By Abdulrauf Aliyu
In recent months, the Central Bank of Nigeria (CBN) has been trying to combat soaring inflation by consistently raising the Monetary Policy Rate (MPR), hoping that tightening the money supply will bring prices down. But here’s the hard truth: even if the CBN raised the MPR to 50 basis points or more, inflation in Nigeria would barely budge. Nigeria’s inflationary problem is far from a simple monetary phenomenon. The issues go deeper, rooted in structural inefficiencies, supply-side shocks, and a persistent lack of infrastructure—problems that no amount of interest rate hikes can address on their own.
The analogy of a cyclist on a bicycle traveling on a poorly constructed road illustrates Nigeria’s inflationary predicament. In this analogy, the cyclist represents Nigeria’s economy, the bicycle symbolizes the monetary policy tools the CBN is using, and the road reflects the overall economic environment, including infrastructure, governance, and productivity. Even with the strongest cyclist (effective monetary policy), progress will be slow and difficult if the road (economic conditions) is filled with potholes and barriers. Similarly, inflation in Nigeria will remain stubbornly high unless structural problems are addressed alongside monetary policy adjustments.
The Nature of Nigeria’s Inflation: Beyond Monetary Policy
Inflation in Nigeria is primarily cost-push inflation, driven by factors outside the control of monetary policy. Cost-push inflation occurs when the cost of production increases, leading businesses to raise prices to maintain profitability. This is starkly different from demand-pull inflation, where too much money chases too few goods, a scenario that can indeed be managed by raising interest rates to reduce money supply.
The factors driving cost-push inflation in Nigeria include rising fuel prices, high transportation costs, currency depreciation, and supply chain disruptions. Take, for instance, the cost of petrol and diesel. With the recent removal of the fuel subsidy and the naira’s depreciation, fuel prices have skyrocketed. Transporters pass on these increased costs to consumers, resulting in higher food prices and costs of other essentials. The CBN’s tightening of the money supply by raising interest rates does little to reduce the cost of fuel or repair Nigeria’s crumbling infrastructure, which are key drivers of inflation.
Economist John Maynard Keynes provided a clear understanding of this problem through his focus on aggregate supply and demand. Keynes argued that inflation resulting from supply-side factors (like rising input costs or structural inefficiencies) cannot be effectively tackled through monetary policy alone. Nigeria’s inflation is largely structural, rooted in broken supply chains, inefficient markets, and an economy overly reliant on imports. For example, when the price of imported goods rises due to the weakening naira, monetary tightening won’t lower these costs.
Nigeria’s “Cyclist, Bicycle, and Road” Inflation Challenge
Let’s return to our analogy of the cyclist, bicycle, and road to better understand why the CBN’s monetary tools aren’t working. The cyclist represents the Nigerian economy trying to move forward. The bicycle, representing the CBN’s MPR and other monetary policy tools, is well-maintained but unable to perform optimally. The real problem is the road—Nigeria’s economic infrastructure and structural challenges.
The road, in Nigeria’s case, is littered with problems: poor electricity supply, inadequate transportation networks, security concerns that disrupt agricultural production, and weak institutions that limit business growth. When these structural issues persist, inflation continues to rise because businesses face higher operational costs, farmers cannot efficiently bring their produce to markets, and manufacturers must pay more for raw materials. Monetary policy in this case, like the bicycle, cannot fix the broken road.
Why Hiking the MPR Won’t Solve Inflation
When the CBN raises the MPR, the goal is to reduce inflation by discouraging borrowing and encouraging saving, thereby reducing the amount of money in circulation. In theory, this should reduce demand for goods and services, thereby bringing prices down. But in Nigeria, the inflationary pressures come primarily from the supply side. No amount of reduced consumer demand can bring down the prices of goods when the costs of production are rising due to factors like fuel price hikes, currency depreciation, and poor infrastructure.
In fact, raising interest rates might even exacerbate some of the structural issues that are driving inflation. Higher interest rates increase the cost of borrowing for businesses, making it more expensive for them to invest in expansion or upgrade equipment. This discourages investment in the productive sectors that Nigeria desperately needs to stimulate to reduce inflation in the long term. Furthermore, small businesses, which form the backbone of the Nigerian economy, face greater financial stress as the cost of servicing loans rises, leading to layoffs or closures that further constrain supply.
Tackling Inflation in the Short, Medium, and Long Term
To truly address Nigeria’s inflation problem, we need a comprehensive approach that goes beyond simply adjusting the MPR. In the short term, medium term, and long term, different strategies must be adopted to smooth out the road and give the cyclist (the economy) a better chance of moving forward.
Short-term Solutions: Stabilizing Key Inputs In the short term, Nigeria must focus on stabilizing key input costs, particularly fuel prices and food production. The government should consider targeted interventions, such as subsidies for transportation and agriculture, to reduce the immediate impact of rising costs on consumers. Importantly, these interventions should be temporary and targeted to avoid the distortions caused by blanket subsidies, which often benefit the wealthy more than the poor. The government can also boost food security by improving logistics for agricultural products, ensuring that food reaches urban markets without significant price hikes due to transportation costs.
Medium-term Solutions: Rebuilding Supply Chains In the medium term, Nigeria must address the broken supply chains that are contributing to inflation. This includes improving security in rural areas so that farmers can grow and transport food safely, investing in logistics to ensure goods move efficiently across the country, and promoting local manufacturing to reduce dependence on imports. The government should also prioritize stabilizing the exchange rate, as a volatile currency fuels inflation by raising the cost of imported goods.
Long-term Solutions: Structural Reforms and Infrastructure Development In the long term, Nigeria needs deep structural reforms. The cyclist (the economy) will only move freely when the road (the economic environment) is fully repaired. This means investing heavily in infrastructure—roads, electricity, and technology. Power sector reforms are critical, as inconsistent electricity supply forces businesses to rely on expensive alternatives like diesel generators, driving up production costs. Building better infrastructure will reduce the costs of production and transportation, bringing inflation down over time. Furthermore, Nigeria must focus on diversifying its economy away from oil. Relying on oil revenue, which fluctuates with global prices, makes the economy vulnerable to external shocks. Developing sectors such as agriculture, technology, and services will create a more resilient economy, less prone to inflationary pressures.
Another key area is governance and institutional reform. Weak institutions lead to inefficiencies, corruption, and rent-seeking behavior, all of which contribute to inflation. By strengthening the rule of law, improving contract enforcement, and making the business environment more predictable, Nigeria can attract more investment and increase productivity, reducing long-term inflationary pressures.
In closing: More Than Just Monetary Policy
Raising the MPR might give the impression of action, but it is not the magic bullet to Nigeria’s inflation problem. Inflation in Nigeria is primarily a structural issue, driven by cost-push factors that cannot be solved by simply tightening the money supply. Like a cyclist trying to ride on a broken road, the Nigerian economy is being weighed down by structural challenges that monetary policy alone cannot fix.
To tackle inflation effectively, Nigeria must take a comprehensive approach, addressing both short-term supply issues and long-term structural reforms. Only by smoothing out the road can we hope to put the cyclist (our economy) on a path to sustained growth and stability.
Abdulrauf aliyu
An economist and public policy analyst
Can be reached on aliyuabdulrauf@gmail.com
