It is official, the Nigerian inflation rate for July 2022 was 19.64%, the highest since 2005. To be honest, the National Bureau of Statistics is just confirming to us what any market woman already knows. Prices of all items have continued to rise: groceries , transportation, clothing etc.
In response to this challenge, the Central Bank of Nigeria (CBN) has immediately issued a directive to all banks to increase the interest rate they pay on savings deposits from 1.4% to 4.2% i.e. 30% of the the Monetary Policy Rate (MPR). According to economic textbooks, this will make people to save , instead of spending money on consumption items.
Well, this cure assumes that the reason prices are rising is because there is excess money in circulation, somethin economist call “demand pull inflation”. Although, there is evidence the this is in play to some extent, but it does not appear to be the main reason prices are rising.
Going by the Consumer Price Report published by the National Bureau of Statistics for July 2022, energy cost is a major component of the inflation figure, which always spread to other items, especially food prices. Vehicles used for transporting farm outputs are often diesel powered. Therefore, nobody should be surprised that food prices keep rising since diesel now sells above N800 per liter.
In order words, we are dealing with cost push inflation, especially as we now import refined petroleum products at high prices. No thanks to the war between Ukraine and Russia. In times past, Nigeria is able to offset the importation cost from our crude oil sales. However, average oil production in July 2022 was 1.2 million barrels per day, compared to the 1.82m bpd quota given to us by OPEC. The huge shortfall is attributable to oil theft and challenges with oil production facilities.
These are not issues that can be addressed by interest rate hikes. We just have to refine our petroleum products and not import them. Something totally outside the purview of the CBN. When dealing with high cost of production, you either reduce the cost of inputs or you increase volume of outputs , which allows you spread your production cost over more units of outputs. thereby reducing your average cost of production. A goal that has remained elusive to our policy makers, we just can not get NNPC to refine products at their full capacity in decades.
Nigeria is still unable to increase output in most economic sectors, it is either due to security concerns that have made farmers to abandon their farms or poor infrastructure that frustrates production throughput. None of this can be corrected by interest rate hike by the CBN. It will only increase the banks’ cost of fund and make them charge more interest on their loans. Something that will further reduce output as entrepreneurs are unable to source funds at favourable rates.
In conclusion, it appears the policy makers are unable to address the real issues. Therefore it is left for individuals to resort to self help as usual, this requires innovative thinking. For instance, can producers within a cluster resort to some facility sharing arrangement, instead of operating their individual equipment? Should we be thinking of equity investment to fund our expansion instead sourcing for loans at high interest rates? We would like to hear your views in the matter, join us here on WhatsApp for more deliberations. Bye for now