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Nigeria’s persistent high inflation 09 Oct 2024

At the September 2024 Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN), members unanimously decided to raise the Monetary Policy Rate (MPR) by 50 basis points to 27.25%. It was a surprise decision. Since the MPR was raised by 400 basis points in February, each subsequent hike had been lower than the previous one.  However, the September meeting saw the same rate of increase as the July decision. Analysts had projected a hold decision for the September meeting, if not a modest rate cut.

The CBN based its latest decision to increase the MPR on inflationary pressure in the energy sector. Earlier in September, the official pump price of petrol had increased by 54% compared with the previous month. So, despite the slight downward trend in headline inflation in July and August, with the consumer price index moderating to 32.15%, the MPC deemed the risk of inflation to be on the upside.

The September decision is noteworthy because it indicates a decoupling from global trends. A few days before it, the US Federal Reserve announced a bigger-than-expected interest rate cut of 0.5 percentage points, bringing its lending rate to the range of 4.75–5%, amid disinflationary trend and softer labour market.

Divergence in Nigeria’s inflationary performance is nothing new. According to an analysis of a half-century data by the IMF, Nigeria’s historical inflation has been higher and more persistent, compared with the emerging market and developing economies (EMDE) and Sub-Saharan Africa (SSA). Nigeria’s inflation has also been slower to decrease compared with its peers. Its long-term average rate of CPI inflation between 1971-2020 was 16%, which is higher than 13% for SSA and 13.6% for EMDE. The analysis shows that, whereas inflation in Nigeria is driven by the same monetary and exchange rate factors as these other economies, empirical evidence points to the country’s relative underperformance.

The big question is why is this the case? The IMF adduced the delay by the CBN in adopting inflation targeting as its explanation. But it remains quite doubtful that since the CBN decided to target inflation, it has demonstrated serious resolve in doing so. For instance, it is on course to miss the target of 21.4% inflation that it set for 2024. From the beginning of the year to date (September 23), the apex bank has allowed the naira to depreciate by approximately 75% amid continued monetary expansion.

But this is not necessarily a deliberate self-sabotage. On the one hand, the CBN is often misled by official and unofficial advisors in adopting inflationary policies. For instance, in pushing the CBN to adopt market exchange rate, the IMF said its analysis pointed to the rate in the parallel market as indicative of where the market value of the naira will likely stabilise. This assumption has proven to be horribly wrong. Fifteen months after the adoption of the exchange rate policy, the naira has depreciated by more than 160% compared with parallel market rate as of May 2023. With its direct impact on the cost of imported petrol, as the government tried to remove the subsidy on the pump price of the product and given the ripple effect of the price increases on the cost of transportation and consumer goods, inflation was further stoked to remain persistently high.

On the other hand, CBN’s inflationary underperformance is an imposition by fiscal policy. The upsurge in money supply since 2019 was driven by the sharp increases in the yearly budget deficit. This trend has continued under the current administration of President Bola Tinubu, with added inflationary impetus from the petrol subsidy fiasco and conspicuous consumption of foreign goods by senior public functionaries.

But there is a limit to the explanation of the Nigerian persistent inflation by the dynamics of demand and supply. At a more fundamental level, these dynamics represent effects rather than causes. Underlying the persistence of high inflation in Nigeria is the political economy. Its inefficiency perpetuates a culture that is incompatible with the production of goods and the delivery of infrastructure to support it. This refers to the structural factors that are well cited in policy and academic circles as a major cause of high inflation persistence in Nigeria. But in a counterfactual manner, the IMF argues that the structural factors are transitory.

Since 2014, suboptimal requirements have determined the leadership of the CBN. Rather than a professional who would deal with the presidency and the fiscal policymakers in a virtuous arms-length relationship, the preference is that the CBN governor should be morally pliable and allied with the government. Under these circumstances, the CBN has struggled to fulfil its mandate of price stability. Indeed, it has had little incentive to seriously pursue it, since it is not going to be accountable for its failure.

The overall effect of this is that the long-term inflationary expectation in Nigeria is unanchored.  Both households and firms have hardened their higher inflationary expectations. This is why the prices of goods are being determined by the anticipation of higher costs of restocking.

When high inflation is persistent, it feeds itself. It weakens the effectiveness of policy response to it. In Nigeria, the failure to curtail high inflation has invariably led to its permanence. To end this long cycle, the government must break away from its tendency to accommodate the extremely negative impact of high inflation on the welfare of the citizens and operating cost of firms, which its top functionaries are insulated from. The country also needs to address the structural challenges that impede productivity.

Jide Akintunde is Managing Editor, Financial Nigeria magazine, and Director, Nigeria Development and Finance Forum.