Nigeria’s fiscal and monetary authorities need to reassess the strategy for combating the country’s hyper-inflationary trend to address the fundamental causes of continuing increase in prices.
The National Bureau of Statistics (NBS) at the weekend reported that inflation rate rose by 180 basis points from 29.90 per cent in January 2024 to 31.70 per cent in February 2024. Food inflation heightened by 251 basis points to 37.92 per cent while core inflation rose by 154 basis points to 25.13 per cent.
Finance and economy experts said there was need for reassessment of the balances between fiscal and monetary causes to improve the effectiveness of policy response to inflation management.
While experts expected the inflationary trend to continue, albeit at slow pace, in the meantime, they agreed that ongoing reforms would lead to steady deceleration in the next few months.
Member of President’s Economic Advisory Committee and Managing Director, Financial Derivatives Company (FDC), Mr. Bismarck Rewane, said the persistent inflation rate, at 28-year high, is enough to make policymakers scratch their heads.
“The situation calls for a comprehensive change of strategy in the use of monetary and fiscal measures to address inflationary trends effectively,” Rewane’s FDC stated.
FDC outlined that the inflationary trend was mainly driven by cost-push factors, weaker naira, and forex translation costs in the replenishment of inventory as well as persistent structural inflationary pressures.
Citing the core inflationary trend, FDC noted that “inflation could be more structural than transient”.
“It also calls into question the appropriateness and effectiveness of relying on monetary policy tools as the antidote to the current bout of inflation. It means that in addition to interest rates, there is a need to add fiscal measures to the existing cocktails of policies to bring inflation under control,” FDC added.
Managing Director, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, identified key drivers of inflation to include foreign exchange (forex), global supply chain disruptions, national security concerns disrupting agricultural output, high and increasing energy cost and monetisation of fiscal deficit, which is highly inflationary because of the liquidity injection effects on the economy.
To curb inflation, he advised the government to address the security concerns causing disruption to agricultural activities as well as sustain reforms in the forex market to stabilise the exchange rate, reduce volatility and stimulate forex inflows.
Yusuf said government should implement incentives to increase forex liquidity and inflows of forex into the country.
Other policy measures necessary to curb inflation, in his view, include fixing of structural problems to boost productivity and competitiveness of domestic firms, addressing the challenge of high transportation and logistics cost, reducing fiscal deficit monetisation to minimise incidence of high-powered money in the economy and managing climate change consequences to reduce flooding and desertification.
Yusuf said government should restore normalcy and good order at the nation’s ports to reduce transaction costs, reduce import duty on intermediate products and raw materials for industries to reduce production costs, especially in the light of the sharp depreciation in the exchange rate, address concerns around high energy cost and create an investment friendly tax environment to boost investments and output in the economy.
Cordros Capital Group noted that ongoing efforts by the Central Bank of Nigeria (CBN) to stabilise the naira would help to moderate inflationary trend.
We expect the naira to be less volatile compared to previous months, thus moderating the impact of currency volatility on price increases in the coming month,” it said.
Afrinvest noted that the rising food prices are due to local supply shortfalls resulting from prolonged insecurity and large-scale sabotage, negative pass-through of high energy goods prices on logistic costs, imported inflation, as well as continued naira depreciation.
FDC expressed optimism that the recent policy measures by the CBN, which hike the benchmark Monetary Policy Rate, “will have a gradual influence on inflation and economic stability as they become operative and interact with different economic forces”.
FDC pointed out that most Sub-Saharan African (SSA) countries recorded an increase in their inflation rates, the effect of the stability in global food prices is yet to be felt.
Reasons for this are not farfetched as currency pressures, supply chain disruption, and several structural challenges hamper productivity in individual countries. Aside from Nigeria, Zambia, and Uganda, most of the SSA countries under review adopted an accommodative stance,” FDC stated.
