Tackling Inflation in Nigeria... Time to get Fiscal?

 

Inflation is a phenomenon that has plagued Nigeria's economy for several decades. The country has experienced several periods of high inflation, which has had a significant impact on the standard of living of Nigerians at all levels. This article will explore inflation in Nigeria, from its colonial past to the present day and examine approaches that may be effective in tackling this faceless thief of value.

Copyright: Evan G. Schneider all rights reserved

During the colonial era, Nigeria's economy was mainly based on agriculture, with most of the country's wealth being generated from the export of cash crops such as cocoa, groundnut, and palm oil. However, this changed with the discovery of crude oil in the 1950s, which became the mainstay of the Nigerian economy. The oil boom of the 1970s led to rapid economic growth and development, but it also had unintended consequences, including high inflation.

Oil boom, inflation boom

The first major inflationary period in Nigeria's history occurred in the 1970s, following the oil boom. The government at the time embarked on a massive spending spree, financed largely by borrowing, which led to an increase in the money supply and a rise in prices (demand-pull inflation). Inflation reached its peak in 1978, with an annual rate of 33.2%.

The government's response to the inflation crisis was to introduce several austerity measures, including reducing government spending and devaluing the naira. Remember the infamous Structural Adjustment Program (SAP) under General IBB? These measures had some success in stabilizing the economy, and by the mid-1980s, inflation had fallen to single digits.

<a href='https://www.macrotrends.net/countries/NGA/nigeria/inflation-rate-cpi'>Nigeria Inflation Rate 1960-2023</a>

However, inflation remained a persistent problem, and the country experienced several bouts of high inflation in the years that followed including a spike in the 90s to over 70%! Inflation reached a recent peak in March 2023, with an annual rate of 22.04%. This was largely due to a combination of factors, including foreign exchange shortages, and a general slowdown in economic activity caused by massive insecurity challenges, the Covid pandemic and more recently the Russia-Ukraine crisis, which have affected global supply chains, led to high oil prices and ultimately increased cost of production (cost-push inflation). Worryingly, this has largely affected prices of food (24.45%) leading to heightened food insecurity.

The government's response to the recent inflation crisis has been to introduce several monetary policy measures aimed at stabilizing the economy, including raising interest rates and liquidity ratios, increasing foreign exchange reserves, and even issuance of a new currency. These measures have had very little success in bringing inflation under control and it remains a persistent problem for the country.

Tackling inflation... Let's get Fiscal!

So, what can be done to address this persistent challenge? One option is to adopt a more aggressive fiscal policy approach that prioritizes measures to curb inflation and promote economic stability rather than relying on monetary policy alone. Historically, that has been the most effective method of arresting inflation in Nigeria.

Fiscal policy refers to the use of government spending and taxation policies to influence the economy. In the case of Nigeria, the government could adopt a more expansionary fiscal policy stance, which involves increasing government spending and reducing taxes to stimulate economic growth and reduce unemployment. Stimulating growth should be the priority for Nigeria now.

Food inflation

The removal of fuel subsidy may be a little premature for the current economic situation and to prevent social unrest from the short term inflationary spike that would undoubtedly occur. However, the savings from subsidy removal could be channeled into providing food and transportation subsidies in the short term. How? By encouraging mass adoption of the eNaira and providing direct subsidies to the most vulnerable at the base of the population pyramid. Buy your food items at designated government outlets at subsidized prices using your eNaira wallet. Hop on a train/bus and pay using your eNaira wallet for subsidized fares. This will not only encourage greater digital financial inclusion, it will provide invaluable data for more effective monetary policies not to mention encouraging more production in the agricultural sector knowing the government is a ready off-taker. It would certainly require world class project management and administration but thanks to modern technology, this is very achievable.

At worst, even if there is massive corruption in subsidizing food, everyone needs food to survive but cannot drink petrol. Also, tackling food insecurity will lead to much greater socioeconomic gains that having cheap petrol.

This approach could be complemented by measures aimed at reducing production costs for businesses and improving the supply chain infrastructure. For example, the government could reduce energy costs by providing subsidies for renewable energy sources, such as solar power. The recent move to allow States to generate their own power is a welcome development as it allows for States to seek investment. It could also invest more in strategic transportation infrastructure, such as roads and railways, to improve the movement of goods from producers to consumers. Perhaps even dredge the Niger river to allow inland ports and decongest Apapa, Lagos?

Public Private Partnerships (PPP)

The private sector must be encouraged and incentivized to be involved in economic development. Nigerian pension funds are sitting on assets worth over N15.44trillion ($33.54billion) at the end of February 2023. These are long term funds that can be utilized in infrastructure, housing and agriculture. Key sectors that with the right investment and structures, could boost the Nigerian economy and stifle inflation. However, regulatory constraints mean that pension funds are limited in their investment horizon, with the bulk of investments in federal government securities (60%). These funds end up being spent on FGN recurrent expenditure (salaries & pensions, debt servicing and overheads), which have little to no impact on economic growth but instead actually exacerbate inflationary pressures. With the 3yr rolling average ROI of pension funds growing at less than inflation rate, retirement for the average Nigerian Gen X and early Millennials is not looking rosy... The Gen Z may still be able to rescue the situation. Incidentally, their "skoin skoin" mentality and drive for entrepreneurship is exactly what is needed in Nigeria to disrupt the status quo!

It is important to note that fiscal policy measures alone may not be sufficient to address the issue of high inflation rates in Nigeria. There is also a need for monetary policy interventions, such as adjusting interest rates, unifying the exchange rates and regulating the money supply, to complement fiscal policy measures and promote economic stability.

High interest rates in a stagnating economy is detrimental to economic growth and only serves to attract portfolio investors. Whilst this may increase foreign exchange liquidity, it hampers the ability for banks and other financial institutions to lend to the real sector and stimulate economic activity. Moreover, with less than 50% of the population being financially included, the effective of monetary policy in bringing down inflation is questionable. Despite several rate increases, inflation has kept going northwards! If businesses could borrow cheaply, they are more encouraged to produce goods and services thereby reducing the supply issues that lead to inflation. High interest rates also make wealthy Nigerians take less risk in investing in the real sector, instead favouring safer investments in high yielding federal government securities.

How inflation affects you

High inflation rates in Nigeria are a significant challenge that requires urgent attention as it affects all levels on the social strata. At the base level it hikes up cost of food items and leads to food insecurity, whilst at the top level, it can lead to the wealthy choosing to take less risk in investing in the real economy. While there is no one-size-fits-all solution to this problem, adopting a more aggressive fiscal policy stance that prioritizes measures to curb inflation, promote local production and economic growth could be a step in the right direction. It is important for policymakers on the fiscal and monetary side to work collaboratively to develop and implement effective policies that will address this persistent challenge and promote sustainable economic growth and development in Nigeria.

Thanks for taking time out to read this article. Please feel free to send me a message or comment on the article. I am always happy to discuss other perspectives and explore different philosophies.