In the coming months, it is possible that Nigeria’s inflation rate would stay “sticky” as a result of the current series of reforms that are taking place in the country.
During a recent appearance on Channels TV’s Business, Ugodre Obi-Chukwu, the Chief Executive Officer of Nairametrics, expressed this viewpoint.
He pointed out that just like Ghana, Nigeria will probably hit its base effects; however, he predicted that until the end of the year, we’d probably see higher inflation rates. He was referring to the fact that Ghana had already hit its base effects.
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Nigeria’s economic reforms
“Nigeria is still going through different cycles of reforms, and for that reason, you would continue to see inflation sticky over the next few months.
“At 27.33%, we see a reflection of some of the things that have happened in the last few months, subsidy removal, exchange rate depreciation, and these are pass-through items that often impact inflation rate. That is why it’s going to remain sticky.
“We are experiencing some reduction month-on-month, from 2.89% in July to 3.1% in August, it dropped to 2.1% in September, and now 1.73% in October. However, on an annual basis, it’s still rising.”
He made the observation that, similar to Ghana, Nigeria would eventually reach base effect at some point.
The influence that previous shifts in prices have had on assessments of present inflation is referred to as the base effect. It happens when the current inflation rate appears larger or lower than it is due to the distortion induced by a low or high reference point from the prior period. This might happen when the reference point for the preceding period was low or high.
If, for example, there was an extremely low inflation rate the year before, then even a minor increase in prices in the current year can appear as a substantial percentage shift. As a result, the current inflation rate might appear higher than it would be if there were no distortions in the data.
On the other hand, if there was a high inflation rate in the past, a similar increase in prices may seem like a lower percentage change, which would disguise the underlying inflation rate.
Ugodre noted, “Ghana has gone through cycles of galloping inflation, hit their peak, and now it seems to be tapering down, and that could be due to base effect. It’s not like any major thing has happened in Ghana.
“Nigeria would also experience its base effect at some point but for now, I don’t think we’ve plateaued yet. And we are very likely to see much higher inflation as we approach the end of the year.”
He went on to say that the devaluation of the currency that took place between the months of August and October has not been reflected in the cost of products and services that are offered throughout the nation.
“I don’t think there’s light at the end of the tunnel yet. There are still a number of things that haven’t come up yet, and a lot of people are yet to reflect their prices. The exchange rate depreciation that we’ve seen between August and October hasn’t reflected on new inventories that’ll be coming in as we approach the Christmas season.
“I think that we’ll see a lot more price increases, and that’s why I think inflation would remain sticky up until the first quarter of next year.
Further noting, “Let’s remember that they are yet to increase electricity prices, that is still being held down. As long as that is held down, you’re not seeing the true cost of doing business in Nigeria from an inflation perspective.
“There’s still a lot of headwinds down the line, nobody knows what is going to happen to crude oil prices and there are predictions that we could go pass $100. Some people suggest that it could go lower as the global economy starts to shake.
“But with the Israel-Hamas war, there’s fears that crude oil prices could go up. If they go up and we continue to face exchange rate pressures, it’s difficult to think that there’s light at the end of the tunnel. Fuel subsidy has been removed and that pass-through cost is going to come down to Nigerians. And when it comes down to Nigerians, it immediately reflects on food prices.”
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He also mentioned that there are indications that this administration will continue the practices of the administration that came before it by continuing to borrow money from the central bank under the auspices of the Ways and Means Committee.
“My own concern is looking at the MTEF for the next three years and the 2024 budget, you see elements of the same kind of economic policies that the Buhari administration had in the current administration.
“They have gone for a wide fiscal deficit budget and revenue targets that are a bit unrealistic. When you have a combination of these two factors, it’s pretty obvious that the government might be looking at borrowing.
“And we know that it’s quite difficult tapping into the foreign debt market. We can keep tapping into the local debt market which they’ve been doing, but for the size of the revenue gap that they’ll face in 2024, they are likely to go back to Ways and Means.”
With the money supply projected to increase to N80 trillion within the next three years, Ugodre questioned the rationale behind the increasing fiscal deficit in the Federal Government budget.
“You look at these things and ask, where exactly is the silver lining? How are they going to contain inflation when spending is going to keep increasing, at least at the Federal level?
“Right now, you’re trying to address inflation and weakening exchange rate; you don’t address that by continuing with wide fiscal deficit budgets that the government is embarking on.
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Limitations of CBN in combating inflation
Ugodre said that the CBN didn’t have many choices for fixing the inflation problems, especially because of how inflation works in Nigeria.
“In terms of the CBN and what they might do, there’s really not much. Inflation has always been driven by structural issues in Nigeria, supply-side issues.
“For the US, the UK, and Europe, many of these countries, inflation is usually based on demand-related issues so monetary policy works. In Nigeria, monetary policy works to an extent, we’re likely to see MPR go up again, they need to increase interest rates so that it could reduce the volume of Naira chasing the dollar.
“However, beyond that, the government needs to sort out several things. We still have an energy crisis, and Nigerians are battling rising fuel prices.
“The government needs to fast-track its plan of moving into CNG as a means of transportation. If fuel prices continue to go up, people are going to find a way to push that cost to Nigerians and that adds to inflation.
“Structural issues around ease of doing business, transportation bottlenecks. Now that the rains are over, the government can continue with fixing roads, and continue with the infrastructure plans they had with rails.
“People need to be able to move food from one part of the country to the other without losing huge parts of their products because of transportation issues.”
What you should know
Nigeria’s inflation rate for October 2023 was put at 27.33% by the NBS on November 15. This keeps the year-long upward trend going.
Also, the government is on its way to having an inflation rate of 30% by December 2023, as predicted by KPMG.
