Nigeria’s inflation rate has climbed for the third consecutive month in November, reaching 34.6%, the highest level in more than 28 years, according to data from the statistics agency.
This increase in inflation has been exacerbated by recent flooding in northern Nigeria, resulting in skyrocketing prices for essential foods such as yam, corn, and rice. Furthermore, rising fuel prices have contributed to the economic pressures faced by Africa’s largest crude oil producer.
The significant inflation rise in the latter half of 2023 follows President Bola Tinubu’s decision to allow the naira to devalue and reduce fuel subsidies, aiming to boost economic growth and stabilize public finances. Since the beginning of the year, the naira has depreciated by 42% against the dollar, leading to increased import costs for fuel and various goods.
Restrictive monetary policy
With inflation remaining elevated, the Central Bank of Nigeria may continue its policy of monetary tightening, which has seen the benchmark interest rate increase from 18.75% at the end of 2023 to 27.5% this year. Last month, Governor Olayemi Cardoso indicated that the Monetary Policy Committee expects inflation to start easing in 2025 as a result of these measures.
Yvonne Mhango, an economist specializing in Africa at Bloomberg Economics, believes there is potential for lower inflation in the upcoming year.
“In light of the unexpected rise in Nigeria’s inflation, we now project that price hikes will moderate from January instead of December, though at a gradual rate. Further rate increases are anticipated until the Central Bank of Nigeria can restore positive real rates, likely by the third quarter of 2025. A reduction in inflation should enable a more accommodating policy by Q4 2025.”
Churchill Ogutu, an economist at IC Asset Manager, explains to African Business that while elevated interest rates will eventually contribute to lower prices, this result may not be immediate.
“Monetary policy has significant lag effects, and we have yet to observe the cumulative impact of the 875 basis points rise in the inflation figures. Additionally, Nigeria’s inflation is primarily influenced by the weakening naira, which has a substantial effect on imported food costs.”
Commitment to reform agenda necessary
With inflation at its highest level in decades and the naira falling to unprecedented lows, concerns about Nigeria’s recovery capability are increasing. However, Ogutu expresses optimism that recovery is possible if the country remains dedicated to the economic reforms introduced by President Tinubu.
“Nigeria can overcome these challenges if it adheres to its reform agenda, even though the nation is currently experiencing short-term difficulties that may lead to long-term advantages,” he stated.
He highlights the importance of enhancing revenue mobilization to stabilize the economy.
“On the fiscal side, we commend Nigeria’s attempt to reform its VAT system, which aims to raise the VAT rate from the current 7.5% to 15.0% by 2030, expected to bolster revenue generation.”
“Recently, Nigeria issued a dual-tranche $2.2bn Eurobond at premium yields compared to South Africa, which issued bonds just two weeks prior, underscoring the fiscal challenges Nigeria faces. Hence, revenue mobilization should continue to be a priority as the country progresses with its reform agenda.”
Ndiame Diop, World Bank country director for Nigeria, also advocates that revenue enhancement efforts should persist. However, he stresses that it should be coupled with support for vulnerable households most adversely impacted by the decrease in purchasing power.
“Looking forward, it will be essential to solidify the improving fiscal outlook while providing assistance to the most disadvantaged households to mitigate losses in purchasing power and hardship, all while expanding opportunities for growth and productive employment,” he noted.
