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The News Beam
Home News Business & Economy Economy

World Bank Lists Seven Factors Behind Nigeria’s High Inflation Rate

June 16, 2021
in Economy, Business & Economy, Finance, News
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World Bank Lists Seven Factors Behind Nigeria's High Inflation Rate
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Throughout year 2020, report showed that Nigeria recorded a steady rise in inflation rate which was primarily driven by surging food prices. By March 2021, it’s inflation rate had reached a four-year high, causing composite food index to reach 22.7 percent, slightly below the 22.9 percent recorded in 2006 (the highest rate in 15 years).

The surges in domestic food prices accounted for almost 70 percent of the total 12-month increase in inflation. The general increase in food prices masks both the price spikes for certain staple goods and significant disparities between regions.

The core inflation rate also increased, reaching 12.7 percent in April 2021, led by rising prices for passenger air and road transportation, medical services, pharmaceuticals, and motor vehicles.

However, in a Nigeria Development Update report (June 2021 edition) by the World Bank, the bank was able to list the factors behind the nation’s high inflation rate and why Inflationary pressures are becoming more difficult to manage.

Below are seven factors listed by World Bank:

1. Insecurity and conflict in food-producing areas, especially northern and central Nigeria, have destroyed crops and forced farmers to abandon their land. Reduced food production exerts a cost-push force on prices, especially in conflict-affected areas and regions with limited transportation and storage infrastructure.

2. The COVID-19 crisis and associated containment measures have disrupted production and supply chains while preventing seasonal migration during harvest time.

3. Trade restrictions, including the closing of land borders starting in August 2019, have contributed to rising prices for food and consumer goods. Food prices are especially sensitive to trade restrictions; domestic supply cannot adjust quickly to offset a decline in imports.

4. Foreign currency restrictions are further pushing up prices of food and agricultural inputs like fertilizer. Imports of over 40 goods, including many staple foods, are currently ineligible for foreign exchange (FX) through formal windows.

5. Nigeria’s exchange rate management has contributed to the rise in inflation because currently there is in effect a cap on the price of foreign currency (nominal exchange rate) and its supply (the FX supply available in the IEFX and other windows where the central bank intervenes) in the formal markets.

Even though the nominal IEFX rate has been depreciating, which has helped to alleviate inflationary pressures, it has not been doing so fast enough to equilibrate the FX market. When there is a divergence between the official/IEFX rate and the parallel FX rate, the parallel rate is the one most associated with food price dynamics.

Unable to access FX in the IEFX window, businesses seek it through the parallel market and other alternative sources and factor in the parallel rate in business decisions, so that it eventually passes through to market prices for goods and services.

6. Nigeria’s monetary policy is not consistent with prioritizing efforts to curb inflation. The tools that CBN use to achieve its policy goals sometimes contradict each other. For example, keeping the exchange rate de facto stable, promoting growth, and containing inflation. This weakens effectiveness of monetary transmission mechanisms to contain demand inflationary pressures.

7. Expansionary monetary policy and financing of the fiscal deficit add more upward pressure on inflation rates. The y/y growth rate of M2 jumped from 6.3 percent in 2019 to 31.9 percent in 2020 as the CBN played a major role in funding a widening government deficit.

This coupled with a decline in the stock of open-market securities used to control the system’s liquidity. The rapid expansion of M2 occurred in a context of contracting economic activity and minimal growth in credit to the private sector.

Since June 2020, the growth in CBN loans to the federal government have accounted for 48 percent of the increase in M2.

Read Also: PwC Unveils Strategy to Help Businesses Deliver Sustained Outcomes

Tags: Factors behind Nigeria's inflationInflationNigeriaWorld Bank
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