Jide Akintunde, Managing Editor/CEO, Financial Nigeria International Limited

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  • Financial Market
  • Fiscal Policy

Understanding the reality of Nigeria’s inflation 08 Dec 2021

The inflationary anchor is unmoored in much of the advanced and major emerging markets. The US recorded a 6.2 percent annualised increase in its consumer price index (CPI) in October 2021, the highest since 1990. Inflation in the EU was 4.1 percent, while the UK’s reading was 10 basis points higher. China’s Producer Price Index jumped to 13.5 percent. Japan, where deflationary forces remained a threat, was the outlier among the matured markets, with 0.1 percent inflation rate.

The long-term benchmarks for inflation in these countries converge around 2 percent. But after deflationary pressure had held sway in the advanced economies after the 2008 – 2009 Global Financial Crisis, inflation appears to have returned with a vengeance.

Yet, there is no consensus on whether this inflationary spout is of a short-term nature and inevitable for a sustainable economic recovery from the Covid-19 pandemic. The US policy horizon appears to be accommodative of above-benchmark inflation rate, with the congress doubling down on another $2 trillion stimulus spending, after the $1.2 trillion infrastructure investment package President Joe Biden just signed into law, following the $1.9 trillion American Rescue Plan of March 2021.

Nigeria’s inflation has lingered on the upside. Since 2016, the yearly average inflation rate has trended in the lower- to mid-range of 10-20 percent, according to World Bank data. In this period, the reporting of high inflation rate by the government’s own statistics agency, National Bureau of Statistics (NBS), rather than the fact of the data, appears to have generated more concern in the wider official circle. For similar reason, the NBS stopped publishing the unemployment rate for two years after the Q3 2018 data showed that the rate of joblessness had continued to rise in the country.

But Nigeria’s double-digit inflation is mediated by policies, some of which are good intentioned and others puzzling. For instance, the Central Bank of Nigeria (CBN) has maintained double-digit Monetary Policy Rates since 2011, with banks pricing this indicative high cost of fund and its inflationary impact in their lending to customers. The CBN has also continued to pump liquidity into the industrial economy. Through its various monetary intervention funds, it aims to boost domestic production, curb imports, stabilise the naira exchange rate, and create jobs.

Elsewhere, CBN’s liquidity tap has been running amok. It has financed the poorly-managed fiscal deficits of the President Muhammadu Buhari administration with approximately N15 trillion. The closure of the country’s land borders between August 2019 and December 2020 also drove up inflation by opening the floodgate for smuggling of food items from the neighbouring countries into the Nigerian market at higher prices to the consumers.

Regardless of its drivers, high inflation in Nigeria remains a major economic challenge. As it is pushing citizens into extreme poverty, even so is it serving as a disincentive for savings while at the same time deterring foreign investments.

CBN’s monetary stances are both advised, and made ineffective, by a dysfunctional fiscal governance, leaving little hope for policy to effectively intervene to bring down prices. However, the CPI compiled by the NBS has been trending downward in recent months. From 18.17 percent in March, the inflation reading was 15.99 percent in October.

This data has been greeted with suspicion. Inflation in Nigeria is significantly imported. The country depends on importation to meet domestic demand for consumer and industrial goods. But in recent months, as the world’s economies have fully reopened after the pandemic lockdown, the full weight of the disruption to global supply chains and the voluntary unemployment caused by stimulus spending in the advanced economies are now being felt through product scarcity and, inevitably, higher prices.

A downward trending of food inflation in Nigeria because of so-called bumper harvests this year is unlikely to offset the much higher prices of imported products. And any positive impact of the new administrative measures of the CBN for the foreign exchange market would be too soon to bring down inventory costs for foreign inputs and foreign products.

The only possibility left is that the NBS may be crumbling in the face of the pressure to make economic data favourable to the government. The new Statistician General of the Federation/CEO of the NBS, Simon Harry, who was part of the past NBS management that admirably held its professional line, needs to ensure that public perception of the institution’s professional rectitude is maintained. It would be a double tragedy for Nigerians to be facing rising prices and also have a national statistics agency that is minimising the unfortunate reality.

Sustainable success in combatting high inflation in Nigeria will not be easy to come by. It would require resetting both governance and economic management of the country by infusing political will and competence at the necessary levels of government. Even if the country were to decide for inflationary growth, like the world’s biggest economies appear to have done in the aftermath of the pandemic lockdown, it should be a clear policy choice with a short- to medium-term horizon to deliver its benefits, given that inflation is a “stealth” tax which disproportionately affects the poor. In this or any scenario, the data should tell it as it is.