BusinessDay

Why inflation keeps surging in Nigeria

Inflation or the rate at which prices rise will continue to surge in Nigeria even after it crossed the 20 per cent mark this morning and this is largely because of the huge impact of the foreign exchange volatility, according to leading economist Bismarck Rewane.

In a model he created, and which was shared with CEOs at the last breakfast meeting of the Lagos Business school, Rewane who is Managing Director of Financial Derivatives company identified dislocation associated with Fx instability as the major causative factor in the basket of elements causing inflation to expand in Nigeria.

According to the model, foreign exchange volatility accounts for 76.1% of the reason why inflation keeps surging in Africa’s largest economy.

The rate at the parallel market where importers including manufacturers get the bulk of the foreign exchange requirement rose to a new peak of N715 to the dollar before easing slightly to below N700 but it is beginning to creep up again.

Rewane gave the second biggest causative factor as the pressure associated with the escalation in the prices of diesel and aviation fuel at 11.6%

Read also: Nigeria’s inflation hits 20.5% in August, highest in 17 years

The next biggest causative factor is relative to exogenous influences like the war in Ukraine while the pressure induced by the rise in liquidity occupied the last position of 4.8%, questioning the huge importance attached to movements in the monetary policy rate, MPR. Of this the bulk comes from ways and means or the overdraft which the central bank extends to the federal government.

To address the inflation crisis which reflects in the squeeze in disposal income of the average Nigerian, the economist who is also a member of the president’s economic advisory team called for a progressive fx management policy that focuses on the supply side and away from the crushing focus on demand management.

Rewane also suggested the introduction of creative ways of curbing the surge in money supply including the securitization of CBN overdraft to the government now estimated at N20trn.

Other measures he suggested include a sharp focus by the government to reduce insecurity around the country as well as measures to better manage the diesel price escalation.

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