• Tuesday, June 25, 2024
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Taming the rising inflation in Nigeria


The Consumer Price Index (CPI) figure for June 2016, recently published by the National Bureau of Statistics (NBS) represents an official confirmation of what is common knowledge to the ordinary Nigerian- that prices of goods and services in the country have hit the rooftop. Rising for the fifth straight month, the CPI according to the NBS, climbed to 16.5 percent in June from 15.6 percent recorded in May. In fact, the CPI, a measure of inflation, has been on the increase since February this year when it rose to 11.4 percent compared to 9.6 per cent in January. For the months of March and April, the NBS had reported increasing rates of 12.8 per cent and 13.7 percent respectively while the 15.6 percent recorded in May was 1.9 per cent points higher than the rate in April. The NBS puts the blame for this disturbing trajectory largely on supply-side factors notably high costs of fuel, electricity, transport, food and imported items. The current inflation rate is many percent points shy of the government’s short-term target of single-digit inflation contained in the 2016 Budget. There is no gain saying the fact that persistent rise in the general price level has negative consequences for the Nigerian economy and must therefore be put in check.

Inflationary pressure, theoretical wise, can be controlled by restricting the supply of money in a country’s economic system. The Central Bank of Nigeria (CBN), in line with its core mandate of maintaining price and exchange rate stability has been applying tight monetary policy measures to subdue the successive spike in inflation since February this year exacerbated by the drastic fall in oil revenue and the delay in the passage of the 2016 budget. These measures include upward adjustments especially in the Monetary Policy Rate (MPR) and the Cash Reserve Ratio (CRR). For example, in response to the uptick in headline inflation to 11.4 percent in February from 9.6 percent in January, the Monetary Policy Committee (MPC) of the CBN had in March 2016 voted to review the MPR upward from 11 percent to 12 per cent as well as the CRR from 20 per cent to 22.5 per cent while maintaining the liquidity ratio at 30 per cent.

That the inflationary pressure has remained in spite of the CBN efforts to control money supply underscores the fact that in reality, dealing with double-digit inflation often proves more complex than the theoretical arguments suggest especially in periods of declining output and high unemployment. A recent CBN report on economic activity in Nigeria indicate that the Purchasing Manager Index (PMI), a measure of manufacturing activity, dropped to 41.9 index points in June 2016, as against 45.8 points in the preceding month. This index has been under the 50 point threshold on the average for the first half of 2016. It is obvious that the country’s economy has entered into stagflation, a situation of declining growth and high inflation that lead to high unemployment. According to the NBS, the economy shrunk by 0.36 per cent while unemployment rate stood at 12.1 in the first quarter of 2016.

Indeed, stagflation complicates policy making since measures designed to lower inflation may worsen economic growth and vice versa especially when considered from the angle that the main policy tools available at the disposal of the CBN are only effective in taming inflation arising out of demand-supply imbalances. With limited policy options, the CBN is very much handicapped where the inflationary pressure is of the cost-push type as the one being experienced in Nigeria at present. As a matter of fact, demand containment measures are counter-productive in periods of stagflation.

What therefore is needed under this situation is a combination of monetary and fiscal measures aimed at removing supply side constraints. The CBN left its benchmark rate unchanged at 12 percent in May and is expected to announce its next decision after its meeting later in July. Without prejudice to the outcome of that meeting, the MPC would be well advised not to jerk up the MPR in a bid to subdue the inflationary pressure as doing so would further hurt output and employment. Rather, the Committee should consider easing monetary policy with a view to stimulating economic growth and reducing unemployment. With significant growth in output, inflation will be tamed ultimately.

Perhaps, there is no better time than now to scale up the CBN’s developmental function targeting agriculture, infrastructure and small businesses. While unveiling his plans for the apex bank shortly after assuming office in June 2014, the CBN Governor, Mr Emefiele, had promised to ‘’pursue a gradual reduction in interest rates’’ as well as focus on development banking with a view to creating jobs and reducing poverty. In line with this pledge, the CBN should not be too focused on targeting inflation to the detriment of output growth especially against the backdrop of a looming economic recession.

The task of taming the rising inflation should not be left to the CBN alone. Given the key factors driving inflation in Nigeria, the need for complementary fiscal measures cannot be over emphasized. The high cost of fuel, road transport, electricity and food will go down if the government spends right in fixing the refineries, roads, rail, housing and power infrastructure as well as committing huge funds to agriculture. With respect to taxation as a fiscal policy tool, the country’s tax regime may be low compared to peers, but the conditions are certainly different. Therefore, this is not the time to increase the Value Added Tax (VAT) as has been canvassed in some quarters recently. As recognized by John Keynes, the famous economist, the major cause of unemployment is weak aggregate demand. Any attempt to increase the VAT from the current rate of 5 per cent is capable of plunging the economy into deeper stagflation.


Without doubt, the implementation of the 2016 budget which has given considerable attention to capital projects would have a salutary impact on inflation. This however depends on meeting the revenue targets. Sadly, recent disclosures by top government officials speak of significant shortfalls in projected revenue for this year due to the activities of militants in the Niger Delta region in spite of the fact that oil price has, for some time now, been above the 38 dollar per barrel benchmark. Clearly, the challenge posed by militants in the Niger Delta is one that should be taken very seriously. The government should make genuine effort to get the militant groups to the negotiating table through the governors of the region and other opinion leaders with a view to addressing the issue including revisiting the amnesty programme started by previous administrations to ensure that it is all inclusive and free from corruption.


Going forward, the panacea for taming the inflation monster in the medium-to-long term remains the diversification of the productive base of the Nigerian economy.


Joseph Uchenna Uwaleke