Spiking inflation: Is the worst over for Nigeria?

From a level of 21.34 per cent as of end-December 2022, Nigeria’s headline inflation maintained a consistent upwards trajectory, closing year 2023 at 28.92 per cent—a rate widely considered to be the highest in about three decades.

Yet, subsisting economic fundamentals and policies do not show any likelihood that the consumer price index (CPI)—which measures inflation rate—would in any way be decelerating to attain the 21.25 per cent projection in the 2024 Federal budget. In point of fact, the factors driving the runaway inflationary trend remain more potent in 2024 than they were in the past couple of years.

Specifically, the fallouts and upshots of removal of fuel subsidy in May 2023—which led to unprecedented spike in the prices of all goods and services in Nigeria, are yet to be meaningfully addressed. Ironically, in the past eight months or so, government at all levels have been cobbling all manner of palliatives to assuage the misery, poverty and hardship unleashed on the citizenry by the fuel subsidy removal initiative. The subsidy removal on Premium Motor Spirit (PMS) which drove the price of fuel up by over 300 per cent has since pushed cost of transportation, food, services, etc. to dizzying heights.

In a ‘decoupled’ form, a core driver of the hiking CPI has been food inflation—a key reflection of Nigeria’s worrisome level of food scarcity/insecurity. Thus, according to the National Bureau of Statistics (NBS), the rate of food inflation increased to 33.93 per cent in December 2023 from 30.64 per cent in September 2023. The statistics agency reported price rises for a range of food products in December 2023, including cereals and bread, oil, fish, meat, fruit, and eggs. Unfortunately, most of what is called the “food basket” of Nigeria have been akin to ‘war zones’ in recent times—being almost ceaselessly ravaged by rampaging armed bandits.

Practically all the farming communities (in those places) have been displaced—the farmers now living in several camps as internally displaced persons (IDPs). These millions of occupants of the IDP camps are the farmers; and their living as refugees forecloses their agricultural production and productivity. Even when the ‘remnants’ of the farmers in remote villages and hamlets manage to produce, the cost of transportation to take their produce to the market has since become outlandish. And this adds to the ultimate price to the consumer; still driving the dreaded inflation to even greater heights!

However, the high and rising inflation in Nigeria, currently at a staggering 29 per cent as of December 2023, is a complex issue with no single cause. Thus, in less-than-obvious way, rising money supply has been one of the drivers of the runaway inflationary trend in the country.

Although the Central Bank of Nigeria (CBN) up until May 2023 tightened its monetary stance, there has been a notable increase in money supply. Apparently, ‘under the table’, the CBN has been availing the government with trillions of naira facility through the ‘Ways and Mean’ window. This ‘surplus liquidity’ has been fueling higher aggregate demand, leading to a chase for limited goods and services, pushing prices up.

It was not until the twilight of the Muhammadu Buhari administration (in 2023) that it became public knowledge that over N23 trillion had been made available to the government by the CBN through ‘Ways and Means’. At this point, the government, against the intendments and provisions of the CBN Act (2007), pushed for the securitization of the humongous ‘loan’ facility. This was practically pushed down the throat of the National Assembly—and the (long term) security was added to the huge and yet rising stock of Nigeria’s public debt. At present, it is already being feared that the Bola Ahmed Tinubu administration might go the route of its predecessor, in ‘secretly’ abusing the ‘Ways and Means’ window.

By far, however, one of the major drivers of the subsisting hyper inflationary trend in Nigeria has been the floatation of the national currency—Naira—in June 2023. The policy translated to an unprecedented devaluation of the currency against virtually all other hard currencies across the globe. No doubt, the depreciation of the Naira against major currencies makes imports significantly more expensive. This impacts not only consumers directly but also manufacturers who rely on imported raw materials, pushing up production costs and ultimately consumer prices. Call it ‘imported inflation’; it also fed into the local runaway inflationary trend.

Structural bottlenecks (especially, Nigeria’s infrastructure challenges), including poor road networks, unstable power supply, and inefficient logistics, significantly increase the cost of production and distribution, translating to higher prices for consumers. Thus, with the trillions of Naira claimed by successive governments to have been sunk into the provision of infrastructure, the reality on ground remains frustrating to all economic agents.

Today, in Nigeria, practically all the operators in the private sector provide their critical infrastructure. Manufacturers, especially, have to have their generating sets (electricity), water supply, roads, waste management/disposal schemes, internal and external security arrangement, etc. All these usually add substantially to the cost of production of whatever items in Nigeria—and end up making such businesses uncompetitive vis-à-vis their foreign counterparts. In almost all cases, such locally produced items end up ‘pushed’ out of the market by much cheaper imported brands or substitutes. This, coupled with Nigerians’ avid taste for foreign goods, have gotten too ingrained to be reversed in the short term (say in 2024).

The world is already a global village; and as such, ‘alien’ issues and crises have been filtering into all nooks and crannies of the globe, including Nigeria. And so, global inflationary pressures and the ongoing war in Ukraine have also contributed to rising input costs and disrupted supply chains, impacting Nigeria’s inflation. By late last year, the conflict in the Middle East and natural disasters in several other places had joined in the disruption of economic activity and propping implicit high inflation. This is yet to abate!

For Nigeria, given the variety and complexity of the causes/drivers of the persisting runaway inflation, there may not be ‘quick fix’ solutions to the spiking CPI—not in the short term. Also, many drivers of the high inflationary trend in the country are exogenous factors that are largely beyond the purview of the powers that be. Therefore, addressing this high inflation requires a multi-pronged approach from the Nigerian government and a wide range of stakeholders.

One of the steps must be a return to tight monetary stance by the monetary authorities. The CBN can further control money supply growth and raise interest rates (somewhat) to dampen demand and stabilise prices. In this regard, it is imperative that the current leadership of the apex bank must eschew secrecy in the conduct of its monetary policy. The prevailing indecision about whether or not to continue to hold the normal Monetary Policy Committee (MPC) meetings does no good to the apex bank. Transparency and creativity demand that the CBN should quickly recommence the MPC meetings, and come up with its usual communique to make its monetary stance known without further delay.

Related to this is that the apex bank must quickly do whatever it takes to stabilise the Naira exchange rate. Implementing policies that promote exchange rate stability can reduce uncertainty and encourage investment. The prevailing situation where, even in the official forex market, the Naira exchange rate varies markedly from day to day is a key disincentive to businesses. This environment is even made worse by the high and rising premium between forex rates in the official window and the parallel market—currently about N300 to N400 per dollar.

This is the time for government to come up with the incentives to encourage and promote domestic production. Such policies must encourage local manufacturing and reduce reliance on imports—to help stabilise prices and boost economic growth. Same thing goes for addressing infrastructural deficiencies and improving logistics efficiency, to significantly reduce production and distribution costs.
All said, addressing these issues will require sustained efforts from policymakers, businesses, and citizens alike to deal with both the immediate challenges and the underlying structural issues that hinder economic growth and stability.

As for the government, particularly, there is the need for effective monitoring of its ongoing policies and interventions to see how they impact inflation rates in the coming months. It’s a task that must be done!

Okeke, a practising economist, business strategist, sustainability expert and ex-chief economist of Zenith Bank Plc, can be reached via: [email protected]