In 2021, the global economy faced an inflation surge. It was the first time in many decades that inflation reached double-digit in most developed and emerging markets. In the US, inflation peaked at 9.1 percent in July 2022, and that was the highest level in 40 years. Inflation at such high levels was unusual and uncomfortable and the Central Banks in these countries tackled it ruthlessly. These policy actions are paying off, and inflation is moderating fast.
What obtains in Nigeria is starkly different from the experience of the rest of the world as it concerns inflation. Nigerians have been enduring an inflation crisis for the past 9 years, much before COVID and the disruptions it imposed. The Central Bank of Nigeria set an inflation target of 6-9 percent which has not been met in any year since 2014.
In the nine years between May 2014 and May 2023, the Naira lost 71.3 percent of its value due to inflation. In simple terms, this means an item that cost N100 in 2023 was only N28.8 in 2014 while an item that cost N100 in 2014 would be worth N347.8 today.
Even among Sub-Saharan Africa peers, a prolonged period of double-digit inflation is a unique Nigerian experience. Among 45 SSA countries tracked between 2014 and 2022, 34 countries had single digit inflation on average. Nigeria was among the bottom 8 with the worst inflation problem, with an average inflation of 13.5 percent over that period.
Why is high inflation an accepted reality in Nigeria? The CBN’s primary objective is low and stable inflation and it has failed woefully in this area since 2014. In fact, the target range of 6-9 percent which the CBN openly adopted has more or less been abandoned. There is little mention of this target and what is being done to restore inflation to that level.
Unlike other Central Banks in emerging markets, the CBN has allowed inflation to go unchecked. Businesses, governments and households have accepted this reality and they go about their transactions expecting high inflation. When inflation expectations are left unchecked, inflation becomes a self-fulfilling prophecy. Economic agents factor expected inflation into economic activities and this creates a cycle that is hard to break.
This behaviour is why inflation affects important prices in the economy. Households demand higher wages because existing wages have been devalued in the marketplace by inflation. Wage increases also eventually trigger inflationary pressures. Electricity prices go up because inflation affects tariff pricing. It becomes more expensive to borrow both in the short and long-term because the suppliers of funds want a return that would beat inflation. In this sense, if inflation is expected to be high, the return expected must also be high.
High interest rates are bad for long-term investments required to boost productivity. Finally, the exchange rate, which is another critical price in the economy, also loses value due to inflation. After all, over a long enough timeframe, the currency with high inflation would always depreciate faster than a currency with low inflation. Yet, the exchange rate depreciation would also cause more inflation. This self-reinforcing nature is what makes inflation so devastating to the economy and the anchor of monetary policy at Central Banks.
Instead, the CBN has deprioritised price stability in favour of growing the economy. The institution loaned money in record amounts to players in the agriculture and manufacturing sectors to fight inflation. Similarly, it funded the government through ways and means up to the tune of N22.7tn from less than N1.0tn in 2015. The CBN threw loads of money at its inflation problem in stark opposition to conventional knowledge. Central Banks do not fix inflation by boosting money supply and the economists at the CBN recognise that. In fact, this raises inflationary pressures in the economy as it takes time for long-term investments to pay off. The convention that has worked is to tighten interest rates and money supply.
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Much like the stance of the CBN, it is popular opinion that inflation is caused by supply driven factors. Proponents of this argument, including politicians, would tout supply chain inefficiencies and the lack of infrastructure as reasons. They would go further to say that the lack of a credit economy means that inflation is not driven by spending or too much money. This argument is inconsistent because the proponents would also argue against interest rate increases or monetary tightening because it would hamper growth.
These arguments also betray the research conducted by economists at the CBN who believe that money supply and inflation expectations remain key drivers of inflation. The same economists say inflation above 12 percent is devastating to growth outcomes in Nigeria, yet inflation is currently above 22 percent and is being forecast to reach 30 percent due to higher petrol and electricity prices.
Inflation is a tax on the poor and everyday people, even more so when it is driven by food and the poor spend the majority of their income on food. It robs people of the full power of their earnings when price increases and wages do not rise as fast. Inflation disrupts prices in the economy and creates a vicious cycle that leads to poor outcomes for everyone.
In addition to ongoing reforms at the CBN, lowering inflation must be top of the agenda for the new leadership. There is an urgent need to bring inflation under control in Nigeria and the CBN must return to basic principles and a narrow focus on achieving low and stable inflation. While it is not a silver bullet to economic development, it would have a transformative impact on the economy and its people.
Owodunni is a Lagos-based financial analyst
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