Managing Rising Inflation in Nigeria
How do you manage your business with the rising inflation in Nigeria? Our guest writer, Emmanuel Otori, explains how to in this post.
No doubt, inflation is a barrier to how much a country can do in terms of value and wealth creation. This is because it affects every aspect of its production. Tragically, this is currently the state of Nigeria where the purchasing power of the Naira declines daily. This decline does not affect daily living – everything increases as the purchasing power decreases. Keep reading to find out how to manage the rising inflation in Nigeria.
Rising Inflation in Nigeria
The Consumer Price Index (CPI) annual percentage change in value is known as inflation. It accurately gauges how much the prices of a portfolio of goods and services vary over the course of a year. The CPI for 2022 increased to 15.60 percent (year-on-year) in January 2022 by records from the Nigerian Bureau of Statistics. Based on the National Bureau of Statistics (NBS), Nigeria’s inflation rate increased from 9.0 percent in 2015 to 17.71 percent as of May 2022 (year on year).
It is obvious that over the years, the value of money in Nigeria has been falling, thereby causing a negative impact. Usually, this inflation is expected to reduce purchasing power by 2 percent or 3 percent to bounce back to stability, but it is seen that inflation in Nigeria has risen above 10 percent. In a state like this, Nigeria is gradually tilting into hyperinflation, thereby reducing the value of the Naira.
Over the past 10 years, Nigeria has long struggled with a general increase in the cost of food, goods, and other necessities as well as a decline in buying power which has barely retraced the market. Inflation rates of 2 percent to 3 percent assist an economy because they stimulate consumers to take out more loans and make more expenditures because interest rates are also held at historically low levels at these levels.
How is Inflation caused?
Inflation is a result of the following, among others:
- Changes in the cost of production and distribution.
- An imbalance in the money supply and demand.
- An increase in the tax rate on goods.
As it is known, the value of money decreases when the economy undergoes inflation. Inflation is an increase in the price of goods and services, resulting in a given unit of currency buying fewer products and services.
Implications of Inflation
According to data from the Nigeria Bureau of Statistics (NBS), the economy made an improvement in 2022’s first quarter. This is evidenced by a 3.1% growth in Gross Domestic Product (GDP). Both individuals and the nation as a whole are impacted by this high inflation.
The effects on consumers are the harshest – people can no longer maintain a budget since their income is so low. Consumers find it challenging to purchase even the necessities of life due to the high cost of everyday goods. They are forced to request higher pay as a result, which gives them no choice.
Government Efforts to Manage the Rising Inflation in Nigeria
In order to manage inflation, the government and the central bank typically regulate the economy through monetary and fiscal policies. Monetary policy is the principal strategy employed (interest rate fluctuation). However, inflation can be controlled with the following measures:
Monetary policy
Reduced economic growth and lesser inflation are the results of lower demand due to higher interest rates. Interest rates can be raised by the central bank in reaction to inflation. Borrowing becomes more expensive, and saving becomes more appealing at higher interest rates.
Residents will have to make higher lease payments, which would leave them with less money to spend. Consequently, households will be less able and less motivated to spend. Businesses will invest less because corporations won’t be as likely to borrow to finance investments. Therefore, increased interest rates significantly slow down investment and consumer expenditure. This results in a slower economic growth rate – inflation also slows down as economic development does.
Money supply control
According to monetarists, there is a direct correlation between money supply and inflation. Hence, reducing the money supply can indirectly reduce inflation. Reducing inflation should be possible if the expansion of the money supply can be managed. Measures advised by the monetary school of thought include;
- Budget deficit reduction (deflationary fiscal policy).
- Elevated interest rates (contracting monetary policy).
- Government’s ability to control the currency type and quantity it issues.
Supply-side fiscal policies
Initiatives to make the economy more efficient and competitive will drive down long-term expenses. This happens because inflation is frequently brought about by ongoing cost increases and weak competition. The economy may become more competitive, and inflationary pressures may be reduced with the aid of supply-side policies.
For instance, more accommodating labor markets, industries, and production activities might help ease the strain on inflation. However, supply-side initiatives may take some time to implement in Nigeria due to the time required for construction and setting up manufacturing operations. In the meantime, this is likely ineffectual against inflation caused by growing demand.
Fiscal policy on tax increment
Increased income taxes may have a moderating effect on demand, spending, and rising inflation. Taxes (such as VAT and income tax) can be raised, thus decreasing spending by the government to lower inflation. Lowering demand in the economy serves to improve the government’s budget condition. These two measures slow the expansion of the overall demand, lowering inflation. Also, reduced Aggregate Demand (AD) growth can lower inflationary pressures without triggering a recession if economic growth is fast.
Wages and price control
Theoretically, attempting to restrict wages and prices could assist in lowering inflationary pressures. However, because they are mostly ineffective, they are not frequently employed. Limiting wage growth can aid in containing inflation if wage inflation (produced, for example, by strong unions negotiating for higher real wages) is the primary cause of inflation. Lessening wage growth will lower business expenses and result in a decline in the economy’s excess demand. However, it can be challenging to control inflation through income programs, especially if the unions are strong. Furthermore, pay regulation calls for broad economic cooperation, but businesses that are experiencing a labor shortage will be more motivated to hire staff, even if it means going above and beyond government salary limits.
Global investment and exportation
Nigeria investing in remunerative products such as oil investment can help manage inflation less importation, and increased exportation can give the Naira a worthy valuable. Nigeria becoming a producer nation should not be overlooked as the least of items are currently imported. Exchange rates and other importation policies decrease consumers’ purchasing power.
As interest rates rise, the value of currencies should rise as well (higher interest rate attracts hot money flows) Inflationary pressure will also be lessened by the exchange rate appreciation through lower costs of imports. As a result of the decreased demand for exports and resulting lower overall demand in the economy, the price of imported commodities (such as gasoline and raw materials) would fall.
Since exports become less competitive than domestic markets, exporting businesses will be motivated to reduce expenses and raise competitiveness over time. By affiliating with a fixed exchange rate system, a nation may aim to keep inflation low. According to the reasoning, keeping inflation under control requires discipline, which can only be achieved if a currency’s value is fixed (or semi-fixed). The currency would start to decline if inflation increased because it would lose its appeal.
Demonetization and re-issuance of money
Conventional policies might not be suitable during a hyperinflationary environment. It can be difficult to alter future inflation expectations. It could be necessary to adopt a new currency or utilize another one, like the dollar, when people have lost faith in a certain currency, as in the case of Zimbabwe. The issue of replacing the existing currency with a new one is the most extreme monetary measure.
A fresh note is substituted for numerous old notes of money in this manner. The valuation of deposit accounts is also determined in this manner. A measure like this is implemented when there is excessive note issuance and hyperinflation occurs in the area. This measure has had great success. When a nation has an abundance of illicit currency, this action is frequently taken.
Emmanuel Otori has over 9 years of experience working with 100 start-ups and SMEs across Nigeria. He has worked on the Growth and Employment (GEM) Project of the World Bank, GiZ, and Consulted for businesses at the Abuja Enterprise Agency, Novustack, Splitspot, and NITDA. He is the Chief Executive Officer at Abuja Data School.
Meanwhile, check out some exciting articles on SME360 to grow your business.
