How World Bank’s report sent CBN, others back to drawing board

Inflation and poverty, two issues that have featured in this column recently, took the centre stage in Nigeria’s economic policy debate last week.  This followed the release of the World Bank’s Nigeria Development Update on June 15, 2021, which painted a disturbing picture of an inflationary spiral that shoved millions away, raising the number of […]

Inflation and poverty, two issues that have featured in this column recently, took the centre stage in Nigeria’s economic policy debate last week.  This followed the release of the World Bank’s Nigeria Development Update on June 15, 2021, which painted a disturbing picture of an inflationary spiral that shoved millions away, raising the number of Nigerians living in poverty.

The report said that at least seven million more Nigerians might have been pushed into poverty in 2020.

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Interestingly, it said the rise in poverty level was in part a consequence of policy mismatches or inappropriateness and the intricate nature of the forces fueling the problem. It, therefore, recommended a retooling by the authorities to be better able to address the issues.

The reported rise in Nigeria’s poverty incidence was a confirmation of what some analysts had anticipated. The news, that is the unexpected part of it, however, was perhaps the reported cause of such a transition into poverty by so many citizens within just a year. These latest delegates to the ignoble region were dispatched via the instrumentality of inflation, the World Bank said. Inflation is the unseen killer of welfare and people’s enjoyment. But the Bank also added that this excluded the impact of the COVID-19 pandemic that ravaged the world last year.

For the records, the Bank had actually sounded a word of caution, that the pandemic was likely to send at least two million Nigerians into poverty last year.

The report gave details on the linkage between inflation and Nigeria’s worsening poverty record and depressed economic activity. After Nigeria was declared the world’s capital of poverty in 2018, the last thing the government wants to hear now is that more of the citizens are slipping below the poverty line. Unfortunately, that is the stark reality.

“In contrast to previous inflationary episodes in Nigeria, the current trend arises from multiple demand and supply shocks, compounded by policy distortions and the exigencies of the pandemic,” the bank said. This makes the current inflation problem quite difficult to handle. It means the Central Bank of Nigeria cannot simply say the problem is a monetary issue, so let’s tweak one or two variables to rein in the pressure and bring down prices. It is a demand and supply-side issue at the same time. This makes its resolution quite difficult because what might serve as a solution to one could be the cause of the other.

The Bank said that headline inflation driven by “a steep increase in food prices”, since September 2019, has risen dramatically. While inflation declined slightly in April 2021, the report noted that it is at a four-year high, with the implication that for an average household today to enjoy the same basket of goods and services it enjoyed four years ago, it has to spend a lot more.

This clarification is key to an appreciation of the Bank’s claim that poverty has pushed so many people below the poverty line. Given the high level of unemployment now and the rise in prices, is it difficult to imagine that some people cannot afford now the basic things they enjoyed four years ago?

Giving further details on the survey that produced the report, the Bank says that some Nigerians who were interviewed admitted to having skipped meals within the period. This a key indicator of poverty; someone or a household that cannot afford food is poor. If they lived four years without skipping a meal and today someone or some members of the family have to forego meals so that others (perhaps the children) can eat, then they have fallen into poverty.

As the World Bank explained, the forces behind this inflationary onslaught on Nigerians are varied. On the supply side, it noted, a combination of unfavourable weather, insecurity and conflict, and pandemic-related shocks affecting food production and market access are pushing food prices up”.  These include trade restrictions, including the government’s closure of land borders in August 2019, which the report blamed in part for pushing up prices for both food and non-food consumer goods.

On the demand side, the lack of a credible monetary anchor encourages firms and consumers to expect shock-induced price increases and incorporate their expectations into their investment and consumption decisions.

African countries should be particularly concerned about the rising incidence of poverty among their citizens. Out of the poorest 28 countries in the world, 27 are in sub-Saharan Africa, according to the World Bank in another report.

The Bank also said in the other report that out of the 736 million people living in extreme poverty worldwide, half of them live in just five countries, and three of them are in Africa: Nigeria, the Democratic Republic of Congo and Ethiopia.

Understandably, the headlines that came out of this part of the Nigeria Development Update naturally drowned the other aspect, which perhaps would have cheered the government. The report did acknowledge that Nigeria, in fact, did achieve some resilience through reforms, while contending with the challenges that besieged economies last year.

While the media picked on the newsworthy aspect of the report, the government responded appropriately by saying that it had actually moved a couple of millions of Nigerians out of poverty. Nigerians recall quite clearly that President Muhammadu Buhari did promise that the government of the ruling APC would over a ten-year period move 100 million Nigerians out of poverty.

In fact, one government official said the relevant agency was going to compile a list of those who had been lifted out of poverty by the government’s policies. While the list is being compiled, there is a need to tweak measures here and there.

One of the key contributory factors to the inflationary blitz, according to the World Bank, is Nigeria’s exchange rate management, which it said has contributed to the rise in inflation. The Bank’s position on Nigeria’s foreign exchange management is aptly captured thus:

“When there is a divergence between the official/IEFX rate and the parallel FX rate, the parallel rate is the one most associated with food price dynamics. Unable to access FX in the IEFX window, businesses seek it through the parallel market and other alternative sources and factor in the parallel rate in business decisions, so that it eventually passes through to market prices for goods and services.”

This implies that the effective exchange rate that determines costs in the economy is the parallel market rate. The CBN should take note of this.