Inflation in Nigeria
The inflation rate for consumer prices in Nigeria moved over the past 62 years between -3.7 per cent and 72.8 per cent. During the observation period from 1960 to 2022, the average inflation rate was 16.1 per cent per year. Overall, the price increase was 566,918.02 per cent. An item that cost N100 in 1960 cost N567,018.02 at the beginning of 2022.
Nigeria’s headline inflation has continued to rise, hitting a new high of 21.47 per cent in November 2022 from 21.09 per cent in October 2022, according to the National Bureau of Statistics’ report released in December 2022. (Recent report shows inflation rate at 21.82 percent as of January 2023 from 21.34 percent in the prior month.)
It is unlikely that the current inflationary surge will subside quickly. Economic history suggests otherwise. Indeed, there are concerns that the country’s inflation trend may not have reached its peak, considering that triggers like intermittent fuel scarcity witnessed during the past four months, stubbornly high gas and energy prices, lingering currency pressures and build-up of higher naira liquidity as the 2023 general election approaches, are yet to be addressed.
The key inflation drivers have not changed over the last few years. They include the following: Depreciating exchange rate, rising transportation costs, logistics challenges, forex market illiquidity, hike in diesel cost, climate change, insecurity ravaging farming communities and structural constraints to economic activities.
Fiscal deficit financing by the CBN, represented in the apex bank’s cumulative N22.7 trillion Ways and Means Advances to the Federal Government of Nigeria over the past seven years is also a significant factor fueling inflation because it distorts the base of the money supply and injects high levels of liquidity into the economy. Tapering of monetary easing in the advanced economies is also driving imported inflation and the depreciation in the exchange rate.
Relationship Between Poverty and Inflation
Inflation intensifies the problem of poverty. For people in lower-income households who already live hand-to-mouth, paying more for essential goods like petroleum products and food can be devastating. Inflation also lowers the real minimum-wage around the world, meaning it decreases the value of minimum wage and lowers the standard of living, even more for those who rely on it.
Cost-push inflation makes many businesses unprofitable, as demand for these products and services decreases. This leads to factory and other business closures, and to unemployment, which perpetuates the poverty cycle.
Inflation and Poverty in Nigeria
The NBS recently released data about Nigeria’s inflation level and worsening poverty, citing it as a key driver for the rising number of poor people in the country. While many have blamed the Russia-Ukraine crisis partially for the present inflation trigger, the more important, lingering structural and security challenges driving prices of food and basic services beyond the reach of the poor and the almost non-existent middle class have often been ignored.
The rise in the prices of everything, including mainstays like food and oil, is both an economic and political problem. Everyone is paying the price. Inflation in Nigeria has been poorly controlled in the past several years. Part of the mandate of the CBN is to maintain price stability, i.e., manage inflation.
Nigeria’s inflation-rate jump to 21.47 percent in November 2022 represents a 17-year high, raising concerns for Nigerians already battling with weak household incomes and import pass-through costs. Poor households across the country are trapped in a persistently rising cost of living cycle. Prices of basic food items increase at a double-digit percentage every other week.
The World Bank has noted that the Nigerian minimum wage, which was worth N30,000 in 2019, could be valued at N19,355 today. This means that there had been a loss of 35.48 per cent value between 2019 and 2022 as inflation erodes Nigerians’ purchasing power. “The cumulative inflation between 2019 and 2022 was 55 per cent”, the World bank’s Alex Sienaert recently noted. The rising inflation led to a slump in the purchasing power of Nigerians.
Although the CBN is making efforts to curb the rising inflation by increasing interest rates, its funding of the fiscal deficit through the Ways and Means Advances has undermined the Bank’s efforts.
The World Bank projects that the inflation shock will push about 15 million more Nigerians into poverty between 2020 and 2022 in its latest Nigeria Development Update report, titled, ‘The Continuing Urgency of Business Unusual”. Noting that Nigeria has one of the highest rates of inflation in the world, the Bank stressed the need to reduce rising rates of inflation.
Moreover, according to the Bank, “Inflationary pressures in Nigeria were compounded by policy distortions, in particular (i) lack of flexible foreign exchange management, (ii) trade restrictions, and (iii) conflicting monetary policy goals.” It further disclosed that global supply shocks arising from COVID-19 and the war in Ukraine exacerbated inflationary pressures and increased their urgency.
What Policymakers Should Do to Keep Inflation Stable
Higher interest rates make it more expensive for people to borrow money and encourage them to save. It means that overall, they will tend to spend less. If, people overall, spend less on goods and services, prices will tend to rise more slowly. That lowers the rate of inflation.
The opposite is also true. Lower interest rates mean it’s cheaper to borrow money, and there’s less of an incentive to save. This encourages people to spend and increases the rate of inflation.
Subsidies: Governments have been turning to subsidies to dampen the impact on households. In some cases, subsidies can be an effective transitional tool to ameliorate the impact of shocks. But they tend to be left in place for too long, leading invariably to adverse effects. Subsidies can quickly detract from spending on infrastructure, health, and education.
Energy subsidies tend to go to wealthier households more than poorer households and encourage excess consumption. Subsidies are better targeted to production than to consumption. The petrol subsidy should be removed, but a subsidized nationwide transportation system targeted at the poor should be put in place to dampen the potential inflationary impact of subsidy removal.
Social Welfare Policies: Policymakers should use effective and transparently implemented social welfare policies to protect the poorest from rising prices. These policies could include targeted safety nets such as cash transfers, food, and in-kind transfers, school feeding programs, and public works programs. Calculating inflation indexes for different income groups provides better information on inflation experienced by the poor and should inform the design of social safety nets.
Fixing Supply Side Constraints: Taming inflation demands urgent government intervention to fix supply side constraints in the economy. Tackling production and productivity constraints, fixing the dysfunctional forex policy, and markedly reducing liquidity injections through Ways and Means funding of fiscal deficit are important.
Fiscal deficits should be reduced. While there are arguments that may support fiscal budgeting, Nigeria’s economy is not sophisticated enough to support this practice, which creates a temptation to resort to excessive borrowings, including those from the Central Bank of Nigeria that are above legally permissible limits. The major focus of the federal government should be improving its revenue generation by reducing taxation levels while expanding the tax net and abolishing wasteful waivers to the commercial sector.
Economic and investment policy must focus on how to bring down the costs of electricity and transportation while maintaining market profitability, as these are major contributing factors to built-in inflation.
Pause Hikes in Monetary Policy Rate: Meanwhile, the CBN should resist the temptation to further increase the Monetary Policy Rate. The deployment of this monetary tightening tool should be put on pause.
Prior distortions and contradictions in monetary and foreign exchange, the structural component of inflation in Nigeria, and inflation expectations, have blunted the ability of the MPR to control inflation at this time. Tightening the money supply remains important, but this should be pursued through other means of controlling the rate of money creation.
Central bank independence needs to be restored in Nigeria. The operational independence of the CBN has evidently been compromised. Unless that independence is restored, the Bank’s ability to maintain price stability (by resisting distortions in the money supply based on fiscal/political stimuli) will likely remain weakened. So will its ability to anchor inflation expectations through the MPR, as well as its ability to formulate and execute efficient foreign exchange policy, which also significantly contributes to inflation.
***Courtesy: Institute for Governance and Economic Transformation (IGET), published in Prime Business Africa under the title, ‘Inflation and Poverty in Nigeria: Explainer’*
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
