Of inflation glint in Nigeria’s economy

In Nigeria, high inflation has been one of the major challenges facing the nation’s economy. The inability of the government to proffer a lasting solution to this problem indicates the inevitability of inflation in the economy; hence, it shows that government lacks the power to eliminate the persistent rising prices of goods and services in […]

In Nigeria, high inflation has been one of the major challenges facing the nation’s economy. The inability of the government to proffer a lasting solution to this problem indicates the inevitability of inflation in the economy; hence, it shows that government lacks the power to eliminate the persistent rising prices of goods and services in the domestic economy. 

Inflation in Nigeria has become a major threat to economic activities, especially on workers whose standard of living declines continuously. The inflationary factors traced to Nigeria’s high inflation include continuous hike in petroleum price and exchange rate depreciation/devaluation.

To control inflation in the country, the Central Bank of Nigeria (CBN) often adopts monetary policies with the aim of achieving price stability, as well as sustainable economic growth. The monetary authorities in an attempt to achieve the overall inflation objective of the government via effective monetary management, sets intermediate and operating targets that are in line with the targets for GDP growth, inflation rate and balance of payments. Despite all the monetary policies adopted by the monetary authorities to reduce high inflation in Nigeria, it is still high with the standard of living of the citizens decreasing continuously.

One of the central objectives of the monetary authorities is to achieve price stability and economic growth. And to achieve price stability, inflation which has been described as a continuous and persistence rise in the general prices of goods and services must be effectively controlled and managed. The Central Bank of most nations of the world is saddled with the responsibility of managing the money supply in the country, this responsibility they perform with a view to achieve price stability and stimulate growth by controlling the rate of inflation in the economy.

Overtime, fellow journalists have lacked consensus on the nexus between inflation and some macroeconomic variables including gross domestic product (GDP), money supply and exchange rate. Based on the relationship between inflation and money supply, the monetarist postulated that increase in the volume of money in circulation leads to a proportionate increase in general price level. In this sense, the monetarists believed that there exists direct relationship between inflation and money supply in an economy. It was also argued that increase in the volume of money in circulation that results from government budget deficit or expansionary fiscal policy of government leads to a rise in the general price level.

On the other hand, the monetarists looked into exchange rates, gross domestic product and balance of payments deficit, and argued that balance of payments deficit causes disequilibrium in the domestic money market, as well as excess money supply, which is as a result of government expansionary policy on foreign goods and assets through depreciation of exchange rate. During a fixed exchange rate regime, expansionary policy involves budget deficit financed by drawing on external reserves of the country mainly to close up the gap created by deficit in the budget. However, some investigations violated this postulation that exchange rate has influence on domestic price level. 

Additionally, persistent rise in the price level of goods and services is the most serious challenge facing every economic unit. In view of this, every nation strives to achieve price stability as the main factor that is required to promote economic growth and development of a nation. They identified some variable determinants of inflation to include monetary policy, fiscal policy and balance of payments position of a country. In their explanation of the monetary policy as one of the determinants of inflation, they argued that inflation results due to increase in money supply. The fiscal policy is related to fundamental factors that cause inflation in an economy. 

It is argued that fiscal policy involves government budget deficit, which is often financed through money creation in the less developed countries, and hence, fuels inflation. On the other hand, balance of payment position was based on the rate of exchange. If exchange rate collapses, it will bring about inflation that may either be in form of higher import prices or in the form of accelerated wage bill. 

Also, increase in the cost of goods and services, is often considered to be counterproductive, and it has negative effect on an economy of a nation. The most significant influence of inflation is its effect on the public revenue. In both policy practice and news research, inflation target being explicit or implicit is almost measured through the standard of living index, the consumer price index, the cost of production index and the producer price index. It is argued that most countries that have adopted an explicit inflation targeting policy target inflation or its variants are higher than those that have not. 

Hence, the federal government is advised to pursue vigorously those economic policies that are capable of promoting economic growth, as it will help to reduce inflation rate in the country. Similarly, government is also advised to expand its capital budget expenditures on public investment projects, and as well create a favourable business environment for private investment in Nigeria. It is only in this way that significant economic growth will be achieved and sustained in the economy. 

 

Felix Oladeji sent in this piece from Lagos State.