The dilemma of a trilemma: Growing a basket of the miserable

Last week the National Bureau of Statistics (NBS) released the bad news that headline inflation has hit 18.3% and has thus doubled in under one year, since we closed 2015 at about 9.5%. In some climes a 100% growth in inflation could cause riots. At the same time, the Naira exchange rate has depreciated by nearly 60% in the official market while it has more than doubled in the parallel market. Interest rates which came down, close to single digit at the end of 2015 has remained high and growing. Since July the Monetary Policy rate (MPR) has been at 14%, though actual bank interest rate is about 25%.

Similarly, unemployment has continued to rise from quarter to quarter. Gross unemployment which came low to about 6.4% in Q1 of 2015 has exceeded 15% by Q3 this year. When added to Underemployment it reaches 31%. In the youth population this comes to over 42%.

This Trilemma of rising inflation, rising exchange rate and rising interest rate has created a dilemma for the government. Superimposed in this Trilemma are economic contraction called recession and the growing unemployment. The fiscal authorities, represented by the Minister of Finance want an interest rate cut so as to make money available to the business class to help expand the economy and work ourselves out of recession. The Monetary authorities represented by the CBN Governor, whose primary mandate is to keep inflation down, so as to strengthen the purchasing parity of the Naira is alarmed by the galloping inflation and insists on using the classical instrument for curtailing inflation- Interest rate hike.

The dilemma is that this classical instrument may complicate matters for the economy. Rise in interest rates will reduce the ability of Small & Medium Scale Enterprises (SMEs) to borrow or service existing debt obligation. Now when they cannot borrow, they are bound to cut down on their operations. This becomes imperative in view of the fact that due to the halving of the value of the Naira, most of them need doubling of the quantum of Naira that they need to import raw materials and other production inputs including machinery and spares. And because they cannot print Naira by themselves (since it is illegal), they have to go and borrow. And when they borrow, that is if they can find banks willing and able to lend, considering that the banks themselves also have their operating capital halved by the same devaluation of the Naira, the borrowed money cannot buy much in the domestic market because inflation is galloping every day.

Thus, they soon default in repayment, complicating the problem of the banks as they have to make provisions monthly for non-performing loans and every provision made reduces loanable funds of the banks, making it more difficult to lend to other potential borrowers except they are willing to pay higher interest rates to enable the banks recover the loss from those who could not pay. And when they borrow at this high interest rate, because they are desperate to borrow, they raise the prices of their goods and services so they can recover the high interest rate. In the process they cause further increase in the inflation rate. Soon nobody can pay the very high prices, because nobody has had pay increases and purchasing power is low, the guy either sells at a loss and tries to pay back whatever he can recover and thereafter shuts down, or he tries very hard to reduce his costs so that he can squeeze out a margin to pay back to the bank. Either way, he sends workers home, increasing unemployment. Similarly the banks also ‘shed weight’ because those who borrowed are not paying and their balance sheet is shrinking and capable borrowers are diminishing. Under this scenario, who wants to be the CBN Governor?

In July this year the Misery Index of Nigeria climbed to 47.7%, making us the 5th most miserable country in the World. As at October, with an 18.3% inflation rate Nigeria’s Misery index climbed further to 49.3%, making us the 4th most miserable country in the world. That is to say that about half of Nigerians (85 Million) are considered miserable. What a growing basket of the miserable! Who wants to be Minister of Finance or indeed who wants to be President of a country of largely miserable people? Let us Pray!

 Sam Ohuabunwa OFR