While several countries experience a slowdown in inflation, Nigeria continues to see rising prices for goods and services, reaching a 27.33% headline inflation rate, an 18-year high. Despite the Central Bank of Nigeria’s (CBN) record rate hikes, analysts attribute the persistent inflation to local factors, including cost-push inflation. KPMG notes the need to address underlying supply-side issues, such as boosting local production, improving infrastructure, cutting costs, and increasing foreign exchange inflow. Factors like petrol subsidy removal, naira devaluation, and excess printing of currency through Ways & Means contribute to the inflationary pressures.
Key Points:
- Global Inflation Trends:
- Inflation rates are cooling in several countries, such as the UK (4%), the US (3.2%), and Ghana (35.2%). However, Nigeria’s inflation has risen for ten consecutive months, reaching 27.33%, an 18-year high.
- Central Bank Measures:
- The CBN raised rates by a record 725 basis points but has not seen a significant impact on inflation. Local factors are considered responsible for the persistent rise.
- Local Factors and Cost-Push Inflation:
- KPMG identifies Nigeria’s inflation as cost-push inflation, driven by increased production input costs. Factors include foreign exchange rates, interest rates, wages, and other costs.
- Increased Input Costs:
- In the past 18 months, Nigeria has experienced up to 100% and 40% increases in the input costs of foreign exchange rates and interest rates, respectively.
- Petrol Subsidy Removal:
- The removal of petrol subsidies led to a significant surge in fuel prices, causing an average increase of 174.6% within three hours.
- Naira Devaluation Rate Pass-Through Effect:
- The CBN’s decision to unify exchange rate windows and devalue the naira by 39.4% led to constant volatility in the black market. The depreciation impacted imported inflation due to high demand for imports.
- CBN’s Ways & Means:
- Excess printing of naira through Ways & Means increased money supply and triggered a flight to dollars. IMF recommends reducing overdrafts and fully sterilizing any future financing of the government’s budget deficit to manage inflationary effects.
- Securitization of Ways and Means:
- Before former President Buhari left office, the Ways and Means were securitized, restructuring the N22.7 trillion loan from the CBN.
Conclusion:
Nigeria’s inflation persists amid global trends of cooling rates, with local factors contributing to the rise. Cost-push inflation, driven by increased production input costs, requires a multifaceted approach, including addressing supply-side issues, boosting local production, improving infrastructure, and managing currency-related policies. The removal of petrol subsidies, naira devaluation, and excess printing of currency are identified as key contributors to inflationary pressures. The IMF’s recommendations for reducing overdrafts and sterilizing financing aim to mitigate inflation risks associated with monetary policies.
