Fiscal discipline, structural reforms key to tackling inflation

Experts said Nigeria’s ability to manage inflation effectively will depend on a combination of fiscal discipline, exchange rate stability and structural reforms aimed at improving domestic production and addressing supply-side bottlenecks.

According to analysts at Cowry Asset Management Limited, without these, inflationary pressures would continue to erode purchasing power and disrupt economic stability.

The analysts argued that rebasing the consumer price index (CPI) has introduced fresh challenges for the country’s monetary authorities.

According to them, research has shown the adjusted CPI framework has had a significant impact on real rates of return, potentially boosting market sentiment in the short term.

However, concerns remain over the sustainability of the inflation path, especially with the recently approved 50 per cent increase in telecom tariffs, which could drive fresh price pressures across multiple sectors.

Given the current economic landscape, the analysts argued that the Monetary Policy Committee (MPC) faces a delicate balancing act as policymakers must decide whether to hold interest rates steady to properly assess inflation trends under the new CPI methodology or implement a marginal rate hike of 15–25 basis points to anchor inflationary expectation.

They noted that with inflation risks still persistent, market participants and policymakers must closely monitor price trends in the coming months to determine the true impact of the rebased CPI and broader economic developments.

The experts pointed out that while the CPI rebasing may provide a statistical reprieve, underlying inflationary pressures would remain elevated due to persistent structural weaknesses and policy-driven cost adjustments.

Recall that throughout 2024, Nigeria experienced steady inflationary acceleration, largely driven by recent reforms, including the fuel subsidy removal, which sharply increased energy costs and transport fares and managed depreciation of the naira, which raised the cost of imported goods and raw materials.

Although these measures were intended to enhance fiscal sustainability and improve foreign exchange liquidity, the experts maintained that the reforms have significantly heightened production costs for businesses, driving inflation across multiple sectors.

The continued rise in inflation has far-reaching effects on Nigerian households and businesses as rising costs have continued to erode consumers’ purchasing power, leading to weaker demand for goods and services.

Meanwhile, businesses, particularly those in the manufacturing and agricultural sectors are struggling with higher operating expenses, which could impact job creation and economic growth.

With the naira still under pressure, businesses that are dependent on imports continue to face rising input costs, making inflation control even more complex, the report noted.

The experts further stressed that Nigeria needs a coordinated policy approach to tame inflation and support economic stability.

Key recommendations include boosting local production to reduce dependence on imports, ensuring exchange rate stability to curb imported inflation and implementing targeted fiscal policies to ease the cost on businesses and households.

While the government’s monetary tightening measures have helped slow inflation’s pace, long-term stability will require deeper structural reforms to address fundamental weaknesses in the economy, while the success of its inflation management strategy would ultimately depend on a well-coordinated mix of fiscal discipline, structural reforms and monetary policies.