Tackling inflation via multi-layered approach

By Chinwendu Obienyi

The economic situation in Nigeria, characterised by persistent inflation and increasing poverty, has been exacerbated by recent government reforms under President Bola Tinubu.

President Bola Tinubu initiated a number of reforms, scrapping a long-running subsidy on petrol and devaluing the currency twice and increasing the electricity tariff in a bid to rev up the economy.

The move, however, has stoked inflation and led to higher import costs and when combined with the food insecurity in the country, the citizens have been tossed into a economic tempest with its concomitant hardship.

To make it worse, data from the National Bureau of Statistics (NBS) revealed that the country’s headline inflation rose to 33.95 per cent for the month of May, representing a month-on-month (m/m) increase of 0.26 per cent in headline inflation of 33.69 per cent recorded in April 2024.

The report further revealed that urban inflation was high at about 36 per cent, as against 31 per cent in rural inflation, representing a huge gap of about 5 per cent. Even worse is that the food inflation rate in April stood at 40.53 per cent, increasing by 15.92 per cent compared to April 2023.

This scorecard performance of the economy is all shades of concern since the Central Bank of Nigeria (CBN)’s nuanced approach to combating inflationary pressures despite raising interest rates at the turn of the year.

Although the CBN Governor, Olayemi Cardoso, clearly emphasized that there was no “magic solution” to reduce the soaring inflation, he implored the Federal Government to prioritise food production and availability, stating that more needs to be done for food producing communities in terms of adequate security.

He stated that following an extensive look at past impacts of the apex bank’s hikes, members of the MPC suggested further tightening to build on the success/impact of recent hikes, adding that balance of risk suggests further tightening of rates.

Cardoso said, “I think it is important to say that inflation is beginning to become an issue. However, there is light at the end of the tunnel because as we have seen an increase in inflation figures, looking at the specifics in terms of food, core and headline inflation, you will see that it is moderating and decelerating in increment. This is because for the first time since October, we have relatively significant moderation on those components.

I believe strongly that the tools employed by the CBN to tackle inflation are working. There is no magic wand and these things take time but I am confident that some relief will come in another couple of months and I know there will be positive outcomes”.

However, economic experts have raised their concerns, questioning whether the reform measures adopted by the FG and CBN have been effective or remedial.

According to them, the government seems to be applying the wrong tools to the wrong ailment as the challenge requires a more effective multi-pronged strategy if it has to be addressed.

Speaking during a monitored programme, the Chief Executive Officer, Cowry Assets Management Limited, Johnson Chukwu, explained that Nigeria’s battle with rising inflation requires a multi-pronged strategy that addresses the root cause of the issue.

He attributed the increase in inflation rate to the pressure on food prices which is as a result of low productivity, exchange rate depreciation and excess liquidity in the system while adding that Nigeria does not have a huge consumer credit system.

Chukwu said, “Core cause of this is food inflation which came at a print of over 40 per cent in the month of May while core was 27.01 per cent and so the greatest pressure we are getting is from food inflation. Then, the question is how do we fight food inflation? Because the inflationary pressure is not coming from excess liquidity injection by way of credit expansion (when banks are lending excessively, then you can tighten monetary policies to slow down credit expansion and therefore cut down on demand) but remember that Nigeria does not even have consumer credit and that approach is most likely appropriate when you have huge consumer credit lending in that economy.

So when you increase interest rates, people can no longer borrow to consume and therefore slow down on their consumption. That assumes that the productive capacity is strong so that when there is a deduction in consumption, there is also a reduction in demand and the producers will bring down their prices. Hence the current situation is driven by 3 factors; pressure on food prices because of low food production in major food belts of the country, exchange rate depreciation (Naira went as low as N1,000 in April whereas now, we are back to about N1,500/$1), a major reversal of the gains we saw in exchange rate.

The FG through the DMO, CBN, have withdrawn within the month of January and last week a total of N15.74 trillion from the economy and so if the issue is excess liquidity, it has been pulled out of the economy and that is enough to have little or major reduction in inflation but we are not seeing that.  The key thing is that we are fighting fire with the wrong tools. If you use certain things to fight different types of fires, you might end up inflaming the fire because you increase the combustive nature of the cause of the fire, so it is not that monetary policies are not effective but obviously from all indications, we are applying the wrong tools to the wrong ailment. We need to address food production, stability in exchange rate and excessive liquidity which is being injected by the FG”.

He stated that between May 2023 and May 2024, the three tiers of government had shared about N12.6 trillion, and added that of the N12.6 trillion, N4 trillion was exchange gain and a third of the amount shared was not backed by productive activities.

According to him, the exchange gain should have been moved into the reserve and passed on to the Nigerian Sovereign Investment Authority (NSIA).

Offering solutions, the Cowry CEO who doubles as an economic analyst, stated that the battle is won on a strategy table where multiple approaches are examined meticulously while adding headline inflation can be reversible if the government takes more holistic approaches.

“We need to focus on improving food productivity, that is the best way to tackle inflation, particularly for an economy that is not mature. Remember that inflation is defined as when too much money is pursuing few goods and so if you keep the money in circulation at the same level and increase the quantity of goods and services produced, you reach a new equilibrium so that prices will come down because if you produce more food than the money that is pursuing it, you will see people who are producing the food begging people to buy from them and so we need to deal with the core cause of inflation which is the issue of productivity.

We also need to look out for crude oil production. I was happy when I saw the first quarter GDP report that revealed that oil production moved from 1.45mbpd in Q3 to 1.55mbpd in Q4 and 1.75mbpd in Q5, the focus should be that we need to quickly improve more on it so we can achieve exchange rate stability and reduce the pass-through effect of naira depreciation”, Chukwu stated.

For his part, Business and economic analyst, Kenechukwu Aguolu, the Dangote refinery brings a slight glimmer of hope for the country’s economic landscape, however, the FG needs to create an effective model to fast-track the diversification of the economy as it is essential to improve revenue sources, enhance the nation’s balance of trade which will in turn stabilizes the value of the naira.

He further added, “Enhancing food production, stabilizing the exchange rate, managing liquidity effectively, and investing in infrastructure are all critical steps.

“Additionally, ensuring security in agricultural areas and adopting a tailored monetary policy will be essential for achieving sustainable economic stability and improving the standard of living for Nigerians.”

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