Good piece by KPMG which echoes my postulation that Nigeria must look deeper into the supply-side of the playbook as we battle inflation, over just focusing on using monetary policies to influence the demand-side when the challenge is not really a demand-pull inflation:
“We recognise that price stability is a necessary condition for economic growth. We equally recognise that raising interest rates is a natural response to inflationary pressures in monetary policy playbooks. However, we emphasise that monetary tightening is more apt for addressing demand-pull inflation. Thus, inflation may yield little in response to the monetary tightening efforts, unless the supply-side bottlenecks fanning cost-push inflation are also addressed. Eliminating these bottlenecks will require concerted efforts from both fiscal and monetary authorities. We are confident that such efforts will better deliver the intended price stability without trading-off economic growth.” – KPMG
Largely, Western economics textbooks will teach you to raise interest rates to control inflation because they have a decent credit economy. When you raise rates, among many things, you make the cost of borrowing higher, and that can affect consumer spending since credit card rates will move up. If you can depress demand through suppressing consumer spending via high interest rates, you have a good chance of controlling inflation.
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But in Nigeria with limited consumer credit, that does not make a lot of sense. In other words, when you increase interest rates, you are not clearly influencing demand since access to credit is limited. Rather, what happens is that when rates go up, companies struggle because the cost of capital is increased, and if that is the case, they do not invest a lot, and that triggers lower supply. With lower supply, inflation jumps up again. That is why for years, inflation has continued to worsen in Nigeria despite our consistent increase in rates.
Sure, I understand that the Central Bank of Nigeria wants to hike rates so that foreign investors can bring money into Nigeria for those rates. Great. But the question is this: would you ever reduce the rates, and if you do, and they decide to pull their funds, what have you accomplished?
My position is clear: Nigeria should modulate on these rate hikes and allow manufacturers and producers who actually need to deepen Supply to reduce inflation. Hiking interest rates will not fix our inflationary problem because it is Supply-driven and unless we deal with that, it is a waste of time. I recommend a two-tier interest rate: a lower one for producers and whatever for every other vector.
Finally, the apex bank must also examine the government policy. The government is injecting a lot of cash into the economy in many forms. You are possibly canceling whatever increased rate is going to accomplish when we push billions to state governments at the end of the month! Those state governments spend all funds immediately, pushing a lot of cash into the system.
So, if you starve manufactures of funds via rate hikes and release billions to the states, the difference is the one which exists between 12 and a dozen. Of course you cannot afford to deny states their funds, meaning that focusing on improving Supply is a better playbook for Nigeria to control inflation.
I am in the school of economics that believes that the best way to manage inflation in a country like Nigeria will be increasing supply (hard in short-term). . If you do that, the price points will move, ceteris paribus. The The United States is taming demand by increasing interest rate. They have better tools to achieve that since the system is already credit-based.
Yes, the US has tons of consumer credits which can be affected as credit card companies and banks raise interest rates. Nigeria does not have that exposure as our credit systems are largely corporate-anchored.
So, in Nigeria, when you raise interests, you are not shaping consumer purchase that much. Rather, you are influencing corporate investments and that will then negatively affect supply which you need to shift the equilibrium point to bring prices down.
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But we have been saying this for long on this page, or will things now change because KPMG has said same? We are always too stubborn when doing the wrong things here, but find ways to justify them. Are we also aware that sending money to ‘poor’ people without corresponding increase in production fuels inflation? Yet we still do it, for political expediency of course.
How do we prioritize in this country? The things that require sense of urgency and much needed investment, we overlook them and keep wasting away on things that really don’t make our situation better. The resources we commit to political/elections litigations, can we commit even half of it to economic reform and development? We know how to set deadlines on when elections petitions should end, why can’t we do same for economic/commercial cases? You need a working judiciary to run a proper economy, so we need to find ways to dispense justice as quickly as possible.
Again, are we really serious about rebuilding this economy or we are fixated with pleasing foreign portfolio investors? The colonial hangover is still doing numbers on us, so from the CBN to electricity supply, our thinking is tilted to what could please fairweather investors, and not really the builders.