The global inflation in 2024 has presented significant and urgent challenges to Nigeria's economic stability. In June 2024, Nigeria's headline inflation rate surged 34.2 percent from 22.8 percent in June 2023. To achieve economic stability, ambitious fiscal reforms, effective budget implementation, alignment of fiscal and monetary policies, and addressing structural issues such as inadequate infrastructure and insecurity are essential. Despite efforts to tighten monetary policies, inflationary pressures persist, leading to higher living expenses and economic instability. The outlook is uncertain, impeding Nigeria's progress towards long-term growth.
Key drivers of global inflation in 2024: The leading cause is oil price shocks, contributing to over 35% of inflationary variations. A 10% increase in oil prices can elevate global inflation percentage points within three years. Global demand shocks account for approximately 28% and significantly impact inflation during economic downturns. Regarding regional disparities, a forecasted global GDP growth deceleration from 2.7% in 2023 to 2.4% in 2024 is evident, with developing economies, including Africa, grappling with high debt and investment shortfalls. The United States is anticipated to experience a decline in GDP growth from 2.5% in 2023 to 1.4% in 2024. China's growth is expected to decelerate to 4.7% in 2024, while Europe and Japan are poised for sluggish growth rates of 1.2% in 2024 (Worldbank). Although Africa's growth is projected to experience a slight uptick, the growth of the least developed countries remains below the Sustainable Development Goals' target of 7.0%.
Transmission channels of global inflation to Nigeria: The transmission of global inflation to Nigeria occurs through multiple channels. Firstly, increasing import prices, resulting from global inflation, escalate the expenses of essential goods such as food and fuel, further compounded by the scheduled removal of fuel subsidies in 2024. Additionally, the depreciation of the naira leads to fluctuations in the exchange rate, subsequently raising import costs and driving inflation. The monetary policies of the Central Bank of Nigeria, particularly adjustments in interest rates, impact inflation by influencing borrowing costs and economic activity. Furthermore, global commodity prices, particularly oil and food, influence domestic costs and inflation. Finally, supply chain disruptions contribute to higher prices and shortages of imported goods, affecting overall inflation.
Effect on the Nigerian Economy
Global inflation has surged from an average of 2.1% between 2010 and 2020 to 7.5% in August 2022, primarily due to factors like the COVID-19 pandemic, disruptions in supply chains, and geopolitical tensions, particularly Russia's intervention in Ukraine. This global inflationary pressure has significantly impacted Nigeria, an economy heavily reliant on imports. Nigeria has experienced a substantial increase in domestic inflation, rising from 28% at the end of 2023 to 31.6% in 2024. However, there is potential for improvement with the right policies and strategies. The interplay of global and domestic factors is evident in Nigeria's inflation rates, driven by global supply constraints, increasing demand, fiscal pressures, currency devaluation, removal of fuel subsidies, and soaring food prices. Inflation remains a significant concern for Nigeria despite a projected GDP growth rate of 3.2% in 2024, impacting living expenses, investment value, and economic stability.
Exchange Rate Volatility: In 2024, the Nigerian naira experienced a significant depreciation of 68%, declining from about ₦470/$ in May 2023 to ₦1,400/$ in May 2024. This depreciation was primarily attributed to a notable imbalance between the supply and demand of dollars and a lacklustre performance in Foreign Direct Investment (FDI) flows, amounting to only $183.97 million in the fourth quarter of 2023. The weakened naira has increased import costs, exerting upward pressure on domestic inflation. Additionally, Nigeria's export competitiveness is curtailed by structural limitations, further exacerbating the situation. Despite an upturn in capital imports, the country's foreign reserves continue to strain.
Monetary Policy Response: In May 2022, the Central Bank of Nigeria (CBN) increased the benchmark interest rate by 1,475 basis points (bps), causing headline inflation to nearly double from 17.71% to 33.7% by April 2024. Despite significant rate hikes, these measures have not substantially impacted reducing inflation. This lack of effectiveness is attributed to a previously dysfunctional monetary policy transmission system, which hindered the proper functioning of the Monetary Policy Rate (MPR). However, recent CBN interventions in the foreign currency market have bolstered the naira, recovering from a historic low of ₦1,625 in March 2024 to ₦1,284 in April 2024. This resurgence has had a considerable effect on curbing inflation.
Fiscal Policy Implications: Between 2015 and 2023, Nigeria's government expenditure was heavily weighted towards recurring expenses, constituting an average of 84% of the total spending. In 2023, the government's revenue only covered 65% of its costs, indicating a limited capacity to generate income. Public debt surged from ₦49.85 trillion in Q1 2023 to ₦121.67 trillion in Q1 2024, mainly due to naira devaluation and securitization of ways and means loans. The budget deficit in 2023 stood at 6.1% of GDP, surpassing the Budget Responsibility Act's threshold and exacerbating Nigeria's debt crisis. The rapid escalation in national debt, driven by debt issuance without corresponding revenue-generating investments, poses a significant threat to Nigeria's fiscal stability. This burgeoning debt could crowd out private investment and imperil the country's long-term economic stability.
Social and Economic Consequences
The escalating inflation in Nigeria during 2024 has substantially impacted poverty, inequality, unemployment, and social stability. In 2023, 10 million Nigerians fell below the poverty line, with 63.5% of the population living below the lower middle-income threshold of $3.65 per day and 90.8% living below the upper middle-income threshold of $6.85. The anticipated 2024 inflation rate of 24.8% has compromised living standards, exacerbated existing disparities, and elevated the cost of essential goods and services for marginalized demographics ((WorldBank). Unemployment has risen, reaching 5% by late 2023. The elevated cost of living and inflationary pressures have led to job losses, particularly in import-reliant industries. Unchanging wages and diminishing consumer expenditure have further restricted employment opportunities, prompting enterprises to reduce or halt hiring. Consequent to these economic challenges, social tensions are mounting. High inflation, escalating poverty, and unemployment have heightened the risk of civil disturbances as residents respond to worsening circumstances.
Conclusion
Global inflation has significantly impacted the Nigerian economy, leading to increased import costs, exchange rate depreciation, and rising inflation. This has resulted in higher levels of poverty, increased unemployment, and a greater risk of social unrest. Despite these challenges, a modest economic recovery is expected, supported by government reforms and a recovery in the oil sector. Policy recommendations include strengthening domestic industries, improving fiscal discipline, and enhancing the effectiveness of monetary policies to stabilize the naira and control inflation. The outlook for Nigeria's economy remains cautious, as ongoing global inflationary pressures are likely to pose challenges to sustained growth and stability in 2024.
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