Nigeria’s problem was beyond inflation in 2021
Inflation posted a problem in Nigeria during the 2021 fiscal year. Inflation was 18.17 per cent in March 2021; the highest in four years in Nigeria.
The purchasing power of money was far eroded. Nigerians paid almost three times the amount they paid for the same quantity of goods and services they bought in 2015. Many households were malnourished and plunged into poverty in 2021. The World Bank report confirmed that inflation plunged about seven million Nigerians into extreme poverty in 2021.
Inflation is the continuous rise in the prices of goods and services in a country. When the high cost of production is identified as the cause of inflation, it is cost-push inflation. And when it is caused by an excess demand for goods and services, it is demand-pull inflation. In the case of Nigeria, high inflation was cost-push.
Inflation in Nigeria in 2021 was the outcome of several other problems that confronted the economy. More prominent among the economic challenges that confronted Nigeria during 2021 were insecurity, inadequate infrastructure, exchange rate hike, poor economic policies, and debt upsurge.
Insecurity was a daunting challenge in 2021. The Northern and Benue states had high insecurity problems ranging from killing, armed robbery, assault, carjacking, kidnapping, hostage-taking, banditry, and rape. According to security reports, not less than 2,371 persons were kidnapped on 281 separate occasions with N10 billion ransom demanded during the first half of 2021. Insecurity was a big threat to farming as many farmers could not carry out their activities due to the fear of being killed and that led to high prices of agricultural produce. The high prices of agricultural products caused an increase in the prices of other products in the market.
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Inadequate infrastructure in Nigeria contributed to high inflation in 2021. The majority of roads in urban and rural areas are not paved and it negatively affects the transportation of commodities. According to the former director-general of Infrastructure Concession Regulatory Commission (ICRC), Engineer Chidi Isuwa, Nigeria had about 195,000km of the road network and only about 60,000km was paved. A large proportion of the paved road was in a very poor condition due to insufficient investment and lack of adequate maintenance. The high cost of transportation due to the bad road was passed to consumers who paid high prices for commodities consumed.
The erratic power supply was a big challenge in Nigeria in 2021. The majority of businesses depended on self-generated power sources to power their operations. The high cost of running and maintaining power-generating plants resulted in a high cost of production which businesses passed on to consumers, and that contributed to high inflation in Nigeria.
The adverse consequences of inflationary pressure arising from exchange rate volatility were serious concerns in 2021. According to the Central Bank of Nigeria (CBN), the official average exchange rate of a US dollar to naira was N403.5858 in 2021. In the parallel market, the average exchange rate was as high as N560. These rates were far higher than the rates obtainable in 2015. The average official exchange rate of a US dollar to naira was N 197.8763 while it sold at N250 in the parallel market in 2015. The high exchange rate exacerbated the inflation problem in 2021. The prices of imported commodities became so high and adversely affected the prices of locally produced commodities.
The federal government budgeted N765 billion for the Social Investment Programmes (SIPs) in the 2021 approved budget. The programmes included N-Power for unemployed graduates, Government Enterprise and Empowerment Programme (GEEP) for small and micro businesses, Conditional Cash Transfer to poor Nigerians, and the National Home Grown School Feeding Programme for public primary school pupils. The programmes were inflationary as huge funds were injected into the economy without a commensurate increase in food production. Consumption demand was higher than food supply as a result, inflation was aggravated in 2021.
Nigeria’s high debt profile harmed the economy in 2021. The nation’s total public debt rose to N38.005 trillion as of September 30, 2021. Nigeria spent N2.49 trillion on debt servicing in the first nine months of 2021. These figures were made public in the debt data released by the Debt Management Office (DMO), in December 2021. The federal government had to raise consumption tax (VAT) to generate more revenue for debt servicing payments. The increment in VAT contributed to high inflation in Nigeria in 2021.
Inflation was a major driver of poverty in Nigeria in 2021. Several other macroeconomic problems such as insecurity, inadequate infrastructure, exchange rate hike, poor economic policies, and debt upsurge exacerbated high inflation in 2021. Inflation problems can be solved through proper handling of other macroeconomic problems that aggravated inflation in 2021.
Felix Ashakah is economics lecturer at Western Delta University, Oghara