With headline inflation at 15.75 per cent year on year in December, ought I to worry about the trajectory of domestic prices ― the headline gauge has risen every month since September 2019? Not if government's spinmeisters are to be believed. Two claims work out here. First, is that "structural legacy" issues were at the heart of the price trend last year. In other words that the freeing of petrol and electricity prices, amongst others, led to a one-off boost to general prices last year. Accordingly, once these effects wear off, prices this year will return to much manageable levels. This is the so-called "base effect" ― where abnormally low (or, in our current case, high) levels of inflation in a previous year, mess up the monthly inflation gauge in the current year.
All so reassuring. Especially when you add to this cocktail, the commitment by the Central Bank of Nigeria (CBN) to address the inflation scourge from the supply side. Until one admits that much of the general price movement last year was the result of food prices ― a major component of the inflation basket ― rising precipitously. I am not sure if any sector of the economy received more "intervention funds" from the CBN last year than did the food sector.
Most commentators that I have spoken to implicate supply bottlenecks in agriculture as the major driver of price increases in 2020. In a note to clients, Renaissance Capital's Yvonne Mhango included "security disruptions in parts of the country that undermined food production; land border closures; floods that washed away at least 450k hectares of rice farmland; and structural deficiencies that impeded the transportation of food" as the main drivers of the food price increases.
In other words, we had clear evidence last year of how effective the supply-side intervention to keep prices down is. In the presence of the myriad supply side constraints to domestic agriculture, throwing more money at the problem was as unlikely to boost harvests as to compound the traditional definition of inflation: too much money chasing fewer goods. Far better, therefore, to have starved the beast. Less accommodative monetary policies would have choked of growth, no doubt ― at least, that is what the old theory (long since jettisoned by the central bank) says. But, given that we have scant evidence that looser money boosted growth last year, nor that it made the economy shrink less, it is a far safer bet that less yielding monetary faucets would have throttled rising prices.
I have heard arguments to the effect that a central bank benchmark rate high enough (c.18 per cent) to make an impression on rising domestic prices would hurt government's domestic borrowing (and its debt service costs). But as government continues to argue, as it frees certain price regimes up to "market forces", subsidies (including for its domestic borrowing) only lead to a massive misallocation of domestic resources.
Yet, this fiscal repression does not hurt the economy half as much as rising prices do. When the central bank suppresses the cost of money in order to slake the federal government's bulimia for debt, it moves resources away from resource-rich segments of society to the public coffers. Okay, so government may not spend the resulting boon well. But the losers therefrom are the minuscule number of Nigerians with tidy balances in their bank accounts.
Inflation, on the other hand, hurts far more Nigerians ― and at the wrong end of the income ladder. You only need to understand that the reason why the food component of the inflation basket is so large (c.40 per cent) is because the basket tries to mimic the spending patterns of your average Tunde, Okoro, and Mohammed. Can it be good for the economy that the average Nigerian who spends more than 40 per cent of his earnings on food was confronted last year by a riot of food prices?
I am told it could get worse, or better, depending on one's vantage. The World Bank forecasts a 1.1 per cent growth in domestic output, this year. Miserly? Yes! And it is likely to be driven by exclaves of the economy such as the oil and gas sector ― borne aloft by a global economic revival. Other sectors of the economy would show the effect of last year's contraction in domestic demand. As more jobs are lost this year, consumer spending should tail off even faster. And less money chasing fewer goods should result in less virulent inflationary pressure.
With but one caveat. This latter outcome prefigures a worsening of domestic poverty. Alas, the poorer the population, the less stable the polity will be.