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Wednesday, August 10, 2016

Turbulent Time: Managing Inflation in Period of Rising Cost


    The last time i write about inflation here was on May 30th  2012, with title "INFLATION HISTORY IN NIGERIA, IMPENDING REMOVAL OF CBN AUTONOMY, AND OTHER ISSUES"; i am back again on the same inflation monster, looking at how time has changed since then. Today Nigerian inflation rate is hovering around 16.5% the highest in recent time and 8th highest in Africa according to some analysis. According to analysis from Trading Economics, it is forecast to reach 18.20% by end of this quarter. If one look at the trend since January, this year's inflation rate has increased month-after-month; looking at the condition of the economy we must worry about the near future.


     Inflation as most of us are aware is bad for business, and politician facing election shall be wary of it too. Around the world, Nigeria is not alone in this, most oil producing nations are passing through the same situation; the result of global decline in oil price, their main source of foreign earning - causing short falls in government budgets. But in the developed economies of the world, inflation is no longer a concern to policy makers; these economies have been operating with inflation rate of around 1.5%  over many years. If not for recent events, the main concern in the rich world is deflation.

     Numerous factors are to blame for the high inflation rate in Nigeria, and not least is the recent increase in interest rate which is expected to negatively affect the inflation rate in the short run.The CBN motive for increasing the rate is mainly to protect the value of Naira against Dollar and boost banking sector performance. In economic parlance we know that Central banks increase interest rate when they want to attract savers (not only from within the country but from abroad as well), that in return boost domestic currency as demand for it by investors increases. This mostly concern foreign exchange matters and how inflation is related to it. As a matter of fact for a country like Nigeria that is import-depended, inflation can be imported to the country, when there is inflation in our major trading partners' economies. It can also result from high cost of foreign exchange as we are passing through at the moment.


        The current CBN management is under intense pressure to find an end to Nigeria's foreign exchange crisis, adding inflation to the fire will make their case worst. As government borrow to finance this year budget, inflation will prove difficult to control; everywhere around the world, deficit budgeting is inflationary. The rising cost of food items, hike in fuel price and bottlenecks in the supply of other widely use things are also to blame for the inflation. As most analysts expect, the recent liberalization of Naira in the foreign exchange market is linked to inflation, at least in the short to medium term period. According to an IMF study (Nguyen, Dridi, Unsal and Williams, 2015), in the last 25 years, the main drivers of inflation in Africa have been domestic supply shocks and shocks to exchange rate and monetary variables. The study also observes that, in recent years, the contribution of these shocks to inflation has fallen; "domestic demand pressures as well as global shocks, and particularly shocks to output, however, have played a larger role in driving inflation over the last decade".

   Many previous empirical works have shown negative relationship between inflation and economic growth (Chimobi, 2010; Doguwa, 2013; Idih and Olu, 2015). This is particularly true in case of double digit inflation such as we are experiencing at the moment. Our rate of growth has been declining since January 2016, at the same time inflation was rising. Hence, the negative relationship between the two major economic variables. Though, there is much debate among academicians on the actual threshold from where negative relationship between inflation and economic growth set in, most studies agreed that inflation such as at our current level is harmful to growth. As our new government try to understand the Nigerian economy, we shall not expect a quick end to our inflationary condition.


       Nigerian government is introducing a lot of changes, some of which are not welcome by the private sector actors, who move (discretely) to undermine these reforms. Government economic team itself is not quite aware of methods to quickly find an end to the inflationary condition. We can safely say that some of them are learning on the job. As a recent IMF study of inflation across Sub Saharan Africa succinctly observes, "country characteristics matter—the extent of oil and food imports, vulnerability to weather shocks, economic importance of agriculture, trade openness and policy regime, among others, help in explaining the role of shocks" (Nguyen, Dridi, Unsal and Williams, 2015). Thus, our war against inflation is just starting. Finally, when you fight corruption, corruption too fight back; those persistent bottlenecks in key areas of the economy may be connected to this fact.


REF:

Chimobi, O. P. (2010), "Inflation and Economic Growth in Nigeria", Journal of Sustainable Development Vol. 3, No. 2; June 2010

Doguwa, S. I. (2013), "Inflation and Economic Growth in Nigeria: Detecting the Threshold Level",CBN Journal of Applied Statistics Vol.3 No.2

Idih, J. F. and Olu, E. O. (2015), "Inflation and economic growth in Nigeria", Journal of Economics and International Business Management Vol. 3(1), pp. 20-30

Nguyen, A.D., Dridi, J., Unsal, F. D. and Williams, O. H. (2015), "On the Drivers of Inflation in Sub-Saharan Africa", IMF Working Papers WP/15/189

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