As inflation continues to ravage economies, Central Banks all over the world appear to be losing the fight to stem the tide.
Experts say inflation depicts an economic situation where there is a general rise in the prices of goods and services, continuously. Others believe inflation is the gradual loss of purchasing power, reflected in a broad rise in prices for goods and services.
Inflation is becoming another monster to economies in the world, Nigeria not an exception.
Nigeria’s inflation today has hit the roof top at 22.3 per cent as at May 2023. While inflation currently stood at 10 per cent in the United Kingdom; inflation in the United States of America was 5 per cent in April.
Data from Trading Economics also reveal that, inflation has risen to 6.85 per cent in Mexico,7.1 per cent in South Africa, 7.8 per cent in Australia, 7.4 per cent in Germany, 7.6 per cent in Italy, 50.5 per cent in Turkey and 104 per cent in Argentina. Other African Countries such as Sao tome and Principe, Egypt, Ethiopia have their inflation at 23.5, 31 and 32.7 per cent respectively.
In Ghana, Sudan and Zimbabwe inflation figures stood at 45, 83 and 87.6 per cent in that order.
Inflation night mare across the globe has given the Central banks sleepless nights.
All the monetary policy strategies deployed by the regulatory authorities seem not to have yielded any positive results. What has happened to the monetary policies which have always been used to tame inflation?
Not even the usual application of monetary policy rates or fiscal policies have worked to tame the ravaging inflation. Off course, other measures such as reducing spending and increasing taxes may not suffice as remedies for inflationary pressures in recent times.
The International Monetary Fund(IMF) has blamed “food and energy as the main drivers of this inflation”, it explains that rising prices continue to squeeze living standards not only in North America but worldwide.
In his reckoning, the Group Managing Director of GTCO, Mr. Segun Agbaje believes the raging inflation may have been caused by the huge stimulus countries doled out to reflate the economies during Covid -19 period and other down times of the global economy.
‘’The world is paying for the sins of stimulus. The is why they are grappling with high inflation today’’ Agbaje said.
Apex Banks Raise Rates To Tackle Inflation
Central Banks have shown aggression in battling inflation that never seems to abate. One of the instruments the Central Banks are deploying to tackle inflation is raising Monetary Policy Rates (MPR).
Nigeria’s CBN aside other measures has raised MPC rate more than six since last year to recent benchmark lending rate at 18.5 per cent, from 18 per cent, in an aggressive push to contain the nation’s inflationary pressure.
The MPR rates had stood at 13.5 as at January 23-24, 2020. In Ghana, the Bank of Ghana raised rates to 29.5 per cent, rates stood 8.5 per cent in South Africa and 22 per cent in Malawi. While the United Kingdom just raised its rates by 0.25 per cent to 4.5 per cent, USA adjusted up rates to 5.25 per cent and China kept its at 2.75. Business Hallmark research shows that Countries are still struggling to force inflation down without positive results.
Experts do not see only policy rates as effective enough to control raging inflation.
In his intervention, Manuela Moschella, associate professor of international political economy at the Italy -based Scuola Normale Superiore, reckons that “using monetary policy to control inflation ends up affecting everyone by increasing the cost of money for both households and businesses if interest rates are hiked.”
According to him,“Before the COVID-19 pandemic, in most advanced countries like the USA or Eurozone, we saw a decade of deflation when inflation was not picking up and they struggled to revive economic activities,” she said. “Inflation did look transitory in the beginning.” Now, as they play catch up, “central banks have to press the acceleration button really hard”
Similarly, World Economic Forum’s Chief Economists also noted recently as quoted by Aljazera,
‘’Curbing inflation is a painful exercise and, in most cases, leads to an economic slowdown. Yet it is a vital task for central banks because high prices affect the poor the most. The somewhat good news: Europe – a continent confronted with Russia’s brutal war and resulting energy shortages – might be showing how inflation can be tackled without tipping the economy into recession’’
Causes of inflation in Nigeria
Inflation has had a significant impact on the Nigerian economy, influencing various sectors and aspects of the country’s overall economic health. Here are some key effects of inflation on the Nigerian economy:
1. Reduced purchasing power: High inflation erodes the purchasing power of consumers and businesses. As prices rise, people can afford fewer goods and services with the same amount of money, leading to a decline in consumer spending. This can result in decreased aggregate demand, which can hamper economic growth.
2. Increased production costs: Inflation can lead to higher production costs for businesses. Rising prices of raw materials, energy, and labor can squeeze profit margins and make it more challenging for businesses to operate. This can discourage investment and hinder productivity growth, negatively impacting the overall competitiveness of Nigerian industries.
3. Uncertainty and reduced investment: High inflation creates an environment of uncertainty, making it difficult for businesses and investors to plan for the future. This can deter domestic and foreign investment, as investors may be reluctant to commit capital in an environment of eroding purchasing power and volatile prices. Reduced investment can hinder economic expansion and limit job creation.
4. Monetary policy challenges: Controlling inflation poses challenges for the Central Bank of Nigeria (CBN) in formulating and implementing monetary policy. The CBN may need to tighten monetary policy by raising interest rates to curb inflation. However, high interest rates can also dampen economic growth by making borrowing more expensive and reducing private sector investment.
5. Income inequality: Inflation can exacerbate income inequality within the Nigerian economy. As prices rise, low-income individuals and vulnerable populations who have limited means to cope with increased expenses may experience a decline in their standard of living. In contrast, individuals with assets that act as a hedge against inflation, such as real estate or investments, may fare better.
6. Impact on fiscal policy: High inflation can strain government finances. As prices rise, the cost of providing public services and social welfare programs increases, putting pressure on government budgets. This can lead to fiscal challenges, requiring adjustments in government spending priorities or the implementation of austerity measures.
7. Exchange rate pressures: Inflation can influence the value of the Nigerian currency, the Naira, in relation to other currencies. If inflation outpaces the rate of inflation in trading partner countries, the Naira’s value may depreciate, affecting international trade, import costs, and the cost of servicing external debt.
Managing inflation and its impact on the Nigerian economy requires a comprehensive approach involving monetary policy, fiscal measures, and structural reforms. It is crucial for the government to implement policies that promote price stability, support productive sectors, encourage investment, and enhance the overall competitiveness of the Nigerian economy.
Experts on how to tame inflation.
Financial experts and economists do not seem comfortable with the economy and are not hopeful that any magic can change things fast not even the new controversial government that will take over the mantle of leadership today Monday May 29, 2023 do not exude any optimism. According to them, inflation is defying all the CBN’s Monetary Policy Committee (MPC) efforts in recent times because the right measures have not been taken.
MPR which is 18.5 per cent today was 12 per cent with a corridor of +/-200 basis points in May 21, 2013.
Emefiele had recently said that loosening rates would have grave consequences for the economy as well as “would greatly jeopardise the gains of previous policy rate hikes”.
He said due to all the causative factors such as Russia, Ukraine war, supply chain disruptions, the slowdown in China, rising inflation in advanced economies, and other headwinds, it became dominant that a losing option was not desirable at this meeting.
“With a rise in inflation, loosening the stance of policy will lead to a more aggressive rise in inflation and will erode that gain already achieved through tightening as regards whether to hold MPC was of the view that they won’t stand at the period close to December festive and expected heavy spending during 2023 general election,” Emefiele said.
“MPC decided to continue to tighten, but at a somewhat more moderated rate, noting that tightening the stance of policy would narrow the negative real effective interest rate margin and force improve market sentiment and further restore investors’ confidence.”
Emefiele further said the continuous tightening was yielding many results.
“The committee uses the opportunity to appraise the efficacy of its decisions at the last meetings and came up with the conclusion that the decisions were beginning to yield the desired results, given that the rate of increase in inflation was beginning to moderate your view of the month or more deceleration and prices presented by the NBS consumer price indices,” he added
“Members noted that though the global economy was progressively weakening due to the various headwinds, the recovery domestic output growth remained positive as a result of the continued support from fiscal and monetary policy.
Also commenting on the issue, Chief Economic Officer, Proshare Nigeria, Mr. Teslim Shittabey opines that using monetary policy instrument to fight inflation may not solve or beat it down given our perculiar macro-economic conditions.
‘’You can see that raising rates cannot work. What we have is supply side challenges and not demand. With the rise on MPR, the cost of money will remain high’’ he said.
He explained, “There are things that should be done to introduce some reforms. There is still a mono -product problem which is oil. There is huge oil theft which has reduced the volume of production from about 1.8million bpd to about 1.2 million pbd, there is insecurity which has scared away both local and foreign investors. The economy cannot grow under such adverse conditions. You also know that Nigeria is not a productive country.”
Whatever may be the case, the Nigerian economy which has recorded a GDP growth of 2.3% in the first quarter 2023 is still in bad shape. The economy has suffered immensely to the point that its debt over hang has become a threat to the continued solvency of the country.
Critically, recent statistics reveal that the rate of unemployment, the second highest in the world is 40%. At the same time, the underemployment rate stood at about 25%; even as inflation, which is hitting the roof top stood at 22.3 per cent (A report said inflation stood at over 52 per cent),highest point in the last seven years. At the same time, Diaspora remittances inflow has fallen below what it was in 2020.
Also remarkable is the country’s heavy debt burden at N77trillion (about $150bn)and expected to grow higher at the end of 2023 and still growing; of the budget of N21 trillion for 2023, budget deficit remains huge as over 101 per cent of revenues is used to service debt.
The major revenue earner for the country, crude oil price, which has hit $80 pbd and above presently still fluctuates.
Insecurity has not only hobbled agriculture, many parts of Northern Nigeria have been taken over by bandits such that not much business activities can subsist. The World Bank just noted that Nigeria’s revenue to GDP ratio hovered between five and six per cent last year and remains the lowest in the world. These days almost every everybody is aware that Nigeria is the poverty capital of the world recently over taking India with over 130 million people in multidimensional poverty bracket. The Naira which sold at N220/$ in June 15, 2015 has depreciated by about 100 per cent to N730 as at May 26, 2023.
With the fearful scenario above, economic trajectory of the country is still uncertain. Not even with the new government that is being sworn in today.
This is because even the apex bank has warned that care must be taken to galvanize and push the economy out of slumber.
FDI is expected to shrink to reflect the worsening operating environment and investment climate, analysts reckon.
Further explanations consider some of these risk components to include; the political risk components, government stability, socioeconomic conditions, investment profile, internal conflict, external conflict, corruption, religious tensions, democratic accountability, and ethnic tensions have a close association with FDI flows.
The above scenario, in fact, captures dramatically what Nigeria is experiencing today. Analysts are in awe how such economy can give hope of pulling up surprises in the near future. They seem discomforted that the same vulnerabilities that impeded economic growth pre-Covid-19 are still visibly predominant in the system and are even worsening. And no expectations from the new President Elect, Asiwaju Ahmed Tinubu.