Wednesday, April 23, 2014

Where is the Economy Headed? By Ifeanyi Uddin


Ifeanyi Uddin

There is this local quirk which never ceases to amuse (and amaze) me. A robust capacity for mimesis ensures that no sooner is the sod turned on some groundbreaking activity, than several copycat versions make their debut.

One explanation for this is the serial failure of our criminal justice system. A key consequence of which is a shameful disregard (or, who knows, maybe even, ignorance) of property rights. Copyrights and intellectual property rights almost have no meaning in this environment.

So soon therefore, as a business idea births, a glut arises in the market for the goods/services associated there with. Does this explain the penchant for regulatory capture? At least, then, the resulting cosseting offers protection of the sort that other forms of property rights offer entrepreneurs in other climes from would-be competitors.

This idiosyncrasy is, however, replicated across every facet of our national life. Even phrases soon go viral, long before their meaning has had a chance to sink in. One current such phrase is the “base effect”. In a backhanded compliment to the monetary authority’s fight over the last three years to keep domestic prices stable, part of the interest with this set of words reflects a growing concern on Main Street with the fine print of macroeconomic management.

Until recently, much of the debate about what is wrong with our economy has focused on the drag to growth that rampant corrupt practices in the public sector represent. Lately, though, much of the focus on what we can do to lend a fillip to economic growth and development has transferred to inadequate husbandry at the macroeconomic level.

As with anything used over and again, though, this one phrase runs the risk, very soon of running behind its original meaning. Basically, it describes the fact that in any economy where “the price index had risen at a high rate in the corresponding period of the previous year and recorded high inflation rate, a similar absolute increase in the price index now will show a lower inflation rate now.”

Once every month since January, newspaper headlines have led with reports on softening domestic prices, as reported by the official bean counters. On this measure, headline inflation has dropped from the 12% year-on-year rise at which it closed December 2012 to 8.6% in March. Other measures (especially of the anecdotal kind), however, have been less benign to the pocket.

This is where the “base effect” has worked well as an explanation. Early last year, a raft of fiscal measures by the federal government drove domestic prices up very fast. Given this fact, in order for the inflation count this year to have recorded anything close to last year’s numbers, we would need to have had similar sized shocks to prices.

That, thankfully, did not happen. Thus, as a relative measure, the consumer price index has trended downwards all though the first quarter of this year. None of this, however, says that absolute prices were kinder to the pocket this year than they were last year. In fact, the National Bureau of Statistics (NBS) reports in its March inflation bulletin that “In March, the composite CPI increased by 0.71 per cent month- on-month from index levels recorded in February”.

So, prices are not rising as fast this year as they did last year. But they are still up. For policy considerations, my take remains unchanged. The economy will run into strong fiscal headwinds in the coming months as politicking heats up ahead of the general elections in 2015.

Inflation will be the least of our worries as an economy when this process starts, as a looser purse will build imbalances across the economy. The central bank will then struggle to keep the economy on an even keel even as the small fiscal buffers we have built up are rapidly run down.

All of this will happen, alas, as we begin to see downward pressure build up on oil prices in the international markets. OPEC is contemplating a quota cut to help shore oil prices up.

If we ignore here the proclivity of OPEC members to cheat on their quotas, that should add a new order of pressure on our fiscal position. And the loss to domestic production from oil theft, and forced shutdowns? Picture is of huge threats to the economy, going forward.

Mr. Uddin, an economic historian and theorist, works as a business strategist in Lagos from where he writes and maintains a weekly column for Premium Times.

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