- Nigeria’s inflation rate has remained high for the past 9 years, way before COVID-19 and the disruptions it imposed.
- Experts have argued that Nigeria’s inflation results from excess money supply in the economic system chasing too few goods.
- Nigeria’s inflation climbed to a new 18-year high in November, matching a record level last seen in 2005.
In 2021, the global economy experienced an inflation surge. This was the first time in many decades that inflation hit double digits in most developed and emerging economies. In the United States, inflation peaked at 9.1 per cent in July 2022, the highest in 40 years.
Such high levels of inflation were unusual and uncomfortable, and the Central Banks in the affected countries tackled it ruthlessly. The applied policy actions paid off and inflation has been moderating fast.
However, what obtains in Nigeria paints a starkly different image from what the rest of the world has experienced in terms of inflation. Nigerians have endured an inflation crisis for the past 9 years, way before COVID-19 and the disruptions it imposed. Nigeria Central Bank set an inflation target of 6 to 9 per cent, which has not been met in any year since 2014.
In the nine years from May 2014 and May 2023, the naira shed 71 per cent of its value owing to inflation. Simply put, this means that an item that cost $0.13 (N100) in 2023 was only $0.036 (N28.8) in 2014. Moreover, an item that cost $0.13 (N100) in 2014 would be worth $0.44 (N347.8) in 2023.
Even among African peers, a prolonged period of double-digit inflation represents a unique Nigerian experience. Among 45 African countries observed between 2014 and 2022, 34 countries posted single-digit inflation on average. Nigeria was among the bottom 8 with the worst inflation problem, with an average inflation of 13.5 per cent over that period.
De-anchored inflation expectations Nigeria
Different from other Central Banks in emerging economies, the Nigeria Central Bank has long let inflation levels go unchecked. Governments, businesses, and households in Nigeria accepted this situation and go about their daily transactions unfazed by the high inflation.
When inflation benchmarks are left unchecked, rising inflation becomes a self-fulfilling prophecy. Economic agents factor expected inflation into economic activities, and this occasions a hard-to-break cycle.
This behaviour explains why inflation affects crucial prices in the economy. Households demand higher wages since inflation has devalued the existing ones in the marketplace. Wage increments also eventually trigger inflationary pressures. Electricity prices soar because inflation impacts tariff pricing.
Moreover, borrowing becomes more expensive both in the short and long term because the finance suppliers seek a return that would beat inflation. In this sense, if inflation is expected to be high, the expected return must also be high. High-interest rates are destructive of long-term investments needed to boost productivity.
In the end, the exchange rate, another crucial price in the economy, also loses value from inflation. After all, over a long enough timeframe, the currency with high inflation would always depreciate faster than a currency with low inflation. Yet, the exchange rate depreciation also causes more inflation. This self-imposing nature is what contributes to devastating inflation levels within the economy and the anchor of monetary policy at the Central Bank.
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Nigeria’s inflation rate more ‘supply-driven’
Nigeria’s inflation rate is more ‘supply-driven’ than ‘demand-driven.’ Policy rate adjustments as a control tool are ineffective when an inflationary trend is dominantly supply-driven. Experts have argued that Nigeria’s inflation results from excess money supply in the economic system chasing too few goods.
However, the core problem is that the aggregate supply level has significantly fallen short of the aggregate demand in an economy that operates below full employment. Ironically, Nigeria’s Central Bank long deprioritised price stability in favour of economic growth.
The monetary institution has, over the years, lent money in record amounts to players in the manufacturing and agricultural sectors to contain inflation. Moreover, the Nigeria Central Bank now funds the government through ways and means up to the tune of $28 billion from $1.2 billion in 2015.
Nigeria’s Central Bank assigned loads of money to address its inflation challenge in stark defiance of conventional knowledge. It is impossible to address inflation by boosting the money supply, as this raises inflationary pressures in the economy as long-term investments take time to pay off. As such, tightening interest rates and money supply would work better.
Consequently, under President Bola Tinubu’s administration, there has been a significant policy shift. The Tinubu administration has implemented bold reforms with meticulous monetary policy prescriptions like the unification of foreign exchange rates and the lifting of foreign exchange restrictions on the importation of 43 items.
Nigeria’s inflation rate an 18-year high
Nigeria’s inflation rate climbed to a new 18-year high in November, matching a record level last seen in 2005. Consumer prices rose 28.2 per cent from a year earlier, compared with 27.3 per cent in October, according to the National Bureau of Statistics. Prices rose 2.1 per cent in November.
Inflation in the West African nation – with 40 per cent of its over 200 million people living in extreme poverty – surged following the loosening of foreign exchange restrictions in June, causing the naira to dip 45 per cent. The end of the fuel subsidy a month prior raised transport costs threefold.
Annual food inflation in November quickened to 32.8 per cent from 31.5 per cent in October, while core price growth, excluding energy costs and farm produce, eased to 22.4 per cent from 22.6 per cent.
The inflation rate in Africa’s largest oil producer is expected to peak at 30 per cent in the first quarter of 2024, with experts predicting the Central Bank to raise rates by 500 basis points in the first half of 2024.
Such a hike would allow the monetary institution to restore positive real rates by August 2024 and reduce Nigeria’s inflation rate expectations that have become de-anchored. Moreover, higher rates in 2024 will attract foreign financial inflows that can help in rate convergence and stabilise the naira.
Nigeria Central Bank’s planned sweeping changes to contain inflation
According to Governor Olayemi Cardoso, the Central Bank of Nigeria plans a switch to inflation targeting as opposed to money supply control in its battle to slow price increases. The central bank raised its key rate by 25 basis points in its last meeting in July. Cardoso also ordered commercial banks to bolster capital reserves.
“The Central Bank of Nigeria is committed to achieving monetary and price stability,” Cardoso said. “We will tackle institutional deficiencies, restore corporate governance, strengthen regulations and implement prudent policies.”
However, with inflation surging to an 18-year high, the Abuja-based monetary institution is expected to lift its key interest rate for a ninth time running when it meets next year. The central banking institution has already raised rates by 725 basis points since May 2022 to 18.75 per cent.
The bank has spent the last few months reviewing the effectiveness of its monetary policy tools and fixing the transmission mechanism to guarantee that the monetary policy committee decisions create the desired objectives.
Since assuming office as the Nigeria Central Bank Governor, Cardoso has pointed towards orthodox policies at the institution, which include controlling market liquidity. The bank has resorted to increased open market operations and issuing the so-called OMO papers to cut excess liquidity in Nigeria’s banking sector.
The governor has also indicated that the bank will formulate new foreign exchange guidelines and legislation after extensive deliberations with FX market operators and commercial banks. The bank has also focused on clearing the backlog of dollar demand that has weighed heavily on the naira.
Finding a lasting solution crucial
Inflation is a tax on the poor and everyday life, significantly when drive by driven by food prices. Inflation robs people of total control of their earnings when prices increase without corresponding wage increases. Inflation disrupts prices in the economy, creating a vicious cycle with poor outcomes for the citizens.
In addition to the ongoing changes and policy shifts at the Nigeria Central Bank, tackling inflation must remain top of the agenda for the new leadership. The is an urgent need to contain Nigeria’s inflation rate, and the central bank must adhere to basic principles with a narrow focus on low and stable inflation. While it is not a silver bullet to economic transformation, it would have a transformative impact on the economy and the cost of living.
