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CBN’s target of 21 percent inflation rate 15 Mar 2024

The Central Bank of Nigeria (CBN) has announced its target of 21.4 percent inflation rate for 2024 year-end. Annualised inflation rate rose to 29.82 percent in December 2023. Therefore, if the approximately eight percentage points decline in inflation this year is realised, it, quite clearly, would be progress. But it would be a very tenuous progress, not least because it would mean the end of the severe cost-of-living crisis Nigerians are facing is not yet in sight.

Many commentators have said the year-end inflation target of the CBN is unachievable. On the contrary, the target is far from ambitious enough. This is partly because of the CBN’s orientation to short-termism, instead of anchoring long-term inflationary expectation.

Nigeria is not the only country that has had to grapple with high inflation in recent years. In fact, nearly all countries and jurisdictions of the world are still trying to return inflation to their long-term targets after the general rise in prices caused by supply-chain disruptions and shifts in demand as induced by the Covid-19 pandemic and the ongoing Russia-Ukraine war. In the United States and the European Union, the pandemic and increases in energy prices pushed inflation to multi-decades highs of 9.1 percent in June 2022 and 11.5 percent in October 2022, respectively.

However, US inflation rate fell to 3.1 percent this past January, which represents a 66 percent decline since its historic peak only 19 months earlier. And, in just 14 months, EU’s inflation rate, at 3.4 percent in December 2023, had fallen more dramatically by 70.4 percent. But if the CBN were to meet its inflation target at the end of 2024, Nigeria’s inflation rate would have declined by only 28.2 percent.

The CBN has been quite wimpish in anchoring long-term inflationary expectation, which it nebulously set at “single digit.” The apex bank has been quite tolerant of price instability. But as Africa’s largest population and biggest economy, Nigeria should be keener on price stability. This is a precondition for foreign investors looking for real yield to consider Nigeria’s investment opportunities.

South Africa, Nigeria’s main economic rival, achieved average inflation rate of 5.2 percent over the 10-year period to 2022. In this period, inflation rate averaged 9.4 percent in Sub Saharan Africa, where the 2022 average was 6.9 percent. This indicates that Nigeria is grossly underperforming with regard to policies to stabilise prices, and, invariably, the economy.

Nigeria’s inflation has remained stubbornly high for a number of reasons. First, after vaguely setting its long-term inflation target, the CBN has tended to forget about it. Like in the current situation, short-term goals override the long-term inflation target. The exception to this was in the latter years of the CBN governorship of Sanusi Lamido Sanusi when inflation dropped to a single digit of 7.7 percent in February 2014 before making its current enduring ascent.

Second, the structural rigidity that has driven long-term high inflation has remained. Nigeria remains mainly dependent on the exportation of crude oil for foreign exchange earnings. At the same time, the country has increasingly depended on the importation of food and refined petroleum products. Government’s efforts at addressing these issues, including the turnaround maintenance repairs of the four state-owned refineries and incentives for agricultural and industrial production, are thwarted by corruption and incompetent bureaucracy. On the monetary intervention side, the situation has not been any better, what with the CBN’s scandalous Anchor Borrowers’ Programme, other industrial intervention funds, and preferential foreign exchange allocation to priority industries. Insecurity has now undermined production in both the energy and food sectors, driving FX and food scarcity and inflation.

Third, excessive deficit budgeting by the government has entrenched demand-pull inflation. However, in the aftermath of CBN’s quantitative easing that saw the bank advance over N23 trillion to the last administration, the situation has morphed to too much naira chasing the few dollars in the market – instead of consumer goods – further fuelling inflation.

The fourth factor driving Nigeria’s high inflation is ineffective transmission of market policies. This often undercuts CBN’s objectives for reducing the Monetary Policy Rate (MPR). On the fiscal side, broader policies for boosting domestic production and consumption of locally-manufactured products are frustrated by the government itself, through corruption and preference for imported products. An example of this is the recent decision by members of the National Assembly to officially acquire imported SUVs instead of locally-assembled ones. In this regard, the lack of exemplary leadership is also driving imported inflation in the system.

The CBN governor, Olayemi Cardoso, reportedly said that “Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy.” But to bring down inflation in a dramatic fashion in Nigeria, similar to what has been achieved elsewhere, requires more than CBN’s efforts. It requires presidential vision – which may be initially foggy. But the President’s economic management team should work to make his vision plain and implementable with positive impacts. Further to this, there should be a functional – as opposed to dysfunctional – collaboration between the fiscal and monetary authorities to foster economic growth and price stability.

The CBN may be doing well with its short-term inflation-targeting measures. But it is time for it to set an ambitious long-term anchor for inflationary expectation. Long-term inflation target of 4-5 percent is achievable in Nigeria if there is commitment to it. It has been achieved elsewhere in Africa and is in line with the targets of many emerging market nations.