In the schema, the fiscal side has a richer toolkit in the design of policies for the growth and development of the economy.
...by far the most important concern in the ongoing national conversation about inflation and the design of appropriate policy responses, is the extent to which the markets believe that the Central Bank's commitment to bringing inflation down, and the tools it has deployed so far to bring this outcome about, are working. Inflation expectations matter a lot.
The headline inflation numbers for April did not cease to provide cause for worry -- up to 33.69 per cent on an annual basis, and a wee bit higher than the 33.20 per cent at which the consumer price index closed in March. The hole in consumers' pockets from the depredation of rising prices continues, therefore, to grow bigger. And as the Central Bank of Nigeria (CBN) continues to raise interest rates in its bid to rein inflation in, the drag on business investment is that much heavier. At its most recent meeting, last week, the Central Bank's policy committee raised its benchmark rate by 1.5 percentage points to 26.25 per cent. As a gauge of the momentum of inflation, the month-on-month increase in April did leave cause for hope. Still up at 2.29 per cent, in contrast to March's 3.02 per cent, yet it seemed to suggest that the rate of domestic price increases was slowing.
Some would see in this evidence that the Central Bank's tighten of monetary conditions is working, arguably not as fast as most Nigerians would prefer. But at that rate, it would take all of this year to bring the headline rate down to 21 per cent year-on-year. Unfortunately, much of this optimistic take on the trajectory of inflation is before you include the core inflation measure for April. Excluding both food and energy prices -- because they are volatile -- inflation was up 26.84 per cent last month from the 25.90 per cent by which it rose in March. By removing the capricious components of the inflation basket from its computation, core inflation gives a more accurate depiction of underlying inflation trends. It is in this sense useful for gauging the relationship between consumer income and the prices of goods and services. So, it matters that it remained sticky upwards in April.
With the average Tunde on Main Street reportedly spending a far larger share of his income on food than members of the income decile immediately above him, the harm to the poor and vulnerable from rising prices is better imagined than experienced. But how much of this price pressure is the result of supply constraints, and how much the result of too much money chasing too many goods is still a moot question.
It matters no less that food, a large part of the basket of goods with which domestic price movements are computed, is still problematic. At 40.53 per cent year-on-year last month, key components of the food basket were up in the month, as they were in March, when the food index rose by 40.01 per cent. With the average Tunde on Main Street reportedly spending a far larger share of his income on food than members of the income decile immediately above him, the harm to the poor and vulnerable from rising prices is better imagined than experienced. But how much of this price pressure is the result of supply constraints, and how much the result of too much money chasing too many goods is still a moot question.
This is why by far the most important concern in the ongoing national conversation about inflation and the design of appropriate policy responses, is the extent to which the markets believe that the Central Bank's commitment to bringing inflation down, and the tools it has deployed so far to bring this outcome about, are working. Inflation expectations matter a lot. Without addressing the markets' concerns that prices will continue to rise in the future, individuals, businesses and associated economic actors will not stop acting to hedge their savings, investment, and spending decisions against expected price movements. These precautionary measures, including front-loading expenses, in turn lend fillip to inflation.
How, then, may a government that is predisposed to economic growth and development go about fiscal husbandry? The size of the public sector deficit is no less important than how it is funded. Consensus is that as much as possible, government borrowing should not crowd out private sector borrowing. While this means that the ends to which government spending is put matter a lot, most commentators agree that these ends are currently neither optimal, nor efficient.
In the face of all these, it is difficult to ignore a further salience of the ongoing discussion around relentlessly rising domestic prices. Monetary policy tools -- the Central Bank's policy rate and its interventions in the bond markets -- are blunt force instruments. This is the reason most commentators on the wrong side of the Central Bank of Nigeria's current round of monetary tightening have likened its response to a carpenter for whom every problem is a nail waiting to be hammered. A better way to conceive of the CBN's challenges in bringing inflation down is to look at the context within which this is taking place. Every economy breaks down (or is it up) into a monetary side -- the CBN's remit -- and a fiscal side (where the Federal Government taxes and borrows from the economy in order to finance its spending initiatives).
Sign up for free AllAfrica Newsletters
Get the latest in African news delivered straight to your inbox
In this schema, the fiscal side has a richer toolkit in the design of policies for the growth and development of the economy. How, then, may a government that is predisposed to economic growth and development go about fiscal husbandry? The size of the public sector deficit is no less important than how it is funded. Consensus is that as much as possible, government borrowing should not crowd out private sector borrowing. While this means that the ends to which government spending is put matter a lot, most commentators agree that these ends are currently neither optimal, nor efficient.
Uddin Ifeanyi, journalist manqué and retired civil servant, can be reached @IfeanyiUddin.
