According to the National Bureau of Statistics, Nigeria’s headline inflation rate stood at 33.95 percent in May 2024, the highest level recorded in 28 years. However, there is a glimmer of hope as the month-on-month inflation rate has decelerated since March 2024. The Governor of the Central Bank of Nigeria (CBN), Dr Yemi Cardoso, attributed this decline to the effectiveness of the bank’s monetary policy measures, which include an increase in the benchmark interest rate. The World Bank, however, has expressed scepticism about the hike in the baseline interest rate and whether it will tame inflation. The private sector also raised concerns that it would lead to a hike in business costs in an already hostile environment.
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One of the significant factors contributing to the deceleration of inflation is the drop in the exchange rate from nearly N2000 to about N1500. Also, the country is gradually feeling the impact of the reduction in diesel costs, thanks to the production and sales of diesel by the Dangote refinery. Diesel costs are a significant expense for businesses due to inadequate power supply by the government. The decline in the purchasing power of individuals and the increase in the benchmark interest rate by the Central Bank of Nigeria, which is aimed at slowing demand, have reduced household consumption. Consequently, businesses are cautious about passing on costs to consumers, with some reducing their prices of goods and services to maintain sales.
When the new minimum wage is finalised and implemented, the CBN may need to raise the benchmark interest rate further to minimise the demand-pull inflation it could cause. It should be noted that the benchmark interest rate has its downsides, as it increases government domestic borrowing costs. Therefore, it should be a carefully considered process, especially in a country like Nigeria with very high debt servicing costs to revenue ratio.
It is important to note that the impact of the new electricity charges is gradually coming to bear on the prices of goods and services. For example, many hotels have increased their bills, citing the new electricity tariff. Additionally, the recent depreciation in the naira in the last few days signals that the battle against inflation may not yet be won. The government should ensure further decline is not experienced.
Nigeria’s inflationary woes cannot be solved through the central bank’s monetary policies alone if Nigeria aims to achieve sustainable long-term results. The country needs to increase its revenue and improve its trade balance by aggressively diversifying its economy. Agriculture, solid minerals, and tourism are some sectors that have not been fully harnessed. Nigeria should boost its oil and gas production, get its refineries functioning, and deal with its insecurity woes as soon as possible. The role of the political will of those at the helm of affairs cannot be overemphasised.
An improved balance of trade will result in a stronger and more stable naira, thereby reducing inflationary pressures. An increase in agricultural activities will also result in a drop in food inflation. The prices of diesel and premium motor spirit will drop significantly if the local refineries are operational and crude oil is supplied to them domestically. This has a far-reaching effect on the price of goods and services.
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While the headline inflation rate in May 2024 is concerning, the month-on-month decline since March 2024 provides some encouragement. In order to tame inflation in the long term, a comprehensive approach is required. This includes further monetary policy adjustments, economic diversification, ramping up oil production, and addressing insecurity. The political will of the people at the helm of affairs is a critical success factor.
Kenechukwu Aguolu FCA, PMP, CBAP; Abuja, Nigeria.
