With Nigeria’s inflation rate currently pegged at 22.41 per cent, an economic expert with Agora Policy, Adebayo Ahmed, has listed the causative factors and advanced solutions to tame the monster.

His views, captured in Agora’s latest PolicyMemo, fingered growing inflation as the main eroder of Nigerians’ purchasing power and the major culprit responsible for the country’s economic desolation.

He accused the Central Bank of Nigeria (CBN) under the suspended governor, Mr. Godwin Emefiele, of abandoning its core mandate of price stability and lowering inflation and straying into areas that were not his turf; like doling out funds as intervention loans, when such ought to be handled directly by the commercial banks.

Ahmed noted that high inflation remains a big challenge for any economy, saying it means that prices of goods doubled in less than four years.

“It means that salary earners lose 22% of their purchasing power every year. It means that the government would need to generate 22% more revenue just to provide the same public services. Inflation at 22% means that the challenge of moving the Nigerian economy forward and improving the lives of ordinary people is significantly harder.

“This high inflation is especially worrying for food which, at nearly 25%, means that the poorest who as at 2019 already spent roughly 60% of their incomes on food, are in a very difficult position. When combined with other recent policy efforts, such as the removal of fuel subsidies, the seriousness of the challenge should be apparent as inflation has been projected to surge even higher.

“Given that keeping prices “stable” or keeping inflation low is the core monetary policy objective of the CBN, then it is easy to make the case that the central bank has been, and is, failing its core mandate. If you add popular annoyance against exchange rate issues, then the scorecard is likely to be very poor”.

Ahmed noted that in 2014, inflation was somewhere around 8% and since it was low, it provided a scope for either monetary expansion or interest rate reductions.

“The CBN governor chose the latter, and chose to expand money supply not through the financial sector, which is typically the better allocator of credit, but directly through its interventions and eventually lending to the government.

“The CBN under his direction, changed from what had been a relatively successful decade of limiting money supply growth which resulted in single digit inflation, to increasing the growth of money supply. Regardless of what else was happening in the economy, what is clear is that there was a change of trajectory and money supply started to increase under his watch. More money supply in a similar-sized real economy, simply means higher inflation”, he said.

Ahmed added that CBN’s failure to arrest inflation could be attributed to a complete misunderstanding of its powers in terms of what it can and cannot do.

“This misunderstanding has led it down the unconventional policy route which, as expected, has resulted in higher inflation and not much else. That misunderstanding, however, is a good lesson for the CBN going forward, especially in the context of the new government’s zeal to set a more credible path for monetary policy”, he added.

On ways to crash inflation, Ahmed said the CBN’s monetary policy direction should move towards tightening or reducing the growth of money supply.

“This also means that interest rates will likely have to go up. How far up? At least to the point where “real” interest rates are no longer negative, but maybe even higher.

“These actions to reduce the growth of money supply and increase interest rates are likely to be complicated by all the underhand administrative measures which were put in place to force rates down or to limit money supply growth through the back door.

“Given the misdirection by the CBN over the last few years, there may be a tendency for the government to want to take closer control of monetary policy. “This will likely be counterproductive as it has been demonstrated here in Nigeria and in other countries where governments tend to want to use monetary policy for other non-inflation objectives. Which is the underlying problem that the CBN faces today.

“A better way forward would be to strengthen the monetary policy committee and place limits on

CBN’s actions that fall beyond the scope of its regular monetary policy actions. One option here would be to increase the number of independent members of the committee (currently only four out of 12) and/or reduce the members from the CBN and other government agencies.

For instance, there is no real reason why the deputy governor for corporate services, a largely administrative role, should be voting on monetary policy. Increased oversight, to ensure that the CBN actually implements the decisions of the monetary policy committee, would also help strengthen the credibility of the CBN.

“The direct sources of expansion in money supply witnessed over the past decade, specifically the ways and means financing of the government and the myriad of intervention funds will have to stop. Else, it would be equivalent to removing the plug to drain liquidity from the bathtub while at the same time turning on the taps’, Ahmed explained.

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