A multi-pronged approach to tackling inflation in Nigeria
By Kenechukwu Aguolu, FCA, PMP, CBAP
In response to Nigeria’s alarming inflation rate of 33.69 percent in April 2024, the Central Bank of Nigeria’s Monetary Policy Committee, during its 295th meeting held on the 20th and 21st of May,2024, opted to raise the benchmark interest rate by 150 basis points, a decision consistent with global practices aimed at addressing inflationary pressures. However, the Governor of the CBN underscored the nuanced nature of combating inflation, emphasising that there is no “magic wand” solution. This acknowledgment resonates with the intricate economic dynamics and highlights the necessity for a multifaceted approach to tackling Nigeria’s inflationary challenges.
Inflation typically occurs when demand outpaces supply, often as a result of an excess of money circulating in the economy. To address this, the central bank raises the benchmark interest rate, aiming to reduce inflation by tightening the money supply. Higher interest rates increase the cost of credit, discouraging borrowing and spending. Savings and investing in government securities become more appealing as higher returns are offered. All these lead to reduced spending by individuals and businesses; thereby decreasing the amount of money in circulation and helping to curb inflation.
Nigeria’s inflation, however, stems from factors other than excessive money supply. The elimination of fuel subsidies has significantly increased transportation costs, affecting prices across the economy. Floating of the naira has led to substantial devaluation, raising the cost of imported goods, raw materials, and fuel, thereby driving up prices. Widespread insecurity has left many farmlands uncultivated, causing food shortages and higher food prices. This scarcity often results in profiteering and hoarding of foodstuffs, which are later sold at inflated prices.
Acknowledging the complexity of Nigeria’s inflationary challenges, many experts and stakeholders, including the Central Bank of Nigeria (CBN), acknowledge that raising interest rates is not the sole solution. There is a limit to how much the CBN can increase rates without causing significant adverse effects on the economy. The organised private sector has raised concerns regarding the potential negative impact of higher borrowing costs on businesses which could further lead to more unemployment in the country. Additionally, while the previous rate hike did attract foreign direct portfolio investments, its impact seemed short-lived, further highlighting the need for a more comprehensive approach to address Nigeria’s inflationary pressures.
Dangote refinery brings a glimmer of hope for Nigeria’s economic landscape with the production of premium motor spirit (PMS) set to begin as there is anticipation that the price of PMS will decrease, mirroring the trend observed when the refinery commenced diesel production. This reduction in the price of PMS is expected to have a ripple effect, resulting in lower transportation costs across the country. However, the government needs to take all necessary measures to fast-track the diversification of the economy. This diversification is essential to improve revenue sources and enhance the country’s balance of trade, which will in turn help stabilise the value of the naira. Improving the security situation in the country is crucial for achieving these goals. Current security challenges have severely impacted sectors like mining, agriculture, and oil production. Without addressing these security issues, efforts to diversify the economy and boost production in these critical areas will be significantly hindered
In conclusion, addressing Nigeria’s inflation necessitates a holistic approach that transcends traditional monetary policy measures. As aptly highlighted by the Governor of the Central Bank of Nigeria, Dr Yemi Cardoso, there is no instant solution or “magic wand” to overcome the multifaceted challenges driving inflation in the country. While adjusting interest rates can contribute to managing inflation by curbing the money supply, Nigeria’s inflationary pressures are rooted in a complex web of factors. Therefore, implementing a comprehensive and multifaceted strategy that includes enhancing security, boosting local production, diversifying the economy, improving infrastructure, and stabilizing the naira is imperative alongside monetary policy adjustments, are essential for effectively combating inflation and fostering long-term economic stability and growth.
Kenechukwu writes from Abuja, Nigeria and can be reached via [email protected]
