The Central Bank of Nigeria's (CBN) decision, yesterday, to hike its benchmark interest rate to 26.75%—the fourth such increase this year—highlights a persistent adherence to conventional economic models that fail to address the unique underlying factors driving inflation in Nigeria. Despite the CBN's efforts, inflation has surged to a 28-year high, exacerbating the economic challenges faced by ordinary Nigerians.
Governor Olayemi Cardoso justified the rate hike by emphasizing the need to tackle rising inflation, which has now reached an alarming 34.19% in annual terms as of June. The governor acknowledged that while monetary policy has aimed to moderate aggregate demand, rising food and energy costs continue to exert upward pressure on prices. This perspective, however, oversimplifies the complex realities of Nigeria's inflationary environment.
Firstly, the notion of "too much money chasing too few goods" largely stems from the actions of the government at various tiers. Boosted Federation Account Allocation Committee (FAAC) revenues, primarily driven by exchange rate gains from significant Naira devaluation, have put substantial amounts of Naira into the hands of government entities. This increased liquidity has not been matched by a corresponding rise in productive capacity, thereby fueling inflation.
Secondly, the core driver of inflation in Nigeria today is food inflation, which is intricately linked to issues of insecurity and currency depreciation. Insecurity has hindered farmers' ability to produce optimally, reducing food supply. Simultaneously, the devaluation of the Naira has made it more profitable for traders to sell scarce food supplies to neighboring countries, further depleting local availability and driving prices up.
Furthermore, rampant corruption and extravagant expenditures on luxury items by state actors have diverted resources away from productive uses. This misallocation not only fuels inflation but also erodes public trust in governance and economic management.
High energy costs and import duties also play significant roles in driving inflation. Increased energy prices impact production and transportation costs, which are then passed on to consumers. Similarly, high import duties raise the cost of imported goods, which constitute a substantial portion of Nigeria's consumption basket.
The cumulative effect of these factors is an inflationary environment that cannot be effectively tackled by interest rate hikes alone. In fact, these hikes may worsen the situation by increasing the cost of borrowing for businesses and consumers, thereby stifling economic activity and growth. Ordinary Nigerians, already struggling with high costs of living, are left to bear the brunt of these policy decisions.
The CBN's approach to combating inflation must evolve to consider these unique challenges. A data-driven, multifaceted strategy that addresses the root causes of inflation—such as insecurity, corruption, and structural inefficiencies—is essential. Monetary policy should be complemented by robust fiscal measures aimed at boosting productivity, enhancing security, and ensuring that government spending is both efficient and transparent.
In conclusion, the relentless cycle of interest rate hikes by the CBN, grounded in conventional economic thinking, fails to address the true drivers of Nigeria's inflation. Without a comprehensive approach that tackles these underlying issues, the burden of economic hardship will continue to fall disproportionately on ordinary Nigerians, undermining both economic stability and social well-being.
