Getting into the inflation vs. growth debate

BY VICTOR OGIEMWONYI 

Victor Ogiemwonyi, a retired investment banker, sent in this contribution from Ikoyi, Lagos. He can be reached via comment@businessamlive.com

The recent Central Bank of Nigeria Monetary Policy Committee’s decision to continue its hiking of interest rate, this time by another 100 basis points to 16.5 percent, has elevated the debate on where the preference should lie. 

Inflation lowering is a core mandate of central banks all over the world. Monetary stability is important for economic well-being. The issue is should that be at the detriment of economic growth, which is central to everything else? 

The current inflation fighting mode is worldwide because of the resulting impact of Covid-19, which disrupted global supply chains, leading to shortages of goods and raw materials everywhere. The resulting impact has seen a hike in prices to compensate for the disruption and the resulting shortages of products everywhere, and therefore inflation. 

The worldwide nature of this inflation phenomenon has seen inflation rates rise even in places like the United States, Germany and the United Kingdom, where inflation has risen to unprecedented levels. These are places where a few years ago, the fear was the possibility of economic deflation, given the long and subdued nature of inflation in those climes. So the inflation problem is real and has to be dealt with.

The initial interest rate hikes by the CBN was not criticized so loudly, though there were those who thought the hikes could have been moderated. It was necessary that the CBN gives itself the advantage and ensure that, should a recession suddenly arrive, they will have the space to use interest rate cuts to stimulate the economy.

However, many analysts think the recent hike has gone over board. This is even more so, given the sluggish state of the economy and the perception that our inflation is currently driven by factors other than interest rates. Our inflation is driven by scarcity of almost everything, because we produce very little of what we consume. We import inflation when we pay for goods in foreign exchange, which in turn puts pressure on our naira. Our imports cut across everything, from food to machinery and raw materials for our factories. Even maintenance for existing production lines also utilizes FX for spare parts. So, the problem of inflation in this sense can not be solved by interest rate hikes.

In the case of growth, we can not afford the slow down. The growth of our economy is so crucial at this stage of our development that any thing that impedes it must be removed. We need double digit economic growth for the next several years, if we are to lift millions of our people out of poverty. Growth is even more important at the medium, small and micro enterprises (MSME) level that will be most impacted by the high interest rates the CBN is pushing. Giving that most jobs are created at this level, the push for high interest rates, so high and so fast, is destructive to job creation and affects this segment of the economy negatively. This is a double whammy for the poor, because they are also the worst hit, when inflation is persistent as it is now.

The consensus in recent times is that for developing countries, growth should be prioritized and pushed, in the hope that strong economic growth will outpace inflation. The Asian Tigers of the 1980s mostly pursued this strategy. They ignored inflation and went for fast growth. It paid off later, as most were able to outgrow inflation. 

I have personally held the view that the inflation rate, in any economy, is the aspirational growth rate of that economy. My interpretation here is that if an economy is growing at say 5% and inflation is 12%, the 7% differential is the additional capacity the real economy aspires to grow at. This is why pursuing growth and temporarily ignoring inflation has a better pay off. This is even more so in our economy, where the inflation drivers are out of our control. 

The CBN has not done enough to curate growth in our economy. Some of the attempts, these past five years, have been abysmal. It has been a case of throwing money at the problem without any clear strategy for results. Some of the programmes that have expanded the CBN’s Balance Sheet have clearly been more political than economic. For MSMEs for instance, the CBN did not need to create a lending agency. The strategy could have been to use existing microfinance banks to on-lend to that segment at a specified low interest rate that would ensure widespread credit throughout the economy. My personal experience with micro credit schemes convinces me that a focused programme to fund this segment of the economy is doable.

The apex bank’s agricultural intervention, for instance, also went over board. It clearly is a case of pouring money aimlessly. The first mistake here was the sudden need for the CBN to become a direct lender, when it was not necessary. The CBN has always been a major player in agricultural finance, where it provides a large funding base for banks to draw from; but the lending has always been left to the banks. The CBN’s direct intervention introduced externalities into the lending process. Most of the money the CBN chose to give out directly will not be coming back. The right thing to do was to have incentivized banks to lend to that sector, and increase lending allocation for agriculture and introduce special low interest rates. No doubt, there was justification to push for a larger share of the lending pie to agriculture. The question was, how?

In the 1980s when I worked for NAL Merchant Bank, there was what was referred to as “Sectoral Lending”, which the CBN imposed on banks. Agriculture, Housing and SMEs were the focus. Banks mostly met these sectoral allocations because there were sanctions. NAL for instance, created their own customers in these areas, where there were no credible customers, giving their very high credit standards in those days. They developed their own companies by backing credible teams. Triple Gee Plc, still listed on the Stock Exchange today, was created as one of such developed SMEs. The genius that was Atedo Peterside and his team, simply identified Mr Giwa, an experienced executive at Academy Press, at the time, who wanted to try his hand at entrepreneurship, got the support of NAL to build a small operation around him, to take advantage of the emerging opportunities in the computer printing papers business that followed the transition to computers in the 1980s. The credit was so tightly controlled in my credit group at the time, it consisted of leasing the equipment needed and credit for working capital. This way, if the credit is not performing, NAL will take back the equipment on lease, and worry only about the working capital, which was small enough, and will not matter. 

To meet their agriculture sector lending they, again working with another NAL customer, Afprint Limited, the largest textile company in Lagos at the time, created Afcott, an agricultural farming operation in the present day Adamawa State. Using large co-operatives of smallholder farmers, and creating jobs in the thousands in the process, they had them doing the farming of cotton, which Afprint processed and utilized for its textiles and even processed the cotton seeds into edible oils. This was Afprint’s response to the government’s backward integration policy at the time.  NAL Merchant Bank was the most profitable bank in this era and did everything to do lending to these sectors to meet the CBN directed sectoral allocation. This is proof that, when the right incentives and sanctions are put in place, banks will do the needful. 

The CBN must never again, allow itself to be dragged into making political interventions as it did the last few years. The current inflation debacle is partly due to the unprecedented and uncontrolled infusion of easy money into the economy. Covid-19 necessitated some, but the unusual expansion of the CBN Balance Sheet can not be justified. It is hoped that the CBN has learnt some lessons. 

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