Next button please, economy not responding

The managers of the Nigerian economy must by now be looking for the next set of buttons to press because so far, the economy has been unresponsive to the numerous measures already taken to calm it. That is because many things are wrong with the current approach to the economic challenge facing the country. And […]

The managers of the Nigerian economy must by now be looking for the next set of buttons to press because so far, the economy has been unresponsive to the numerous measures already taken to calm it. That is because many things are wrong with the current approach to the economic challenge facing the country. And the approaches may not lead to a desired destination soon.

The government by its actions set in motion a force that it has not fully understood, and so cannot control. That force is summed up into the word inflation. This is structural inflation, provoked by an unusual combination of two unfortunate actions: the removal of fuel subsidies and a forced exchange rate convergence process. This inflation is not textbook inflation. It is not the one that central banks are equipped to tackle with their usual monetary policy tools: interest rates and monetary aggregates such as Cash Reserve Ratios, etc.

A central bank can vary these variables to alter the money supply in the system ostensibly to tame inflation. The reality, however, is that these instruments have their limitations in the sense that they work up to a point beyond which they lose their ability to influence the target variables in an economic equation. This is more so when the cause of the inflation spiral has little or nothing to do with the money supply in the economy.

These two actions ordinarily are combustible in their impact on the price level. Each has the power to ignite price escalation, even in an economy where firms and individuals have a reasonable headroom for adjustments. Unfortunately, these two forces were unleashed in one fell swoop on hapless Nigerians who were already gasping for breath in an economy squeezed by its structural defects.

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This is the situation in Nigeria today. This inflation is caused and sustained by the structural defects in the economy, which have made it difficult for the economy to respond appropriately without this sustained increase in prices.

In truth, the announcement of those two measures was tantamount to giving an overdose to a patient on whom a proper diagnosis had not been carried out. The overdose only exposed the real extent of the patient’s sickness.

This is what happened to our economy between May 29 and June 14, 2023. The two policy actions taken within that 16-day space only succeeded in revealing how sick our economy is. It showed the structural weaknesses that characterise this economy, which is why the inflationary pressure has been difficult to tame.

Recall that at that time the economy was just coming out of a rancorous election. Recall also that that election was in turn preceded by the infamous currency exchange/redesign that emasculated Nigerians across the board. It led to the death of many, some dying because their families could not withdraw money from their accounts to pay for drugs. Suddenly, cash dried up from our banking system. 

Nigerians roamed their cities, moving from one bank to another in search of cash. They woke up early to queue at banks, hoping that officials would be kind enough to dispense even N5,000 to each account holder.

Nigeria experienced social, religious, and economic dislocations. People who had money in banks became poor overnight, as they could not access cash to buy even the basic things of life. Production, whether on farms or in factories, stagnated because funds to pursue economic activities had evaporated.  This worsened the impact of insecurity that had already enveloped the country.

It was within this chaotic milieu that the government implemented policies that prepared the ground for the current crisis. Before then, we as journalists had discussed or framed the cost-of-living crisis in Nigeria dwelling mainly on global factors, including the Russia-Ukraine war. We blamed that war for the rise in the cost of wheat, rice, diesel, etc. We did not fail, however, to factor in the insecurity in the country, which was already forcing farmers off their farms.

These were accepted at that time. Now, the current cost-of-living crisis has a different origin. It is home-grown.  To the lingering insecurity, the government added an overdose of a cocktail of policies that have made life unbearable for Nigerians in the last six months, or so.

This is why the numerous measures taken so far, including those by the Central Bank of Nigeria, have been ineffective. The problem with the government is that it has adopted the wrong frame of the economy and the problems. It is holding the wrong reasons or factors responsible for the current cost-of-leaving crisis, hoping that its trial-and-error method will work in the real economic system.

The authorities have blamed hoarding for the high cost of food. They have also blamed the wrong display of price tags at supermarkets. And in their zest and effort to please their masters, officials of the Federal Competition and Consumer Protection Commission could be seen harassing salespeople at a shop in Abuja, asking why particular products didn’t have price tags, or had tags different from the prices at which the products were being sold. If there had been wrongdoing by these organisations, why did it take so long for this agency to dictate this?

We have seen warehouses being forced open or sealed and their owners being accused of being responsible for the food shortage that is ravaging the land. We cannot put back the hand of the clock. Command economies faded away in the 1970s and 1980s.

Economies do not respond to commands; they are moved by incentives. As economic agents respond to incentives, they produce goods and services that solve people’s needs. That is what economic systems are made for. Many economies that have become global performers today were once socialist or pseudo-socialist contraptions that failed to meet the basic needs of their people.

While this Column does not support any extortionist or wrongdoer in the economy, it is also incumbent on me to point out that the market economy is driven by incentives. The overall incentive in the market economy is the availability of profit; an individual invests a certain amount on a business venture and at the end of the entire process, he has a positive difference between his total expenditure and total revenue.

To criminalise the profit motive in a market economy is to say indirectly that you do not want risk-taking. The FCCPC officials who locked a supermarket in Abuja and later re-opened it one or two days later just displayed the spirit that has characterised Nigeria’s civil service, where officials are disconnected from the reality in our economy.

Every Nigerian wants prices that are affordable to all consumers. The best way to ensure that is by making the operating environment level for all players.

Regulators have to be proactive and not wait until things go wrong and then begin to fight fires. If you say a certain producer should not sell his product beyond a certain price, have you controlled the prices of all the resources that went into the production of that product?