No doubts, inflation can stop a country from creating value and becoming wealthier because it affects how productive the country can be. Unfortunately, this is what’s happening in Nigeria right now. The value of the Naira is going down every day. This makes things more expensive for Nigerians.
What is Inflation?
Inflation is the annual percentage change in the value of the Consumer Price Index (CPI). It helps us understand how the prices of various goods and services change over a year. In 2022, the CPI increased by 15.60 percent compared to January of the same year, according to data from the Nigerian Statistics. According to the National Bureau of Statistics (NBS), Nigeria’s inflation rate rose from 9.0 percent in 2015 to 17.71 percent by May 2022, when comparing the years.
It’s clear that the value of money in Nigeria has been decreasing over time, causing negative effects. Normally, inflation is expected to decrease purchasing power by around 2 percent or 3 percent to bring things back to stability. However, in Nigeria, inflation has gone beyond 10 percent. This situation is pushing Nigeria closer to hyperinflation, which drastically reduces the value of their currency, the Naira.
Over the last decade, Nigeria has faced challenges with prices going up for food, goods, and essential items. This has also led to a decrease in people’s ability to buy things, which hasn’t really improved in the market.
Causes of Inflation in Nigeria
Inflation is brought on by 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, which is an increase in the price of goods and services which as a result, a given unit of currency now buys less products and services.
Implications of 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.
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 rates fluctuation). However, inflation can be controlled with the following measures:
1. Monetary policy – When interest rates go up, it leads to reduced economic growth and lower inflation. This happens because people and businesses tend to borrow less when interest rates are high. The central bank might raise interest rates to control inflation. As interest rates increase, borrowing money becomes more expensive, while saving money becomes more attractive.
When interest rates are higher, people have to pay more for things like loans and leases, which leaves them with less money to spend on other stuff. This means that households can’t spend as much as they used to. Similarly, businesses become less likely to invest and grow because borrowing money becomes less appealing.
So, when interest rates rise, it has a big effect on slowing down both business investment and consumer spending. This slower spending then leads to slower economic growth. And as the economy slows down, inflation also tends to slow down because people aren’t buying as much, which keeps prices from going up as quickly.
2. Money supply control – According to monetarists, there is a direct correlation between the 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) and government’s ability to control the currency type and quantity it issues.
3. Supply side fiscal policies – Initiatives to make the economy more efficient and competitive, which will drive down long-term expenses as inflation is frequently brought on 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 labour 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.
4. 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. By lowering demand in the economy, this serves to improve the government’s budget condition. These two measures both slow the expansion of the overall demand, which lowers inflation. Also, reduced Aggregate Demand (AD) growth can lower inflationary pressures without triggering a recession if economic growth is fast.
5. 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.
6. Global investment and exportation – Nigeria investing in remunerative products such as oil-investment can help manage inflation. Moreover, less importation and increased exportation can give the Naira a worthy value. Nigeria becoming a producer nation should not be overlooked as currently, the least items are imported. Exchange rates and other importation policies contribute to decreasing the purchasing power of consumers.
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 cost 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 this 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.
7. Demonetization and reissuance 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.
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 an excessive amount of note issuance and hyperinflation takes place in the area. This measure has had great success. When a nation has an abundance of illicit currency, this action is frequently taken.