Nigeria’s Inflation Rate
Nigeria’s inflation rate has maintained an upward trend, reaching 26.72% in September 2023, the highest rate since September 2005. The increase is attributed to the removal of fuel subsidies in May 2023, which had a significant effect on the cost of transportation and energy for consumers and businesses, the devaluation of the official exchange rate in June 2023, which inflates imports and exports prices, and reduced the purchasing power of Nigerians, and the increased insecurity issues in the northern part of the country. The prices of food and non-alcoholic beverages, alcohol and tobacco, housing utilities, health, transport, restaurants and hotels, and miscellaneous goods and services have all increased. On a monthly basis, the Consumer Price Index (CPI) data rose by 3.18% in August 2023, the highest growth in 15 years, and is now a 2.10% increase in September 2023. The CPI data increased year-on-year by 5.94%, comparing September 2022 to September 2023. The inflation problem has worsened the economic misery of millions of Nigerians who struggle to afford basic necessities (see charts 1 and 2 below).
Food Inflation and Consumer Purchasing Power
Rising food inflation in Nigeria has significantly impacted the economy and the purchasing power of consumers, mainly because food constitutes a significant portion of household budgets. The Food inflation rate in September 2023 was 30.64% yearly, 7.30% points higher than the rate recorded in September 2022 (23.34%). This has led to a decline in the purchasing power of Nigerians, particularly low-income earners, who find it difficult to afford basic necessities such as food, housing, and healthcare.
As food prices increase, consumers are forced to reduce expenditures on other essential items. This leaves them with less disposable income on other goods and services, reducing spending in the economy’s non-food sectors. The rise in food prices has also contributed to the overall inflation rate in Nigeria, which reached 26.7% as of September 2023. The high inflation rate has led to a decline in living standards for many Nigerians, particularly those with lower incomes. Families may be forced to compromise on the quality and quantity of food they consume, leading to potential health implications and overall reduced well-being. The rising food inflation has further pushed citizens down the poverty line as they struggle with rising costs (see chart 3 below).
High inflation has become one of the subtle pressures on investment inflow, as investors are hesitant to invest in an environment where the value of their investments is eroded by inflation. The current economic situation has led to declining employment as businesses may reduce their workforce or cut wages to cope with rising costs.
Of Inflation and Financial Market Performance
The rising inflation has kept investment real return negative, affecting market participation and performance. Foreign market participation has declined, reflecting the foreign investors’ disinterest in the market and diversion to countries with positive real returns and less currency volatility, like the US. Meanwhile, domestic investors have reacted to the rising inflation with a growing preference for assets with higher returns that can mitigate loss. The equity market became one of the preferred assets, with the ASI generating a year-to-date return of 30.80% as of October 16, 2023, higher than the September inflation rate of 26.72%. Analysts observed investors deserted fixed-rate investments due to the higher inflation expectation, as evidenced by the aggressive selloffs in the bond market. The average bond yield has increased to 14.68% as of October 16, 2023, from 13.02% as of January 02, 2023. Similarly, the money market has been relatively bearish, with the yield curve experiencing a bumpy trend, and the average yield settled at 5.85% as of October 15, 2023, from 5.29% on January 02, 2023.
The future inflation expectation made investors prefer short-dated instruments, especially new treasury bill auctions and commercial papers. Hence, investors demanded higher interest rates on long-dated instruments, increasing borrowing costs for the government and firms. High inflation is a silent disincentive for good market performance and participation (FPI), considering that investors would continue to price in default risk, asset value loss, exchange rate volatility, and hampered real return.
Navigating Nigeria’s Inflation Conundrum: Strategies for Stability and Growth
Addressing Nigeria’s high inflation rate of 26.72% necessitates a multifaceted approach involving the Nigerian government and the Central Bank of Nigeria (CBN). To combat this soaring inflation, the CBN can employ monetary policy tightening measures, such as raising interest rates and increasing reserve requirements for banks. Interestingly, the CBN has implemented a tight monetary policy stance since 2016, with the benchmark interest rate at 14% since July 2016. However, this has not been very effective in curbing inflation, partly because of the government’s high fiscal deficit and debt levels, which have increased the money supply and put pressure on the exchange rate. The CBN might continue the rate hike to improve market confidence and attract investors into local debt, supporting the naira and easing the dollar shortage. In response to the just released inflation rate, CBN disclosed that the central bank “has an unenviable inflation task and will need to respond with aggressive monetary tightening” (see chart 4 below).
Chart 4:
Last Mile Thinking
Nigeria is experiencing its highest inflation rate in nearly two decades, underscoring a worsening cost of living woes much more than the number suggests. The surge in inflation follows President Bola Tinubu’s policy reform, which involved removing the long-standing petrol subsidy, resulting in more than a threefold increase in fuel prices and the devaluation of the naira against the dollar, nearly doubling the exchange rate.
The escalating cost of living is taking a toll on millions of Nigerians, with food inflation being the predominant component of Nigeria’s inflation index. Food inflation at 30.64% in September suggests that more Nigerians may sink into nutritional deficiencies. The monetary authority has primarily led efforts to combat this surging inflation without substantial collaboration from the fiscal policy authority. Consequently, analysts have a growing consensus for a more effective and practical approach to address the soaring inflation problem.
In light of this, the Nigeria Development Update published by the World Bank has put forth a set of immediate policy options, which revolve around three priority areas. First, implement policies geared towards macroeconomic stability, fostering inclusive growth, and generating job opportunities to mitigate the impact of inflation on the economy. Second, protects low-income households from the adverse effects of inflation, as they are particularly vulnerable to rising prices. Third, facilitate access to financial resources for small and medium-sized enterprises (SMEs) operating in critical sectors to counteract the effects of inflation and expedite the process of economic recovery.
Some analysts say Nigeria needs to improve its business environment, speed up its revenue-driven fiscal consolidation measures, and enhance its spending and debt management practices to achieve fiscal sustainability. Moreso, reforms in the agricultural sector can improve productivity and alleviate food price volatility, a major contributor to inflation in Nigeria. Investment in infrastructure and responsible exchange rate management can also contribute to overall price stability. Supply-side policies, like streamlining supply chains, fostering competition, and encouraging technological innovation, should be promoted to combat cost-push inflation. A clear inflation-targeting framework, transparent data analysis, and engagement with key stakeholders will be crucial components of this comprehensive strategy.
Proshare analysts believe high post-harvest logistic and distribution costs as well as single-digit credit to preferred sectors have been a fertile ground for inflation, especially the food component. Putting that in the context of high inflation worldwide and the pass-through effect of falling naira value means inflation will remain a persistent problem in the country for some time. Howbeit, the stability of the FX market is a necessary and sufficient condition for moderation in Nigeria’s inflation rate. The decision to withdraw the FX restrictions on the 43 imported items is laudable but not enough to guarantee a stable FX market and moderate the impact of imported inflation. Continuous “open-mouth operation” in the form of pro-market forward policy guidance, clearing the billions of dollars in FX backlog, increasing oil and gas production, boosting exports, and enforcing quality in local outputs to compete with imported items remain the low-hanging fruits for FX market liquidity and exchange rate stability.
