The latest inflation data from the National Bureau of Statistics reveal Nigeria’s inflation rate for the month of February rose to another 17-year high of 21.9% as cash shortages fail to bring down the cost of goods and services.
Add the tepid economic growth of 3.25% recorded in the last quarter of GDP plus the growing fear that we might be faced with a contraction this quarter, and a severe unemployment situation and it becomes clear that the economy is currently facing a new round of stagflation.
Countries that are neck deep in stagflation also run a high budget deficit characterized by high recurrent expenditure (an over-bloated government), increasing deficit borrowing, and less than impactful welfare spending. Nigeria is also experiencing these factors on the fiscal side.
Unbeknownst to a lot of Nigerians the country has been experiencing this economic phenomenon for over two years now.
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How did we get here?
Nigeria’s history with inflation is well known and despite efforts of the central bank at managing rising costs and stimulating growth, we continue to remain stuck with this evil. There are two major reasons why Nigeria is experiencing stagflation, structural and monetary.
Structurally, the Nigerian economy has always relied on oil as the major source of revenue for the government. It is also the basis for which foreign exchange is imported into the country as the oil sector accounts for over 90% of Nigeria’s exports and over 70% of government revenue. However, due to the volatile nature of oil prices, Nigeria’s economy is highly susceptible to external shocks.
When oil prices fall as they did during covid-19, oil export revenues are down and the economy takes a major hit. This was the case in 2020 and 2021 when oil prices traded below $30 forcing foreign investors to feel Nigeria as the central bank doubled down on capital controls. With forex scarcity fully in a tailspin, the exchange rate depreciated pushing an already shaky GDP growth rate into a recession. Nigeria is still smacking from this tepid growth.
Asides, from the exchange rate crisis, a lower oil export revenue is a recipe for a fiscal crisis as the government’s revenue takes a dip leading to more deficit financing. This has been the case in the last two years, with deficit borrowing forcing the current government to increase public debt to up to $150 billion.
Another reason for Nigeria’s stagflation is the country’s poor infrastructure. Nigeria’s inadequate infrastructure, including poor roads, limited access to electricity, and inadequate water supply, hampers economic growth and increases the cost of doing business. Poor infrastructure also limits the growth potential of the agricultural sector, which is critical for Nigeria’s economic diversification efforts.
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On the monetary side, the central bank’s multifaceted policies aimed at driving stimulating growth inadvertently drove the inflation rate to records not seen in decades. With over N50 trillion in money supply as of November 2022, the level of net domestic and foreign assets pushed prices of goods and services to record levels without a commensurate jolt to GDP.
The central bank might argue that without their monetary expansion policies, Nigeria might have been in a far worse position and possibly leading to a recession.
Unfortunately, Nigeria’s fiscal and monetary policies have not been effective in addressing the country’s economic challenges. The government’s high borrowing and spending levels have led to a rise in debt and inflation. Similarly, the central bank’s monetary policy has not been effective in controlling inflation and stabilizing the exchange rate.
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How the world fixes stagflation
In the 1970s, the United States faced a period of stagflation, characterized by high inflation and high unemployment. To address this challenge, the U.S. government implemented a combination of fiscal and monetary policies.
On the monetary side, the Federal Reserve implemented a policy of raising interest rates significantly to reduce inflation. This policy had the effect of slowing down economic growth but was deemed necessary to curb inflation. The Federal Reserve also implemented reserve requirements for banks, which limited the amount of money that could be lent out and helped to control inflation.
Nigeria’s central bank is currently implementing these policies having raised monetary policy rates to 17.5% from 11.5% this time last year. Banks are also subjected to stiff cash reserve requirements while lending to the unproductive sectors is hugely disincentivized. So far, this has not had the right effect due to the structural issues we pointed out above.
On the fiscal side, the government implemented spending cuts to reduce the budget deficit. This involved cutting back on government programs and reducing government employment. Additionally, the government implemented deregulation policies that aimed to increase competition in key industries, such as transportation and energy.
The current Nigerian government has failed woefully on the fiscal side as deficit spending on debt servicing and recurrent expenditure continues to worsen Nigeria’s fiscal crisis. A case in point is the fuel subsidy which the government has refused to remove. The next government will need to be bold enough to implement fiscal solutions to curb stagflation.
To address Nigeria’s stagflation, the new government must take bold steps to diversify the government’s revenue from oil and its reliance on foreign exchange. The government should encourage private sector investment in the non-oil sectors, including agriculture, manufacturing, and services. The government should also invest in infrastructure, including roads, power, and water supply, to create an enabling environment for businesses to thrive.
The new government should also implement effective fiscal and monetary policies to control inflation and stabilize the exchange rate. The government should reduce its borrowing and spending levels, increase revenue through taxation and other sources, and prioritize debt service payments to reduce the country’s debt burden.
How Businesses mitigate stagflation
During periods of stagflation, businesses face significant challenges, such as rising costs and reduced demand for their products or services. To survive and thrive during stagflation, businesses typically implement a combination of cost-cutting measures and strategic adjustments.
One key strategy for businesses during stagflation is to focus on improving productivity and efficiency. This can involve investing in new technologies, reorganizing processes to reduce waste and improve quality, and improving workforce training and development. By improving productivity, businesses can reduce costs and improve their competitiveness.
Another strategy is to focus on innovation and diversification. Businesses can explore new markets and product lines to reduce their reliance on a single product or customer base. They can also invest in research and development to create new products or services that meet changing consumer demands.
Cost-cutting measures are also important for businesses during stagflation. This can involve reducing staff, cutting back on non-essential expenses, and renegotiating supplier contracts to reduce costs. Businesses may also consider alternative financing options, such as equity financing or trade financing, to reduce their reliance on debt.
Businesses must stay attuned to changes in the economic environment and adjust their strategies accordingly. This can involve monitoring inflation and interest rates, tracking changes in consumer behavior and preferences, and keeping up to date with regulatory changes that may affect their operations.
By staying nimble and adapting quickly to changing circumstances, businesses can survive and thrive during periods of stagflation.