Nigeria’s inflation rate jumped to 21.47% in November 2022—the highest in 17 years and a 0.38 percentage point increase over the October figure. This figure will likely increase in December, given the inefficiencies in the oil industry, the intractable fuel saga, and the consequent black markets. Furthermore, the increase in aggregate demand during the Yuletide would contribute to the December figure, among other contemporary drivers. So, what’s in stock for 2023? This article argues that inflation would remain persistent, thanks to a combination of existing factors, nominal rigidity as prices remain sticky-down, and other potential factors that might surface globally later in the year. 

While the Central Bank of Nigeria (CBN) has continued to use demand-pull measures to curb the inflation problem, it is visible that Nigeria’s inflation is resistant to monetary measures. This is because inflation in Nigeria is largely a supply-side phenomenon emanating from supply shocks and low productivity. Traditional macroeconomic thinking is of the opinion that falling aggregate supply levels in the presence of relatively stable demand levels jack up prices and are a great enabler of stagflation. 

Inflation Outlook

The figure below shows that inflation was highly volatile between 2003 and 2013. While inflation became less volatile in the following years, the year 2020 saw a growing trend in both headline inflation and food inflation levels. One of the key factors that led to the increase in inflation, with an emphasis on food inflation, is the land border closure, which the federal government implemented in August 2019. 

This invariably decreased the total agricultural supply in the country. Figures edged higher as local factors, including banditry, terrorism, and climate disasters, kicked in. The COVID-19 pandemic exacerbated an already precarious situation with the global fall in crude oil prices that resulted in a decline in export value that precipitated naira depreciation in the parallel market, further accompanied by global supply chain disruptions. Together, the effects on the Nigerian economy were stagflation (rising inflation and unemployment levels). While the effect of the pandemic steadily declined, the invasion of Ukraine by Russia led to an increase in energy and food prices. A clear example of this is the increase in the price of bread as a result of the increase in the price of imported wheat driven by the disruptions in supply from Ukraine, a major wheat supplier to Africa. This has contributed substantially to Nigeria’s inflation problem. These factors are likely to persist all through 2023, as the spectre of the war’s resolution remains far off.

Food inflation will linger in 2023. Armed conflict and terrorism, the border closure of 2019, and the recent flooding that destroyed farmlands across Nigeria (in particular rice) will all contribute to persistent food inflation in the country. It is worth mentioning that even though the Nigerian borders have been opened, it takes a very significant increase in aggregate supply for food prices to decline due to nominal rigidity. 2023 would see the price of rice increase as a result of the flooding, and as households substitute rice with close substitutes, the prices of those items would also increase. We expect food inflation to increase, thanks to a combination of the aforementioned factors. Furthermore, as COVID numbers in China worsen, the globe might face possible supply chain disruptions if the government is forced to intervene again. This will further fuel inflation in Nigeria. 

Has the CBN policy been effective?

The mandate of the CBN is to ensure price stability, and they do this through monetary policy. However, this is most effective when inflation is driven by demand. This isn’t the case in Nigeria, where inflation has been a persistent supply-side issue. This helps explain the failure of the CBN’s rising monetary policy rate (MPR) as a tool to control inflation. The CBN has pushed up the MPR from 11.5% in April 2022 to 16.5% in November 2022. On the other hand, inflation rose from 16.82% to 21.47%, an indication of the ineffectiveness of conventional monetary policies in addressing inflation challenges. The CBN must understand the importance of supply-side measures in reducing inflation and stabilizing prices, as well as the fact that many of Nigeria's inflation contributors are exogenous to the MPR.

Conclusion

Supply-side inflation is one of the hardest to combat. Nigeria’s rising inflation figures, notwithstanding the CBN’s effort at reining it in, lend credence to this. We expect 2023 to be no different than 2022—probably worse. This doesn’t bode well for millions of Nigerian households with little to no safety net.

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