A seemingly responsible fiscal plan will become unimplementable, in the modern era, if the underlying monetary indices are out of sync with budget projections. Conversely, the stubborn sustenance of appropriate monetary benchmarks for inflation, cost of funds and exchange rate may still rescue the performance of an otherwise bad budget. For example, if salaries and other incomes double or triple summarily, as happened during the Udoji salary awards of the 70s, prices will spiral beyond the comfort level of consumers, as “too much” naira supply chases relatively modest output of goods and services on offer.
However, if inflation rate for example, approaches 20 per cent, as in our present predicament, then we would also lose a fifth of the purchasing power of our salaries and incomes. The dwindling purchasing power caused by inflation will invariably erode consumer demand for goods and services, and therefore constrain domestic industrial output, while further investment decisions will ultimately be kept on hold.
Thus, in addition to a significant loss in real income values and deepening social poverty, an unmanageable inflationary spiral will severely challenge the comprehensive implementation of any fiscal plan that does not accommodate the prevailing rate of inflation. For example, the recklessly ambitious 2016 N6tn budget, has become difficult to implement because of reduced revenue and a significant naira devaluation that has increased local production cost to further spur inflation closer to 20 per cent. For the above reasons, Central Bank managements, in successful economies everywhere, are statutorily mandated to sustain strategies that will keep money supply at an equilibrium level that will not push inflation rate beyond, say three to four per cent, so as to sustain price stability and social harmony.
Similarly, if foreign exchange is in short supply and dollar rations are regularly auctioned while naira supply is, undeniably, constantly in heavy surplus, the local currency will invariably depreciate in value, and make all imports (including industrial raw materials) correspondingly more expensive. Unfortunately, the competitiveness of local enterprise will become even more seriously challenged, if the CBN’s Monetary Policy Committee chooses to counter inflationary pressures by hiking the rates at which commercial banks borrow from the apex bank, to as high as the 14-16 per cent adopted at the MPC meeting held in July 2016.Read more