By Abdulrauf Aliyu
Inflation is an economic specter that can haunt even the most robust of economies. Nigeria, a nation teetering on the precipice of hyperinflation, has been grappling with an inflation rate that has surged to nearly 27%. In the short run, inflation is indeed a monetary problem that the Central Bank of Nigeria (CBN) can attempt to address through various policies and measures. However, in the long run, inflation becomes a productivity problem that transcends conventional monetary instruments, demanding a holistic approach from various economic ministries and agencies. In this op-ed, we will explore the current state of inflation in Nigeria, the role of the CBN in addressing it, and the need for a multi-pronged approach involving other key economic stakeholders.
In the words of renowned economist Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.” This statement holds true for Nigeria’s current predicament. Inflation, in the short run, is primarily driven by excessive growth in the money supply, and the CBN, as the country’s monetary authority, bears a significant responsibility. Inflation erodes the purchasing power of consumers, disrupts investment decisions, and distorts resource allocation. To tackle this monetary problem, the CBN can employ various tools and strategies.
One of the CBN’s primary instruments to combat inflation is the control of the money supply through open market operations and interest rate adjustments. By tightening monetary policy, the CBN can reduce the money supply, making it more expensive for individuals and businesses to borrow, thereby curbing spending and investment. While this approach can be effective in the short term, it often comes at the cost of slower economic growth, as it may deter businesses from investing and consumers from spending.
Another tool at the CBN’s disposal is the use of exchange rate policies. A depreciation of the national currency can increase the cost of imports, which, in turn, can contribute to higher prices for imported goods and services. However, exchange rate policies can be a double-edged sword, as a weakening currency can also exacerbate inflation by increasing the cost of raw materials and intermediate goods for domestic producers.
Inflation targeting is another strategy employed by the CBN. This approach involves setting a specific inflation target and implementing policies to achieve it. However, it is essential to strike a balance between controlling inflation and supporting economic growth. High interest rates used to control inflation can deter investment and hamper economic development. The CBN must navigate this tightrope walk carefully, as excessive focus on inflation control at the expense of economic growth may lead to other economic challenges.
It is worth noting that inflation is not only a monetary problem but also a symptom of underlying structural issues within the economy. In the long run, the roots of inflation are deeply intertwined with productivity problems. As Nobel laureate economist Paul Samuelson once said, “Inflation is the one form of taxation that can be imposed without legislation.” It is crucial to recognize that monetary policy alone cannot address the structural inefficiencies that give rise to long-term inflation.
In the case of Nigeria, several factors contribute to the ongoing inflationary pressures. These include supply chain disruptions, fiscal deficits, a reliance on oil exports, and inadequate infrastructure. The country’s overdependence on oil revenue makes the economy vulnerable to global oil price fluctuations. When oil prices fall, Nigeria faces fiscal deficits, leading to an increase in the money supply as the government prints more money to cover its budgetary gaps.
To address the long-term inflation challenge, it is imperative for Nigeria to shift its focus beyond the CBN. Other economic ministries and agencies, such as the Ministry for Finance, the Ministry for Trade and Investment, the Federal Inland Revenue Service, and the Ministry of Budget and Planning, must play pivotal roles.
The Ministry of Finance, for instance, plays a crucial role in managing the fiscal policy of the country. By ensuring fiscal discipline, the Ministry can reduce the government’s reliance on money printing to cover deficits. Economist John Maynard Keynes once said, “The boom, not the slump, is the time for austerity.” It is essential for fiscal policies to be countercyclical, meaning that governments should save during economic booms and spend during economic downturns, avoiding excessive deficits that can fuel inflation.
The Ministry for Trade and Investment should focus on promoting a competitive business environment and removing bottlenecks that hinder productivity. Economist Michael Porter’s “Competitive Advantage” theory highlights the importance of a supportive business environment in enhancing productivity. By reducing bureaucratic red tape, facilitating trade, and improving infrastructure, the Ministry can contribute to the country’s long-term economic growth and productivity, thus helping to mitigate inflationary pressures.
The Federal Inland Revenue Service (FIRS) can help address long-term inflation by broadening the tax base and improving tax collection. Economist Arthur Laffer’s “Laffer Curve” illustrates that there is an optimal tax rate that maximizes government revenue. By increasing tax compliance and collection efficiency, the FIRS can reduce the need for deficit financing through money printing, which contributes to inflation.
The Ministry of Budget and Planning should focus on prudent budgetary management, prioritizing productive investments, and minimizing wasteful expenditure. Economists have long emphasized the importance of efficient resource allocation in achieving long-term economic growth. By aligning budgetary allocations with projects and programs that enhance productivity and reduce waste, the Ministry can contribute to a more stable economic environment.
In conclusion, Nigeria’s current inflation rate of nearly 27% is a grave concern, impacting the lives of millions of Nigerians. In the short run, the CBN can employ various monetary tools to combat inflation, but it must balance the need for inflation control with the imperative of fostering economic growth. In the long run, inflation morphs into a productivity problem that cannot be addressed by monetary policy alone.
The responsibility for managing long-term inflation extends beyond the CBN to other key economic ministries and agencies. The Ministry of Finance, Ministry for Trade and Investment, Federal Inland Revenue Service, and the Ministry of Budget and Planning must collaboratively address structural inefficiencies, promote fiscal discipline, and improve the business environment. Only through a multi-pronged approach can Nigeria hope to tackle the root causes of inflation and secure a stable economic future for its citizens.
As economist John Kenneth Galbraith once noted, “The only function of economic forecasting is to make astrology look respectable.” While we cannot predict the future with certainty, we can make informed choices to navigate the challenges that lie ahead. It is imperative for Nigeria to take decisive action to address both the short-term and long-term dimensions of inflation, ensuring a brighter economic outlook for its people.
An economist and Policy Analyst writes from
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