Inflation is a serious concern in Nigeria as it remains extremely stubborn. Inflation rate picked up to 28.92% last December, according to the National Bureau of Statistics, which signals a significant erosion of purchasing power for Nigerian citizens. The inflation rate has been rising for the past 12 months, indicating a trend that hasn't shown signs of easing. This further amplifies the concerns about the ongoing economic crisis.
This inflation rate represents the highest in Nigeria since the mid-1990s, highlighting the severity of the current economic situation. Indeed, the rise in food prices, accounting for roughly half of the inflation basket, is a major contributor to the overall inflation rate. This means basic necessities are becoming increasingly expensive, putting a strain on households.
Inflation in Nigeria in 2023
Source: National Bureau of Statistics
Inflation is fundamentally a monetary phenomenon, which means that it is a phenomenon created by an injection of money into the economy. In 2020 and 2021, the Nigerian central bank and federal government engaged in expansionary monetary and fiscal policies, which have flooded the economy with liquidity, outpacing the growth of goods and services. This excess of money chases a limited supply of goods and services, pushing prices up.
Moreover, the Nigerian Naira has depreciated significantly against major currencies like the U.S. dollar. Which made imports more expensive, fueling inflation as these costs are passed on to consumers. Nigeria relies heavily on imported goods, making it vulnerable to global price fluctuations and exchange rate movements. And the global rise in food prices due to factors like the Ukraine war and climate change has impacted Nigeria, a net food importer. This has led to higher domestic food prices, a major contributor to inflation.
As a result, the living standards of Nigerians have been reduced. With prices outpacing income growth, the average Nigerian's living standards are likely to decline. This can lead to increased poverty and hardships. In addition to that high inflation created an environment of uncertainty for businesses, making it very difficult to plan and invest for the future, which hinders economic growth and development. Logically, these persistent economic hardships can fuel political and social unrest.
The Nigerian central bank has been raising interest rates to fight inflation. In May 2022, the Central Bank of Nigeria raised interest rates from 13% to 14%, from 14% to 15.5% in July 2022, from 15.5% to 16.5% in May 2023, from 16.5% to 18.5% in July 2023, and from 18.5% to 18.75% in November 2023. This is a total of 725 basis points and yet, these hikes were clearly not aggressive enough to prevent inflation from rising. The central bank is compelled to keep raising interest rates and maintaining them at high levels until it takes a downward trajectory. Reducing the money supply is the primary goal of the Central Bank of Nigeria. This means that for the year 2024, Nigerian consumers will have to reduce their spending and save more.