Currently, Nigeria’s inflation pressure rate is officially 34.19 per cent. According to the data published by the Nigeria Bureau of Statistics, this is the highest rate of inflation in the past 27 years. By all indications, the figure doesn’t look good and the government is concerned about this and its negative impact on the economy, hence both the Federal Government and the apex bank have rolled out policies to reverse the rising trend.
Why is Nigeria’s inflation rate stubbornly high? For some years now, the country has witnessed progression of decline in food production due to insecurity which made only 33 million hectares out of the available 84 million hectares of arable land utilised for agricultural purpose. The population of farmers also decreased considerably, as insecurity displaced households. Consequently, commodity prices soared amidst rising population. The Naira also became weaker due to pressure of demand on foreign exchange.
A recent survey showed that many citizens preferred saving their money in foreign currency in anticipation that the Naira will continue to depreciate against the dollar on the foreign exchange market.
According to the CBN Business expectation survey for the month of July 2024 published by the statistical department of the apex bank, the naira will continue to depreciate in the next three months but will begin to appreciate sometimes after December 2024 with the agricultural sector driving the growth. While food prices and a weak Naira were contributory factors to rising inflation, there are other contributory factors such as the combination of removal of petroleum subsidies and government policies; excessive port charges and multiple taxations on goods and services.
The apex bank targets inflation to decline by 21 per cent before the end of 2024 hence its aggressive monetary policies. The CBN target of 21 per cent inflation is commendable when viewed against the current inflationary pressure, but again why set inflation rate at 21 per cent rather than 0 per cent or 2 per cent which would have been ideal. A price growth rate of 2 per cent will allow the economy to fully reap the benefits of price stability and at the same time provides the margin to reduce the risk of debts. The CBN governor is not unmindful of this but is being realistic by targeting what will be achievable to stabilise the naira and prices of goods.
President Tinubu, on his part, has prioritised economic stabilization as one of his major goals. To this end he rolled out a staccato of economic reforms on assuming office; the removal of fuel subsidy, floating of the Naira and supporting agriculture to reduce food cost.
While these polices are generally acknowledged as positive steps in the right direction, it has nevertheless received knocks in some quarters where it is argued that the approach adopted in implementing the reforms were responsible for the rising inflationary pressure which is affecting various industries in various ways. With inflation at 34.19 per cent, Nigeria is ranked as one of the top ten countries with the highest inflation rate in Africa.
To reverse the worsening inflation rate, the country will require sound monetary policy and disciplined fiscal responsibility as both are inextricable in curbing inflation. The apex bank and the MPC understood this crisis, hence the governor is focused in advancing policies that will reverse the inflationary pressure and also support the stability of the Naira.
Inflation and interest rate tend to move in the same direction because interest rate is the primary tool used by most Central Banks to manage inflation. This is theoretically correct and this may have informed CBNs decision to raise the MPR by150 basis point from 24.75 per cent to 26.25 per cent in June 2024 being the third increase in the year.
As already highlighted, increase in interest rate is one of the most popular tools used by Central Banks to reverse persistent high inflation rates. The apex bank does this as part of broader strategy to address inflation comprehensively. The previous increase of 200 basis points in March and 400 basis points in February have started showing positive outcomes, such as exchange rate unification and moderation in headline inflation, excluding high food inflation that has refused to go down. The positive indication of the measure in February and March may have motivated the apex bank to reach its third decision of June.
The increase in interest rate expectedly have been criticised by some stakeholders across board who had argued that the measure may not achieve its aim of economic growth, as consumers may likely experience higher cost of living due to increase in the cost of goods and services and more expensive credit.
Already the lending capabilities of banks are limited due to stringent liquidity requirement which had made bank customers weary of borrowing. Some key business players had argued that many businesses will find it difficult to access capital at nearly 30 per cent interest rate. To survive such high interest rate businesses may be forced to cut down on its workforce or scale down operations which will push up unemployment which is not a plausible option for a struggling economy.
It is feared that the measure may invariably worsen the economic situation, especially when businesses begin to collapse or fold up due to difficulty in accessing capital for their operations. They argue that what boosts economy is where there are high consumptions, but whereby people are weary of consumption because cost of goods and services are out of reach, the economy will tank or slow down
The CBN has since pushed back on the critics, explaining that its MPR decision which hiked interest rate is a strategic move aimed at curbing inflation rate and stabilising the economy. The measure it said is a temporal measure which will be scaled back once the objective of stabilising price and the inflation rate are achieved. The bank also noted that the measure requires time to create a long term stable economic environment conducive for long term growth by addressing inflation holistically.
The apex bank further explained that the MPR is only a temporal measure that will be reversed as soon as the key objective of stabilizing price and monetary policy is achieved.
The new MPR regime would also booster savings as high yielding profits on savings will make funds available to borrowers. Already savings and investing in government securities is becoming more appealing as higher returns are offered.
Higher interest rates will make Nigeria assets more attractive to foreign investors seeking higher returns on their investments, potentially stabilising the Naira and improving the balance of payment. It must be noted that choice of investments is not totally dependent on higher interest rate and better returns. There are other factors such as social and political climate that influence investors’ choice of where to invest capital.
In conclusion, the CBN’s multi-pronged approach to tackling inflation is worth supporting and giving time to manifest. To achieve this requires patience on the side of citizens and consistent fiscal responsibility on the side of government. The government must plug wastages and cut the cost of governance. Restoring security, boosting agriculture and ensuring that our private and public refineries work to satisfy domestic needs will be low hanging fruits.