By Tony Obiechina
For economic experts, inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.
With inflation, even the real value of taxes is reduced. Inflation helps the government in financing its activities through inflationary finance. As the money income of people increases, government collects that in the form of taxes on incomes and commodities.
Effectively, many Nigerians have become poor due to high inflation rates challenging the economy.
According to the National Bureau of Statistics (NBS), the inflation rate was 16.82 percent in April 2022; it lies above the projected 13 percent for 2022.
Subsequently, in May it increased to 17.71 per cent on a year-on-year basis, indicating 0.22 per cent points lower, compared to the rate recorded in May 2021, which is (17.93) per cent, indicating that the headline inflation rate slowed down in the month of May when compared to the previous month.
The causes of high inflation include insecurity, poor economic policies, the devaluation of the naira, and pre-election campaign spending. Nigeria can curb high inflation rates via effective economic policies.
Inflation is a continuous rise in the prices of commodities in the market, leading to the price of every commodity in the market tripling. A cursory look at prices in the Nigerian markets reveals that the inflation rate is beyond the NBS estimate.
Nigeria’s inflation rate climbed to its highest level in 65 months (over 5 years), and the fifth consecutive monthly rise. The last time the inflation rate in Nigeria touched the 18.6% ceiling was January 2017, when it stood at 18.72%.
Latest CPI report by the NBS showed that the nation’s inflation rate in the month of June 2022, surged further to 18.6% compared to the 17.71% recorded in the previous month.
However, high inflation rate is not limited to Nigeria as many countries across the globe battle with this scourge, which was blamed largely on the COVID-19 pandemic.
Studies showed that in 37 of these 44 nations of the world, the average annual inflation rate in the first quarter of this year was at least twice what it was in the first quarter of 2020, as COVID-19 was beginning its deadly spread. In 16 countries, first-quarter inflation was more than four times the level of two years prior.
For instance, data obtained from the Organization for Economic Cooperation and Development, a group of mostly highly developed, democratic countries, revealed that 37 of the 38 OECD member nations, plus seven other economically significant countries), suffered high inflation.
Among the countries studied, Turkey had by far the highest inflation rate in the first quarter of 2022: an eye-opening 54.8%. Turkey has experienced high inflation for years, but it shot up in late 2021 as the government pursued unorthodox economic policies, such as cutting interest rates rather than raising them.
Back home in Nigeria, the Central Bank of Nigeria (CBN) has deployed various strategies to control inflation in the country.
The Apex Bank bank uses discount rates to control inflation by taking out the excess money in circulation. It does this by increasing interest rates to encourage people to save or invest and discourage borrowings. By saving and investment, the excess money in the economy is taken out.
This is because the high inflation rate in the country is associated with high exchange rates, insecurity, and infrastructural deficiency. The devaluation of the naira is a challenge in Nigeria. It has pushed up the prices of imported raw materials, cost of production, and the prices of commodities in the market.
The average exchange rate in the parallel market is now as high as N610 per dollar against the official exchange rate of N416.08 per dollar. Most importers of food, raw materials, and machinery do not have adequate foreign currency from the official channels; as a result, they access the parallel market at a higher rate.
In bid to mop up excess liquidity ahead of the 2023 general elections the Monetary Policy Committee of the CBN at its 285th meeting held in Abuja raised the lending rate to 13.5 percent, making it the first time the CBN would increase its MPR since September 2020 when it was pegged at 12.5 per cent.
Advancing reasons for its decision, the CBN said the action is targeted at mopping up excess liquidity ahead of the 2023 election spending.
Only recently, the Apex Bank at its 286th MPC meeting raised the benchmark Monetary Policy Rate (MPR) by 100 basis points from 13 per cent to 14 per cent, citing rising inflationary pressure across the world.
CBN Governor and Chairman of the MPC, Mr. Godwin Emefiele, had warned during a media briefing at the end of the two-day meeting that the MPC would continue to raise benchmark interest rates as long as inflationary pressure continues.
However, the Committee retained the asymmetric corridor at +100 and -700 basis points around the MPR, retained the cash reserve requirement (CRR) at 27.5 per cent and retained the liquidity ratio at 30 per cent.
Emefiele explained that the decision to raise the MPR was reached due to MPC members’ concerns about rising inflation which had risen to 18.6 per cent in June.
He said: “MPC noted with concern the continued aggressive movement in inflation even after the rate hike in the last meeting and expressed its unrelenting resolve to restore price stability while providing the necessary support to strengthen our fragile economy.
“As regards the decision whether to tighten or hold, the committee was unanimous and so did not consider both loosening and retaining rates at existing levels at this meeting.
“On loosening, the MPC felt it would worsen the existing liquidity conditions in the economy and further dampen the money market rate necessary to stimulate savings and investments. Members also felt that loosening would trigger the weakening of the exchange rate which could pass through to domestic prices.
“MPC did not also consider holding because it suggests that the bank is not responding to both global and domestic price development as inflation numbers continue to trend upwards.”
According to him, however, the policy dilemma was hinged around the level of tightening needed for inflation without dampening manufacturing output which could result on a higher cost of borrowing.
He, therefore said, the “committee resolved to increase the MPR by 100 basis point from 13 per cent to 14 per cent. Retain the asymmetric corridor at +100 and -700 basis points around the MPR, retain CRR at 27.5 percent, and retain the liquidity ratio at 30 per cent.”
Shedding more light on the inflationary pressure being felt in the country, Emefiele said: “Today, the last data released just about a few days ago was 18.6 per cent. MPC members feel we cannot just hold or continue to watch inflation grow the way it is rising. Something must be done to rein in inflation.
“We conducted a very serious analysis of data presented to us at this meeting. And we felt that there was need, not just because we want to look at what other economies are doing, but also the fear that whereas we are seeing some output growth as a result.
“So, essentially, with what we are doing in terms of development finance, we need to do a lot more work to rein in inflation. MPC did not even take any look at the issue of whether to hold rate constant or to loosen it. Some analysts say we should not continue to increase rates because we have increased cost of borrowing for the borrowers and that it may also weaken manufacturing output.
We agree with that postulation
“The important thing is that as long as we see inflation at the level that can retard growth, it must be dealt with while at the same time we are looking at how to use our development finance tools to do continue to push towards improved output growth.
“That is what we’re doing. The MPC is very determined that if inflation continues at this rate, particularly aggressively, we will continue to tighten because that is the only thing that I can say at this time.”
Governor Emefiele further noted: “Inflation can be a terrible scourge and what that means is that it is capable of totally obliterating the purchasing power of citizens of the country particularly the weak, vulnerable and the poor.
“By the time it weakens the purchasing power of the vulnerable, naturally it will also lead to heightened unemployment and will ultimately retard growth. We have to be very careful about the rate of acceleration of pricing or inflation, it is a very serious matter to the policy committee because as inflation continues to trend higher it would no doubt adversely begin to retard growth.”
According to him, many economies, both developed and developing, have had to embark on very aggressive rate increases so as to dampen the size of inflation.
“Nigeria, what we have done in our own attempt to pursue a policy of price stability that is conducive to growth is that we have tried at a couple of meetings to leave rates the way they were, but at the same time we are pushing on how to improve output.
“But of course, with the aggressive acceleration of inflation rates in Nigeria, we decided in May after almost two and a half years to raise interest rate by 150bps. We need to do more work on inflation.”
