Nigeria’s recovery from pandemic is on but there’s one problem

Nigeria’s near-term economic growth is made more uncertain by high inflation which is affecting business sentiments and consumer purchasing power.

The Nigerian economy is expected to grow by 1.5 percent in 2021 as the impact of the lockdown in 2020 fades but high inflation could thwart economic recovery, according to a report by the Economist Intelligence Unit (EIU).

According to the report, inflation will impede improvements in business sentiment and dampen real purchasing power amid high unemployment and low wage growth, all of which impede economic recovery.

Africa’s biggest economy has seen its inflation rate slowing for three consecutive months but at 17.75 percent, it is far above the ideal single-digit inflation rate target by the Central Bank of Nigeria (CBN).

“The CBN will fail to keep inflation below a target ceiling of 9 percent, and its policy decisions are likely to remain erratic. Since a 100-basis-point cut to 11.5 percent in 2020, the policy rate has been kept steady,” according to the EIU report.

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In the recent Monetary Policy Committee (MPC) meeting which was held in July, members were generally of the view that since Nigeria’s exit from recession is fragile, any decision to tighten may reverse the recovery and return the country back to recession, therefore the Monetary Policy Rate (MPR) was retained at 11.5 percent.

A monetary policy that lowers interest rates and stimulates borrowing is known as a loose monetary policy while a monetary policy that raises interest rates and reduces borrowing in the economy is a tight monetary policy.

The MPC expects that the loosening would lower rates and improve access to credit which would drive unemployment, stimulate output and boost aggregate demand. The current strategy is to boost the supply side of the economy and thereby control inflation.

“We believe that this is misguided; high inflation will frustrate an economic recovery, and issues such as inadequate public infrastructure, hard-currency shortages, and rampant instability need to be addressed before the supply side can substantially contribute to moderating the price level.”

Nigeria has a myriad of challenges such as exchange rate depreciation and insecurity which continue to spur inflation,” the Economist noted.

The spike in the inflation rate is also a result of the worsening farmer-herder clashes which have kept farmers away from their farmlands, resulting in food shortage and driving inflation.

The naira slumped further to N523/$ at the parallel market on Wednesday, a day after the Central Bank of Nigeria stopped the allocation of foreign exchange to Bureau de Change operators in the country.

The measure is the latest step by Godwin Emefiele, the CBN governor to support the naira, which the central bank has devalued three times since March 2020 as lower oil income eroded the nation’s reserves.

The report by EIU also pointed out that the CBN has been taking some notable steps to boost local industries but there are conflicting policies that would stifle their growth.

“Nigeria’s government and the Central Bank of Nigeria (CBN) will aggressively promote local industry, but some elements of the policy are contradictory and will contribute to macroeconomic imbalances. A notable example will be the management of the naira.

“Bans on foreign exchange for imports of certain manufactures and agricultural goods (covering some 50 items) are being enforced to protect local industry and support the currency, but have some important flaws. Most notably, restrictions are elevating inflation and undermining the managed currency regime through sustained real effective exchange rate (REER) appreciation,” the EIU said.

Rising inflationary pressures weaken the purchasing power of citizens as real incomes collapse. Inflation also has a big impact on businesses. The level of consumer spending affects prices, investment decisions, and the number of workers that businesses employ.

Nigeria’s surging inflation rate has pushed 7 million Nigerians into poverty, the World Bank said in its latest Nigeria Development Update report. From the report, 11 million more Nigerians are expected to fall into poverty between 2020 and 2022 due to Covid-19.

“We expect inflation to have peaked in the first quarter and to average 17.3 percent in 2021, with increases in both core and non-core levels. Assuming that the exchange rate stabilises and the CBN tightens monetary policy, we expect annual inflation to begin to fall from 2022 to an average of 10 percent in 2024,” the Economist Intelligence Unit (EIU).