The Inflation Interplay in Nigeria

“Money you have now is worth more than the same amount in the future”, this is the notion of time value of money.

Five years ago, 5 naira and 10 naira currency were a significant part of our national denomination, and you could walk into any shop and get sweets, biscuits for that amount. This same 5 and 10 naira are becoming hard to come by, with little or no purchasing power. Coins have gone into extinction, confined to the books of accounts only, telling us the currency keeps losing its value with the passage of time.

The Dual Consequences

Persistent increase in the general prices of goods and services in an economy is described as inflation. In monetary terms, inflation reduces the value of a currency making it worse off compared to its previous value. For instance, when the price of Pure Water was 5 naira, 100 naira could buy 20 pieces of water. With the same sachet of water being sold for 10 naira now, 100 naira can only purchase 10 pieces at retail. This has dual implication, increase in the actual cost of living, which reduces the standard of living.

The above example illustrates how increase in price decrease the standard of living, from 20 pieces to 10 pieces. In order to afford previous consumption level of 20 pieces, one needs twice his income (200 naira) at N10 for 20 pieces hereby increasing the actual cost of living.

Inflation in itself isn’t bad, as it signals spending by economic agents within the economy hence propelling economic growth. The problem arises when the rate starts increasing or even surpassing its benchmark. The natural level of inflation should be between 1% and 3%, as this rate is considered healthy for consumers as well as businesses.

Another evil effect of inflation is in terms of borrowing. Economics 101 says that inflation benefitsthe debtor and does otherwise to the creditor. This statement reechoes the time value of money. For instance, borrowing N1,000 from a lender for 2-years at 0% interest rate with the promise to repay the same amount at maturity of the borrowing period. Since the loan isn’t hedged against inflation, the debtor will repay the same N1,000 in face value (less than intrinsic value). However, the creditor will receive a lesser real (intrinsic) value for his N1,000.

Inflation in the Nigerian context

In Nigeria, the Central Bank of Nigeria has in its core mandate, to keeping inflation under check. It rolls out a benchmark rate mostly single digit (currently at 9%) based on the fundamentals of the economy. The May, 2020 publication by the National Bureau of Statistics puts the headline inflation rate at 12.56% (year-on-year), the 10th consecutive month of increase. This is 3.56% above the 9% threshold set by the CBN.

To compare, inflation rate in South Africa has oscillated around 2% and 7% over the decade. The latest report from statistics South Africa shows its May 2020 inflation at 2.1%.

In the UK whose policies we often adopt, inflation is below 1.5%, while interest rate from the Bank of England (BOE) is 0.25% and less than 5% from individual commercial banks.

Obviously, the economic situation in Nigeria is headed south. Plethora of reasons have contributed to the growing rate of inflation in the country over the years. Imported inflation has been a major concern given the high level of consumer goods imported into the country. Inflation experienced in the parent countries are being passed on to the Nigerian economy. The recent closure of the land borders and transportation prices have contributed to increase in the prices of food items across the country.

Insecurity across the nation ranging from Terrorism, farmers-herdsmen clash has led to the disruption of supply of agricultural outputs from farmers to the market hence the high prices of locally made foods.

The novel coronavirus has also had its fair share in fueling inflation rate in the country. Measures taken to curb the spread of the virus ranging from lockdowns, curfews, ban of interstate travels as well as on International flights have further disrupted global supply chain of goods and services.

Naira devaluation fueling inflation

The chart below shows the quarterly average of inflation and official exchange rate since 2012.

The chart resonates the positive relationship between rate of inflation and foreign exchange rate in Nigeria. There’s been a direct positive relationship between these variables. Both have been galloping directly over the years.

On July 3rd, 2020, the naira was devalued by 5.5% to N381/$ from N361/$. The unsustainable momentum of the external reserve and the need to unify the forex windows (occasioned by the need to meet the IMF and World Bank loan conditions), made the move imminent.

READ MORE: Towards a Unified Foreign Exchange Rate in Nigeria

Demand for forex will continue to increase given the need to import raw materials, agricultural produce as well as manufactured goods into the country. The foreign trade report by the NBS shows that manufactured goods constitute c.63% of total imports (N 2.7 Trillion) in Q1’20. The pass-down effect of the high cost of exchanging Naira for the greenback “US Dollars” will be on the cost of goods and services hence leading to higher prices of goods within the economy.

The next battle after devaluing the Naira is certainly inflation. The move to devalue the currency is a good one given the prevailing economic situation. However, it is accompanied by its inflationary pressure. What is left to be seen is how the CBN addresses the issue of keeping inflation under check as well as providing liquidity to the forex market. This is because no matter the level of devaluation, once there is no supply of dollars to cater for the demand in the currency market, the naira will continue to be pressured.


Maintaining the desired level of inflation requires more than the orthodox method of leaving it in the hands of the monetary authority, it requires a joint effort by both fiscal and monetary policy makers. Countries with valued currencies are at the forefront of maintaining global export competitiveness.

Although improvement has been seen over the years with the Anchor Borrowers’ Programme (ABP) of the CBN, subsidized fertilizers to farmers by the FG, single digit loans to the entertainment sector, more still needs to be done to feed its growing population.

With COVID-19 disrupting the known economic landscape, we hope the proactive simultaneous measures by the CBN and FG is sufficient to mitigate the effect of the pandemic on the economy and rescind its current trajectory.

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