In Nigeria, inflation has been an ongoing concern, with the latest data showing it hovering around a staggering 27%. High inflation can erode the purchasing power of the population, create economic uncertainty, and hinder long-term growth prospects. Addressing this issue is essential, and it requires a multi-faceted approach. In this op-ed, we will explore the dual nature of inflation, the short-term monetary solutions the Central Bank of Nigeria (CBN) can employ, and the long-term productivity challenges that must be addressed to achieve lasting price stability.Economists often debate whether inflation is primarily a monetary problem in the short run or a productivity problem in the long run. The famous economist Milton Friedman once remarked, “Inflation is always and everywhere a monetary phenomenon.” In the short run, this assertion holds true. Inflation is largely influenced by the money supply, as an increase in the money circulating in an economy can lead to increased demand for goods and services, which, in turn, pushes prices higher. The CBN can indeed address this short-term issue through monetary policy tools.The primary tool in the CBN’s arsenal is interest rates. When inflation surges, the CBN can raise interest rates to curb spending, reduce demand, and ultimately slow down inflation. This policy is based on the Quantity Theory of Money, which posits a direct relationship between the money supply and the price level. However, raising interest rates is not without its challenges. High interest rates can deter investment and economic growth, which is why a fine balance must be struck between controlling inflation and fostering economic development.One key responsibility of the CBN is to maintain price stability, as Yomi Cardoso, the current CBN Governor, emphasized in a recent public statement. In the short run, achieving this goal means skillfully managing the money supply, using tools like interest rates and reserve requirements. The CBN must collaborate with other economic-related departments and agencies of the Federal Government, including the Ministry of Finance and the Ministry of Trade and Investment, to develop a comprehensive approach to address inflation.The Ministry of Finance can assist the CBN by coordinating fiscal policy to complement monetary policy. Fiscal policy involves government spending and taxation, which can directly impact inflation. The CBN’s efforts to control inflation can be undermined if the government’s fiscal policy is expansionary, increasing government spending and widening budget deficits. Therefore, coordination between the CBN and the Ministry of Finance is crucial to ensure a harmonized approach to tackling inflation.Additionally, the Ministry of Trade and Investment plays a role in addressing inflation by promoting a healthy business environment. Encouraging competition, streamlining regulations, and supporting small and medium-sized enterprises (SMEs) can enhance productivity, which is a crucial factor in addressing inflation in the long run. By improving the business environment, the Ministry of Trade and Investment can contribute to reducing supply-side constraints that drive inflation.In the long run, inflation transitions from being primarily a monetary issue to a productivity problem. As the economist Paul Samuelson noted, “In the long run, inflation is the result of the productivity of the economy.” This perspective highlights that a nation’s ability to produce goods and services efficiently plays a fundamental role in determining its overall price level. In Nigeria’s case, persistent high inflation rates reflect not just excessive money supply but also structural issues affecting productivity.To address inflation’s productivity dimension, the CBN should work in tandem with various stakeholders to boost the nation’s economic output. One essential aspect is improving infrastructure. The inadequate infrastructure in Nigeria, from transportation to power supply, hinders productivity and drives up costs. Inefficiencies in the supply chain contribute to rising prices. Therefore, investing in infrastructure development is a crucial step toward addressing long-term inflation.Investing in human capital is another vital component. A well-educated and skilled workforce is essential for enhancing productivity. Nigeria must prioritize education and vocational training to equip its labour force with the skills needed for a competitive and productive economy. As the economist Robert Solow famously stated, “Economic growth occurs when there are advances in technology or increases in the quantity and quality of the factors of production.” Education and training are key factors that contribute to the quality of labour and, in turn, economic growth.Another way to address long-term productivity challenges is by fostering innovation and entrepreneurship. Encouraging small and medium-sized enterprises (SMEs) can lead to job creation and innovation, thereby increasing economic output. Providing favorable conditions for entrepreneurship, such as access to credit and a conducive regulatory environment, can help boost productivity.Furthermore, addressing long-term inflation requires tackling issues related to the agricultural sector. A significant portion of Nigeria’s inflation can be attributed to food price inflation, often driven by supply-side issues. Promoting agricultural development, improving access to credit for farmers, and modernizing farming practices can enhance food production and reduce price volatility.Inflation is not solely the responsibility of the CBN. As noted by the economist Joseph Stiglitz, “Monetary policy is a blunt instrument which is supposed to stabilize the economy, but it’s not a very effective tool.” It’s essential to recognize that addressing inflation requires a coordinated effort across various government agencies and stakeholders. The CBN can play a significant role in controlling short-term inflation through its monetary policy tools, but the long-term battle against inflation demands a comprehensive strategy to enhance productivity and economic growth.In conclusion, Nigeria’s persistently high inflation rate is a multifaceted issue that requires a dual approach. In the short run, the Central Bank of Nigeria can use monetary policy tools to control inflation, but it must work in conjunction with other government departments to harmonize fiscal and monetary policies. In the long run, inflation is fundamentally a productivity problem that requires addressing structural issues like infrastructure, education, and innovation. Yomi Cardoso and his team at the CBN must recognize the complex nature of inflation and collaborate with other economic-related departments and agencies to establish a holistic strategy for long-term price stability. As the nation strives to achieve sustainable economic growth and stability, these collaborative efforts will be crucial to address Nigeria’s inflation challenge.
