Inflation in Nigeria

Surging inflation and rising prices pushed an estimated 7 million Nigerians below the poverty line in 2020 alone, according to the world bank.
In its Nigeria Development Update (NDU) released, the Washington-based lender added that Nigeria’s economic growth is being hindered by food inflation, heightened insecurity, unemployment, and stalled reforms.

According to the update, persistent inflationary pressure is driven largely by accelerating food prices, while Nigeria’s inflation rate rose steadily throughout 2020 and reached a four-year high in March 2021.

The previous Governor of the Central Bank of Nigeria (CBN) had intended to introduce the N5,000.00 currency bill into the Nigerian economy and claimed that such currency bill would help it manage the exchange rate, especially against the dollar. This generated a huge outcry from the public especially economists.

The major reason was that this introduction would generate inflation and also because the policy ran counter to the cash-less policy of the Central Bank of Nigeria. But to the Central Bank, there was no economic theory to suggest a currency redenomination could cause inflation. This debate once more threw up a need to reexamine the determinants of inflation in Nigeria.

Generally, inflation could cost-push or demand-pull but what drives the demand or informs cost quite often differ from one economy to another. The article recommends that government should concentrate on providing social infrastructure that would encourage the private sector to invest and expand output, taking advantage of existing unemployed resources.
This would help to stem inflation in Nigeria which is usually caused by scarcity.

Nigeria is often referred to as the Giant of Africa, it is the 7th largest populated country in the world with about 167 million people; one out of every 4 persons in West Africa is a Nigerian and Nigeria is the largest country entirely of Negroes. Apart from its abundance of human resources, the country is blessed with large arable lands and mineral resources. These resources include coal, tin ore, crude oil, and gas among others. But it is an underdeveloped economy characterized by a high unemployment rate, inflation, poverty, low capacity utilization among many other such factors.
Inflation defines a rise in the general level of prices of goods and services in an economy over some time. Inflation may also be defined as a sustained rise in general price levels or a period of persistent rise in prices.

The implication is that each unit of the currency in question will buy less than it had previously bought. When there is inflation, the currency loses purchasing power. The purchasing power of a given amount of naira will be smaller over time when there is inflation in the economy. For instance, assuming that N10.00 can purchase 10 shirts in the current period if the price of shirts doubles in the next period, the same N10.00 can only afford 5 shirts.

Broadly, inflation can be grouped into four types, according to its magnitude.

1. Creeping Inflation:

This occurs when the price rise is very slow. A sustained annual rise in prices of less than 3 percent per annum falls under this category. Such an increase in prices is regarded as safe and essential for economic growth.

2. Walking Inflation:

Walking inflation occurs when prices rise moderately and the annual inflation rate is a single digit. This occurs when the rate of rising prices is in the intermediate range of 3 to less than 10 percent. Inflation of this rate is a warning signal for the government to control it before it turns into running inflation.

3. Running Inflation:

When prices rise rapidly at the rate of 10 to 20 percent per annum, it is called running inflation. This type of inflation has tremendous adverse effects on the poor and middle class. Its control requires strong monetary and fiscal measures.

4. Hyperinflation:

Hyperinflation occurs when prices rise very fast at double or triple-digit rates. This could get to a situation where the inflation rate can no longer be measurable and uncontrollable. Prices could rise many times every day. Such a situation brings a total collapse of the monetary system because of the continuous fall in the purchasing power of money.

WHY MUST THE CENTRAL BANK FIGHT INFLATION?

Central banks the worlds over are obsessed with inflation and, therefore, devote a significant amount of resources at their disposal to fight inflation. Hence, the primary objective of monetary policy is to ensure price stability. The focus on price stability derives from the overwhelming empirical evidence that it is only amid price stability that sustainable growth can be achieved.
Price stability does not connote constant (or unchanging) price level, but it simply means that the rate of change of the general price level is such that economic agents do not worry about it. Inflationary conditions imply that the general price level keeps increasing over time. To appreciate the need to fight inflation, it is imperative to understand the implications of frequent price increases in Nigeria. Some of these implications include:

Discouragement of long-term planning

Inflation in Nigeria’s economy discourages long-term planning. As a result of the unstable nature of prices of goods in the country, Nigerians will rather buy whatever they want now, instead of thinking long-term.

Reduction of savings and capital accumulation

Inflation generally reduces savings. first off, getting a domiciliary account is not an easy process so most people feel what’s the point of saving when your money keeps reducing in value.

Reduction of investment

reduction in savings subsequently leads to a reduction in investments.
Creating uncertainty and distortions in the economy. Inflation not only disrupts the value of the currency, but it also disrupts businesses and therefore the way of life of so many Nigerians.

September 23, 2021

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