Global Inflation rates are rising; is Africa and Nigeria ripe for monetary/fiscal policy adjustments?

It is not uncommon to read or hear of the word 'inflation' nowadays as the economy of many nations across the world has been engulfed by this trending phenomenon. The COVID-19 Pandemic and supply chain disruptions caused by the Russian/Ukrainian war have been largely mentioned as the major causes of these unfortunate economic situations. According to a recent report released by the IMF, over 90% of Emerging economies in the list of inflation-targeting countries have exceeded their inflation target and almost 100% of Developed Economies have exceeded their targets too.

Note: 100 basis point = 1%

As inflation hits hard on advanced economies, The United States Federal reserves hiked its interest rate by 75bps, its highest since 1994, and there are expectations that the same basis point increment or more will apply for the month of July, this is as the country’s inflation rate rallied to 9.1% in the month of June up from 8.6% in the month of May. The Eurozone is not left out in this economic brouhaha, The European Central Bank on Thursday hiked its deposit rate by 50 bps (0.5%) in what is known as the first rate rise since 2011.

How about the seat of the Queen of England? Britain has witnessed a record high inflation as it approached 9.1% in the month of May breaking a 40-year record. In the month of June, Inflation toppled slightly above the American inflation rate by 0.3% to arrive at 9.4%. Although core inflation across the world has been slightly lower due to the exclusion of energy and food prices. The increase in CPI can be unapologetically tied to the rising energy prices and food prices which takes us back to the causes we mentioned earlier.

Now let’s dive into the main topic of discussion.

What does inflation mean for Africa? 

The Nigerian National Bureau of Statistics (NBS) recently released its monthly inflation report for the month of June. Data from the report shows a shattered 65-month record as inflation jumped from 17.7% in the month of May to 18.6% in June. Although this isn’t so new as a higher inflation rate was recorded in the year 2017 when inflation stood at 18.72%. In a similar fate, the Nigerian Monetary Policy Committee (MPC) hiked the country’s interest rate from 13% to 14% in what is to be known as the 2nd streak for 2022. This is coming after the country bolstered its interest rate by 150 basis points in the month of May breaking the 6 years record of unhiked interest rates in the country.

The Black Stars (Ghana) are not left out of this intriguing story as they recently welcomed a delegation from IMF. The country has witnessed what I would describe as a miraculous surge in inflation, The country’s inflation rate currently stands at 29.8% up from 27.6% in May and 23.6% in April. In March, the Bank of Ghana raised its policy rate by 250 basis points to 17% the largest hike in its history. The month of May also saw a 200 basis points increase from 17% to 19%. Ghana is currently at a high risk of Debt default.

Mandela’s hometown also took a fair share as inflation rates in South Africa reached a five-year high of 6.5% in the month of May, although this figure can be termed as low when compared to inflation rates across Africa and the world. Notwithstanding the country announced its biggest interest rate hike when it raised its interest rate from 4.75% to 5.5% from June to July.

The bulk percentage of Africa’s vulnerable population has been at the receiving end of this inflationary pressure as prices of basic commodities have risen by over 100% in some communities undermining the tenacity of reports presented by the Bureau of statistics.

Anytime we talk about inflation in Nigeria, it is easy for many to present textbook facts and theories developed by renowned economists from Europe or North America whose hypotheses were tested on geographical regions with different cultural terrain. I remember visiting the library at my university and the only advanced economic textbooks I could find were written by American economists with examples applicable to the American society whose political and Economic Structures have already been built on firm foundations.

In my opinion, it is grossly unrealistic to continue to apply monetary or fiscal policies as a cushion effect against problems caused by structural challenges. There’s a vital need to study the Nigerian Economic and political terrain over time and come up with policies that would work for the Nigerian Nation. The USA or Britain have a more mature political and economic structure which places it in a competitive position to optimally utilize its available resources for the benefit of its citizen. While Nigeria on the other hand still has a bulk of unutilized or underutilized resources. It makes no sense for an importing nation to increase interest rates or taxes to cushion inflation imported from a foreign country. 

Nigeria isn’t the only country that imports, other countries do that. In fact, Germany relies on Russia for 38% of its Natural Gas supplies to power its electricity. Countries like North Macedonia, Moldova, and Bosnia and Herzegovina rely solely on Russia for Gas. This is fine because of the principle of absolute and comparative cost advantage which is largely influenced by the distribution of resources. Nigeria as a country has a bulk of these resources but they aren't fully developed or utilized. The majority of those that are utilized are being controlled by foreign companies.

Building a firm structure can be daunting when the stakeholders involved are corrupt or act for their selfish interests. I personally think the definition of inflation should be expanded from just a general increase in the price level over a period to include the prevailing causes of inflation beyond the demand and cost-push inflation we are been taught in school.

The African government needs to work hard in ending the high rate of insecurity in the country, support local industries, invest in education and Research, build infrastructures, and create an enabling environment for businesses to thrive. For Africa to become great again, we need solid political and economic structures, not paper-back policies. Naira dollar scheme won’t make the Nigerian Naira appreciate against the dollar, we need to give people genuine reasons to bring in their money and invest in the continent. When goods and services are produced in abundance and in tandem with the availability of resources, too much money will learn to chase too many goods.