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Sorry, Nigeria can’t beat this inflation with rate hikes

Nigeria’s inflation rate rose to 20.52% in August 2022, from 19.64% in July, one of the worst in decades and it is unrelenting.

The high rate of inflation has opened up a can of worms upturning several economic policies that have largely focused on driving economic growth.

For example, it has forced the central bank to raise interest rates thrice in a row, first from 11.5% to 13% and then to 14% and now to 15.5%, one of the most aggressive rate hikes in years.

A lot has been said about the causative factors for inflation and Naijaonpoint has had several stabs at the topic over the last few months. In one instructive article, we cited increased money supply (now at its highest in the economy) as a major factor.

While the central bank also agrees with our prognosis, the governor of the bank, Godwin Emefiele listed several other supply-side factors that have also contributed to the high inflation rate we are seeing.

Supply-side relates to factors other than demand that contribute to the high inflation rate. They are often out of the control of the central bank and when pervasive cannot be surmounted by rate cuts.

Supply Side Factors

Energy Cost: The first reason cited by the central bank is a rise in energy costs such as diesel, fuel, and electricity tariffs. The CBN suggest the rise in energy cost has also triggered a rise in transportation and production cost.

“The hike in energy prices, such as the rising price of Automotive Gas Oil (AGO), hike in electricity tariff, as well as the perennial scarcity of Premium Motor Spirit (PMS) contributed significantly to the building of expectations, thus pushing up the cost of transportation and production.” CBN

The CBN does not set oil or electricity prices and neither can it stop the trillions spent on fuel subsidies.

Insecurity: Terrorist attacks, the spate of kidnappings, armed robberies, and other nefarious activities have impacted negatively on the economy affecting the ability of businesses to produce and distribute their goods and services.

“Other contributory factors include: the broad-based insecurity across the country, which continue to dampen production activities” CBN

The CBN cannot checkmate insecurity situations and there is no amount of money that it spends that can curb this.

Poor Infrastructure: infrastructural challenges such as poor road networks, dilapidated transportation, and poor power supply have increased the cost of production sending prices high.

“legacy structural factors such as the inadequate state of critical infrastructure; high cost of importation of essential grains, such as wheat” CBN

While the central bank has spent trillions in intervention funds to the private sector,

2023 Elections: The central bank is also anticipating a higher increase in inflation due to the expected spending by politicians as we approach the 2023 general elections. Election spending typically threatens currency stability as politicians prefer to share forex.

“…increased demand for money associated with the forthcoming electoral campaign season.” CBN

Imported Inflation: Nigeria is not the only country experiencing higher inflationary pressures. Most countries where we import from are also facing higher inflation and it is likely that we will import this inflation whenever we buy goods and services from them.

Another major headwind is that as these countries strive to bring down their inflation rate, they raise interest rates indirectly increasing borrowing cost for emerging markets like Nigeria.

“The ongoing monetary policy tightening by the US Federal Reserve Bank is also putting upward pressure on local currencies across the world, with pass-through to domestic prices, as investors exit these economies to seek higher yields in US dollar denominated fixed income securities.” CBN

Bottom Line

The factors above are clearly outside of the control of the central bank thus it is unlikely that the recent hike in the monetary policy rate will have any effect.

  • The challenges above are most fiscal than monetary so it is the federal government that will have to address these issues.
  • Unfortunately, the government is unable to address these issues as it struggles with revenue shortages amidst lower oil production output and a ballooning government recurrent expenditure.
  • This suggests high inflation rate is likely going to remain sticky for years before it starts to drop below acceptable levels.
  • The central bank’s monetary policy rate increase will snuff out forex supply and slow down the galloping inflation but we do not see it dropping below single digits if it does not address the supply factors mentioned above.

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