That will push food inflation perilously close to 25 per cent in the next three months.
The factors fueling inflation are multiple. Inflation can only be checked by a combination of fiscal and monetary policy interventions. CBN’s unilateral monetary policy combative postures can only worsen a bad situation.
