As Nigerians battle inflation: Where are the mercenaries and tools to tame the monster?

Among world central bank governors, one man stands out as the guy that fought inflation to a standstill, even against stiff opposition. His name is Paul Volcker. Many Americans still remember Volcker as the man who tamed the monster, inflation for them. More than three decades after he left office as the Fed Chair, Volcker, […]

Among world central bank governors, one man stands out as the guy that fought inflation to a standstill, even against stiff opposition. His name is Paul Volcker. Many Americans still remember Volcker as the man who tamed the monster, inflation for them. More than three decades after he left office as the Fed Chair, Volcker, who passed away in December 2019, is still reverred as the champion that delivered American investors and savers from the claws of inflation. But it was a tough fight and not many loved him or what he did, while the battle lasted.

By 1979, when former President Jimmy Carter appointed Volcker to head the Fed, inflation in America was at 18 per cent, and an average American was screaming.

Inflation is not good for anyone. It takes your money away from you even while you are still holding it in your hand, or while it’s sitting in your bank account. You may not know until you want to buy the same things you bought a month ago only for you to discover that you need a larger amount of money to buy the same quantity you bought last time.

The truth is that while you waited, inflation was busy, like the little rat in the house, chewing at the value of the money, taking away a little at a time.

It is even worse if your money is a fixed amount that you receive regularly, or simply a lump sum sitting somewhere. If that money has no way of growing at a rate that keeps pace with the inflation rate, sorry, you are a loser.

The losers include pensioners whose monthly stipends are fixed; people who have borrowed money for projects, including homeownership. It also includes bondholders, who have locked into fixed rates till the maturity of the instruments. Indeed, many are losers whenever there is inflation.

For instance, the government borrowed your money through the issuance of a 20-year bond, promising to pay you seven per cent interest per annum. By the time you receive the principal at maturity, you will be shocked that it is worth a lot less in terms of what you can buy with it. That’s a real loss of value and that’s why in a high inflationary environment, the lender is a great loser, especially when you lend at a rate far below inflation rate…you can’t get to recover hitherto loss!

That is why governments, through central banks and other relevant authorities, do everything possible to fight it. Often the tools for fighting inflation are unpopular, which explains why not many officials like to do the job. Typical measures to fight inflation include tightening money supply or a restrictive monetary policy that reduces the quantity of money in circulation in the economy.

The other related measure is to raise interest rates, which, by increasing the cost of funds, also reduces the abilities of individuals, households and even firms to access money, thus moderating business and household consumption – the demand and supply dynamics that set a lower equilibrium price for goods and services.

These are quite unpopular policy instruments, often disliked by businesses, whose owners complain to politicians, who have eyes on votes from the electorate. If a tight monetary policy hurts business, this could have a backlash on the government of the day.

Nigerians have been in the claws of inflation similar to what the Americans were experiencing at the time Volcker appeared on the scene.

In the period from January 2016 to January 2021, Nigeria’s headline inflation nearly doubled, rising to the current level of 17.33 per cent. Within the same period, the level of unemployment in the country followed the same trend, almost doubling as well. Unemployment is at 33.3 per cent  underemployment 22.8 per cent , and youth unemployment /underemployment 42.5 per cent. These are frightening figures, indicating that more than half of the labour force of the country is not fully engaged in productive activities.

Let it however be made clear that the current level of inflation is nowhere close to the highest the economy has experienced. Nigeria has had a worse situation with regards to the inflation scourge. Indeed, Nigeria’s all-time high inflation rate was in 1995, when it rose as high as 72.84 per cent ! Inflation also rose to 57.17 per cent  and 57.03 per cent  in 1993 and 1994, respectively.

Sure, these were unthinkable years! And you wonder how consumers, households, even businesses, survived those horrible nightmares. It meant that one’s income in nominal terms needed to rise by between 50 per cent  and nearly 75 per cent  to maintain the same basket of goods and services that they consumed in the previous period. That is utopian, you conclude.

Hyperinflation or runaway inflation can be tamed, but the snag is the social and political costs associated with doing so. A central bank governor could lose his job if the political leadership views his moves as being inimical to its interest. In Turkey last month, President Tayyip Erdogan sacked the Central Bank Governor, Naci Agbal for raising interest rates to fight rising inflation and the decline in the value of the currency, the lira.

Agbal, who was appointed last November, had made it clear he would fight inflation using higher interest rates. Within the period he raised the main policy interest rate by 8.75 percentage points to 19 per cent.

Consider what Volcker did and the risk he took. He believed, contrary to his predecessors, that instead of monetary authorities targeting inflation rates, they should rather target the rate of credit or money growth in the economy. And that was what he did. He tightened credit lines. Easy money was gone. Even his announcement that he was going to tighten money supply further fueled the inflationary spiral, as prices surged by 14 per cent.

As inflation spiked, he also raised interest rate, pushing it to  20 per cent  by 1980, which was unheard of in the country. Two forces that emasculate the average player in the economy. Volcker pushed the economy into recession, as unemployment mounted. But, the Volcker years have been recognised as the foundation period of the boost and stability that the American economy enjoyed into the 1980 and 1990s.

For sure, the situations in Nigeria and the United States then are quite different. The position of Nigeria’s economy today is that nearly everyone has been primed to believe that what the economy needs is more money. This is more so given that the economy has been through two recessions in four years.

Nigeria’s case is also different given the structural challenges of the economy, ranging from infrastructure deficiency to the country’s high import dependency that leads to imported inflation via local currency depreciation, production disruptions, among others.

These present opportunities for creative solutions to the problem of inflation in the country. There must be a period that someone singles out inflation as a problem to be solved so a foundation can be laid for a future sustainable turnaround for the economy.