2020 of pandemic, recession and inflation
It is no news that many economies including Nigeria are currently in recession. In reality, the year 2020 has been eventful, chiefly with the novel Coronavirus (COVID-19). Its impact has continued to have a severe impact on businesses, households, and economies globally and one of its consequences is inflation. Even though inflation is a concept that affects all of us; but most importantly high inflation could be hostile to economy and business especially the micro, small and medium enterprises (MSMEs). With a persistent inflation, businesses and households usually perform poorly, and expectedly, more money is paid for the same goods and services. This has been the troubling trend in Nigeria in recent times, where high price increases have been recorded in transportation, food cost, household needs, raw materials, pharmaceutical products, health care, motor cars, vehicle spare parts, equipment, and in prices of services amongst others. Admittedly, inflation erodes our value of money and also erodes the purchasing power of all of us. Therefore, the nexus of impact of inflation is the specific focus of this piece. However, it was mainly instigated by the continuous rise in the level of inflation rate in Nigeria in recent times. The consequences and impact of inflation (price instability) in Nigeria cannot be over-emphasized. Key amongst the consequences of inflationary pressure is the persistent decrease in the purchasing power of citizenries especially at a time when the economy is in recession and pandemic is ravaging.
Inflation is simply seen as a persistent rise in the general price level of the broad spectrum of goods and services in a country over a long period. Largely, when prices of energy, food, commodities, goods, and services go up, it hurts all of us and hardship is heightened. A major driver of Nigeria’s headline inflation has been the consistent rise in food cost. Agreeably, the inflation rate is determined by calculating the percentage change in a price index such as consumer price index (CPI), wholesale price index (WPI), and producer price index (PPI), etc in an economy. The commonly used metric is the Consumer Price Index (CPI) which measures the change in income a consumer needs to maintain the same standard of living over time. That is, the CPI is the economic measure that tracks changes in the cost of living over time. It is simply a more acceptable means of measure of inflation or price movements in an economy.
Therefore, because CPI is available on a more frequent basis, it is mostly in use for monetary policy purposes even by the Central Bank of Nigeria (CBN) when determining inflation rate. The Data from the National Bureau of Statistics (NBS) reveals that the headline inflation rate in Nigeria rose for a fifteen-straight month to 14.89% in November 2020 from 14.23% in October 2020 meanwhile as against 13.71% recorded in September 2020. With this metric, the 14.89% rate is the highest recorded in the country since March 2018 which is over a two-year high and is a cause for concern.
Noticeably, in a study on inflation in Nigeria using panel-data models, Sani Ibrahim Doguwa of Ahmadu Bello University, Zaria Kaduna State finds a threshold inflation level of 12 percent applicable to Nigeria. This threshold implies that below the level, inflation has a mild effect on economic activities; while above it, the magnitude of the negative effect of inflation on growth is very high. Consequently, from the National Bureau of Statistics (NBS) data the country has experienced high volatility in inflation rates in recent times and the continuous rise above the threshold level of 12% is a cause for apprehension. The sharp increase in the inflation rate, lull in economic activities, and the economic recession could be attributable in specific terms to the increase in Value Added Tax (VAT) rate, increasing public debt, volatility in the price of crude oil, and the multifaceted COVID-19 consequences effects of government policies, COVID-19 pandemic, external shocks, and insecurity in the northern part of the country amongst others.
The novel coronavirus (COVID-19) pandemic has negatively affected the global economy and most especially in Nigeria. It has significantly affected industrial output, the fortune of businesses especially MSMEs. More so causing a decline in economic activities with an attendant shrink in GDP. Furthermore, COVID-19 has caused severe shortages in the supply of goods and services across borders, due to series of restrictions and this has necessitated depressing foreign earnings for Nigeria and also impacted negatively on economic growth and the fortune of businesses particularly MSMEs. So far, we have seen the inflation rate rise from month on month (MoM) in the year 2020.
Significantly, history and literature present some other factors adduced to the unsustainable economic growth in Nigeria apart from the high inflation rate, recession, and impact of COVID-19 pandemic to include: the incessant insecurity in the northern part of the country, rising foreign and domestic debt, currency exchange rate volatility, propensity to consume more and save less, decrepit infrastructure and poor policy implications, among others. Regrettably, these issues can further compound and manifest in areas we already have deficit as a nation, staggering unemployment, rising cost of living, bleak business continuity, poverty level increase, illiteracy, crime, and terrorism. Another perennial issue is the country’s over-reliance on crude oil production revenue, which has posed unsustainable due to exposure to global shocks.
Based on the aforementioned and from the inflationary perspective, to achieve adequate price stability in the country, the government needs to reduce budget deficit, adopt significant structural policy reforms with monetary and fiscal policies. Such as reducing import duties on some essential items and commodities and so on. This will help to control inflation and maintain stronger growth rates in terms of improved Gross Domestic Product (GDP) and to stabilize the tide of inflationary pressures on the economy and in business operations. It is advocated that political leaders should minimize avoidable public spending, reduce spending on non-development activities, address insufficient infrastructure, and build strong and effective institutions. The massive growth and developmental challenges of the country can improve by also promoting the human and SME ecosystem. The SME sector can play a major role in the economic growth of the country through the distribution of wealth, poverty reduction, and job creation. The sector is labor-intensive and can provide a reasonable reduction in the unemployment rate in the country but the government needs to provide an adequate enabling environment and support for the sector to strive.
Considerably, institutions, businesses, and individuals have the opportunity to beat inflation by accelerating the preservation of capital and strengthening purchasing power with income addition. This can be done by acquiring investments particularly assets such as real estate because they usually keep up with inflation. Remember N100,000 today will not acquire the same value of goods and services in 10 years mainly due to inflation. Therefore, investing is key to hedge against a sharp inflation impact because it erodes the value of savings if funds are just left in the bank accounts.
Supportively, it is imperative to consider investing in other currencies, diversify your investment portfolio internationally if you can, consider inflation-protected securities with potential for higher-growth like equities, Gold Shares ETF, or mutual funds. These can earn more interest returns per year than the inflation rate therefore the options are reasonable. It is also possible to start a business, cultivate passive income, and even buy items with a long shelf life today to mitigate the impact of inflation. Good luck!
Dr. Olubiyi, Ph.D. Business Administration, is an Entrepreneurship & Business Management expert.
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