DailySun
The inflation rate in Nigeria has climbed for the third consecutive month as of November, reaching 34.6%, the highest level in more than 28 years, according to data released by the statistics office.
This inflation spike has been exacerbated by recent flooding in the northern parts of the country, causing prices for staple items like yam, corn, and rice to surge. In addition, escalating fuel costs have contributed to the financial pressures experienced by Africa’s largest crude oil producer.
The significant rise in inflation in the latter half of 2023 followed President Bola Tinubu’s policy reform aimed at allowing the naira to depreciate and cutting fuel subsidies to promote economic growth and stabilize public finances. Since the start of the year, the naira has lost 42% of its value against the dollar, resulting in increased import costs for fuel and other goods.
Tight monetary policy
Given the persistently high inflation, it is likely that the Central Bank of Nigeria will continue its strategy of monetary tightening, which has seen the benchmark interest rate rise from 18.75% at the end of 2023 to 27.5% this year. Last month, Governor Olayemi Cardoso indicated that the Monetary Policy Committee expects inflation to begin to improve in 2025 as a result of these measures.
Yvonne Mhango, Africa economist at Bloomberg Economics, is optimistic about the potential for reduced inflation in the upcoming year.
“Following the unexpected rise in Nigeria’s inflation, we now expect price increases to slow down from January rather than December, although at a gradual pace. Continued rate hikes are anticipated until the Central Bank of Nigeria achieves its goal of restoring positive real rates, likely by the third quarter of 2025. A reduction in inflation will create opportunities for a less strict policy stance by Q4 2025.”
Churchill Ogutu, an economist at IC Asset Manager, tells African Business that although higher interest rates will eventually lead to lower prices, it may take time for this effect to be felt.
“Monetary policy has significant lags, and we have yet to observe the overall effect of the 875 basis points increase in the inflation figures. Additionally, Nigeria’s inflation is primarily influenced by the depreciating naira, which has greatly affected imported food prices.”
Need to stick to reform agenda
As inflation reaches a peak not seen in decades and the naira plummets to record lows, concerns about Nigeria’s recovery capability are escalating. Ogutu remains hopeful that recovery is feasible if the country stays dedicated to the economic reforms initiated by President Tinubu.
“Nigeria can successfully navigate these challenges if it adheres to its reform agenda, though the country is experiencing short-term pain that may ultimately lead to long-term benefits,” he stated.
He underscores the necessity of enhancing revenue mobilization to stabilize the economy.
“From a fiscal standpoint, we commend Nigeria’s initiative to reform its VAT system, with the goal of increasing the VAT rate from the current 7.5% to 15% by 2030, which should support revenue growth.”
“Recently, Nigeria issued a dual-tranche $2.2 billion Eurobond at yields higher than those of South Africa, which issued bonds two weeks prior, reflecting the fiscal challenges Nigeria is facing. As such, prioritizing revenue mobilization should remain a focus as it pursues its reform agenda.”
Ndiame Diop, World Bank country director for Nigeria, also agrees that there should be a continuous push for revenue enhancement. However, he emphasizes the need to also support the vulnerable households most adversely affected by the decline in purchasing power.
“Going forward, it will be essential to strengthen the improving fiscal outlook while increasing support for the poorest households to mitigate the losses in purchasing power and hardships, all while creating opportunities for growth and productive employment,” he concluded.
