Central banks wield enormous power to perform monetary policy effectively and independently from undue political interferences. Central banks use various instruments to reduce the rate of inflation to the lowest possible rate capable of driving economic growth and development of the domestic economies.
In Nigeria and over the years, different monetary policy regimes have been adopted, which resulted in unsatisfactory success. At first, the main monetary policy instrument adopted in Nigeria was the minimum rediscount rate (MRR). Recently, the monetary policy rate (MPR) has become the main monetary policy instrument used by the Central Bank of Nigeria (CBN) to stabilise the economy.
In Nigeria, inflation rises monthly. Many Nigerians have asked severally without getting answers whether the CBN has the required independence in carrying out monetary policy to better economic conditions in Nigeria.
The CBN has not demonstrated any commitments to reduce inflation to a single-digit over the years. The inability of the CBN to reduce the inflation rate in Nigeria has generated concerns among economists, researchers, and many other persons in Nigeria.
In Nigeria, inflation has risen beyond the 13 percent target for 2022 and it has impacted the Nigerian market in different ways. The price of each commodity in the market has increased beyond the affordability of the poor. Also, the costs of production have escalated beyond the reach of many manufacturers.
Many Nigerians are passing through pain as they can no longer eat twice a day due to high inflation in the markets. Many consumers have reduced their consumption due to the prevailing high prices in the markets.
Macroeconomic studies have shown that consumption expenditure is one of the main drivers of the domestic market. A reduction in private consumption in Nigeria may affect GDP growth, thereby derailing the economy from the path to prosperity.
In Nigeria, food inflation hits the highest at 18.37 percent in April 2022 from November 2021. Many Nigerians have become poor due to the prohibiting food inflation rate in the country. About seven million Nigerians were plunged into poverty in 2021 by high inflation rates, says the World Bank.
The current high inflation rate challenging the Nigerian economy may aggravate economic hardship in 2022, and many more Nigerians may fall into poverty in 2022.
The high inflation rate in Nigeria is associated with high exchange rates. The devaluation of the naira is a challenge in Nigeria. It has pushed up the prices of imported raw materials, cost of production, and the prices of commodities in the market.
The average exchange rate in the parallel market is as high as N610 per dollar against the official exchange rate of N416.08 per dollar. Most importers of food, raw materials, and machinery cannot access adequate foreign currency from the official channels; as a result, they access the parallel market at a higher rate.
Exchange rate depreciation has driven the cost of production in Nigeria beyond the reach of many producers. According to Tony Anakebe, managing director of Gold-Link Investment Limited, about 80 percent of importers source foreign exchange from the parallel market due to their inability to source forex from the official market.
Manufacturers are finding it difficult to cope with the high cost of production. The Director-General of the Manufacturers Association of Nigeria, Segun Ajayi-Kadir, confirmed that the manufacturing sector was still battling for survival as its growth rate was not impressive due to the high cost of production.
He stated further that high prices in Nigeria were adversely affecting the profitability of the manufacturing sector and were partly responsible for its poor performance.
The manufacturing sector has cut down production and employment following the high cost of production in Nigeria. The cut in production and employment in the manufacturing sector has the full potential of aggravating poverty and insecurity in the country.
The Nigerian government must allow the CBN the optimal independence it requires to effectively perform monetary policy. The CBN must rise to the responsibility conferred on it, thereby reducing inflation and exchange to the lowest possible rates capable of driving the Nigerian economy on the path of growth and development.
The Nigerian government must employ experienced economic and monetary experts with traceable records of success in their careers. The economic managers at the CBN must be separated from active participation in parties’ politics to enable them to effectively handle the inflation problems confronting the Nigerian economy.
Felix Ashakah is economics lecturer at Western Delta University, Oghara
