Nigeria’s history of inflation: a tale of the destruction of value

One of the fundamental goals of a modern economic system is to keep prices of goods and services stable at rates that would not be detrimental to the population. It thus follows that the number one item on the list of the five core mandates of the Central Bank of Nigeria (CBN) is to ensure monetary and price stability. This is listed first, even above the regulator’s responsibility to issue the legal tender currency, maintain the country’s external reserves and act as the banker of the Federal Government of Nigeria. The attainment of this goal is very crucial as its non-attainment may carry with it dire micro and macroeconomic consequences. As people’s purchasing power is eroded, and they are unable to buy what they need, the fabric of social cohesion begins to tear at the seams.

The key metric used to measure price stability in the economy is the inflation rate. This is measured and released on a quarterly basis by the Nigeria Bureau of Statistics, to ensure that the institution responsible for measuring it is distinct and independent of the institution whose core mandate is to ensure price stability. The CBN’s target is to achieve and maintain a single-digit inflation rate, but Nigeria has had single-digit inflation in only 25 of the country’s 62 years post-independence. The troubles of 1966 which led to mass migration of Igbos from the North to the East, led to a collapse in demand and supply, and ultimately to a massive rise in inflation.

Oil money introduced a new paradigm into the public psyche in Nigeria, one of an endless supply of money in a boom period. An unwillingness to adjust spending to reflect the new realities after the oil boom ended meant that the country resorted to borrowing, which the banks were only too happy to oblige. Reality began to bite in the 1980s which saw single-digit inflation for the briefest of periods before the seeds our profligacy of the 1970s planted and the bad decisions and economic practices which carried on into the 1980s and watered those seeds made them germinate. Two successful coups, price controls and a war against the law of supply and demand saw a collapse that forced the country into a Structural Adjustment Programme. But a failure to stay the course, and other undisciplined spending saw the highest inflation rates so far by the end of the 1980s. The period of Nigeria’s most brutal dictatorship saw the chickens come home to roost as the lagging impact of the fiscal indiscipline of the late 1980s began to make its way into the country’s economy, and soon enough, demand collapsed as Nigerians were simply too poor to afford the basics.

This was the situation as we transited to democracy at the end of the 1990s. Among other reforms instituted by the Obasnjo government, in 2003, the CBN allowed the market to determine the liquidity and exchange rate markets for the first time in 23 years. The result of this was to crash the black market, and gradually curb inflation. As the economy expanded, purchasing power and productivity rose, and we saw expansionary inflation for the first time in our history as the Obasanjo reforms and the global economic crisis of 2008 saw a huge return of Nigerians from the diaspora, ushering in a period of increased productivity and rising middle-class consumption.

A reversal of some policies after Nigeria’s first civilian-to-civilian transition, as well as an easing of the monetary policy saw inflation creep into double-digit territory from 2008, until a death at Aso Rock saw the adoption of a tighter monetary stance which brought inflation back under control. However, two policy choices: energy subsidies and an addiction to a strong naira dogged the country’s economy, and following the first ever peaceful takeover of government by an opposition party, which coincided with falling oil prices, poor decisions such as an unexplained border closure, expanded government borrowing, and the ignoring of safeguards put in place during the period of reform in the early 2000s, saw inflation begin to rise very quickly.

Now that the political season for the 2023 general elections is in full swing, it is unlikely that any serious policy changes will be made under the Buhari administration. It is, therefore, more important to attempt to set an agenda for whoever will take over in 2023. Inflation management specifically, and the larger monetary policy management, as well as the attendant fiscal policy decisions will be crucial to the well-being of the Nigerian people in the coming years. The global context is that many developed economies are experiencing record inflation levels, and the factors driving these are already arriving on Nigeria’s shores, to exacerbate our existing inflationary problems. Rolling back destructive fiscal policy choices like the fuel subsidies, restricted import lists and others will be a priority for the post-2023 government. Fixing the exchange rate regime to remove the current arbitrage by allowing a willing buyer, willing seller mechanism to determine the rate thereby freeing up Nigeria’s foreign exchange supply and bringing more predictability into the market will be crucial.

Our history also shows that at a fundamental level, Nigeria has had a productivity issue, especially since the 1970s. Drastic measures need to be taken with laser focus to improve the productivity of Nigerians and the Nigerian economy. This will be achieved by improving education, providing tools and infrastructure, and securing lives, property and property rights. Education will also include disabusing the Nigerian psyche from destructive mantra such as equating the strength of the economy not with its productivity but with the strength of the currency, mantras that became entrenched in the book years of the 1970s and which continue to be employed as a tool by a greedy elite to mobilise the people against reforms that would ultimately be better for the country. Structural productivity inhibitors such as the Land Use Act need to be reformed to vest the rights to land and the minerals under it to the owners of the land, and not a distant federal government in Abuja. Inflation has never been a primary driver in political agitation in Nigeria. But this can change very quickly, and it is better the government manages it responsibly before it becomes the ignition to the tinderbox.

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