In the bustling streets of Lagos, Tolani navigates various shops searching and scanning for slightly cheaper groceries as prices keep climbing. This market was once a well known location for meaningful bargains, but it is now a battleground following the hike in prices of foodstuffs, which is blamed on the increasing dollar rate and government at all levels.
Tolani’s husband, Peju, works tirelessly as a mechanic, but his wages are no match for the relentless and ridiculous inflation. Every paycheck seems to vanish before it can provide relief. Their once modest lifestyle now feels like a distant dream as they struggle to keep pace with the ever-rising tide of expenses. Tolani displays a tired sigh as her thoughts are rudely interrupted by a fellow customer’s rage “Madam, buy if you wan buy na, abi na film you dey watch for there?”
In Nigeria today, Tolani’s predicament is sadly almost the same for over 60% of the population. The rising cost of living is now more than just numbers, it is a tough reality for families like Tolani’s who are fighting to stay afloat amidst the ever increasing expenses. Every day feels like a ‘battle’ against the growing expenses as everything now comes with an outrageous price tag.
The concurrent economic issues of inflation and exchange rate depreciation have become enduring in the country. They have transformed into formidable challenges, resisting various policy remedies. Without effectively managing these two rates, the pursuit of economic growth will continue to remain elusive.
Inflation has been not just a persistent challenge but a greater enemy to Nigerian citizens. Being a sustained increase in the general price level of goods and services in an economy over a period of time, it is responsible for fueling the increased cost of living for households in Nigeria. When inflation is higher, this tends to have a depressing effect on the value of a country’s currency. This is because increased inflation reduces the currency’s buying power, which weakens it against other currencies.
One of the key challenges to economic policy management all over the world and particularly in emerging and developing economies has been the effect of changes in exchange rates on inflation and economic activities. It is believed that exchange rate movements would create domestic economic distortions and affect a country’s economic competitiveness. When inflation is higher, it typically exerts a downward pressure on the value of a country’s currency. Consequently, the impact of rising inflation on currency conversion rates is generally negative.
Amidst the present chaos and rising cost of living, The country’s headline inflation moved to 29.90% percent in January 2024, according to the latest data released by the National Bureau of Statistics (NBS) on Thursday, 15th of February, 2024.
Inflation doesn’t just happen, a number of reasons are responsible for inflation in Nigeria. The devaluation of the naira has indeed contributed to inflation in Nigeria. When the value of the naira decreased relative to other currencies, imports became more expensive. This led to higher costs for imported goods and services, which then drove up overall prices in the economy.
Devaluation of naira has also led to cost-push inflation. Domestic producers who rely on imported inputs, such as raw materials or machinery, face higher production costs due to the increased prices of these inputs. To maintain their profit margins, they often pass these higher costs on to consumers in the form of higher prices for their goods and services.
When the value of the naira decreases, it takes more naira to buy the same amount of foreign currency, hence, imported goods become more expensive for Nigerian consumers and businesses. Since Nigeria relies on imports for various products such as machinery, raw materials, and consumer goods, the increased cost of imports directly contributes to inflation.
Simply put, when the naira is devalued, prices of imported goods rise, production costs increase, and consumers’ purchasing power decreases. This chain of events can fuel inflationary pressures and managing currency devaluation is crucial for balancing trade competitiveness with the risk of inflation.
Another ‘driver’ of Inflation in Nigeria is the absence/ inadequacy of effective economic policies. When the government fails to implement appropriate policies to regulate key economic factors such as money supply, fiscal discipline, and price stability, it can result in uncontrolled inflationary pressures. Without clear policies to address issues such as excessive government spending, inadequate taxation, or ineffective monetary management, the economy becomes susceptible to prolonged periods of high inflation. Additionally, the lack of coherent policies to promote investment, diversify the economy, and address structural imbalances can further exacerbate inflationary tendencies by limiting productivity growth and exacerbating supply-demand imbalances.
Therefore, having sound economic policies is essential for managing inflation and fostering sustainable economic growth in Nigeria. These factors and more put together have been recognised as the driving factors pushing inflation in Nigeria.
This Inflation doesn’t only have impacts on the economy, it also has impacts on business owners, consumers and citizens at large. As prices rise, the purchasing power of consumers diminishes. This means that with the same amount of money, consumers will tend to buy fewer goods and services, leading to a decrease in their standard of living.
Inflation has diminished the value of savings over time. Money saved today will buy less in the future due to inflation, reducing the real value of savings and potentially affecting long-term financial goals such as retirement or education savings. Consumers are also facing higher costs for imported commodities and increased transportation costs, leading to lower levels of consumption and social unrest. This is particularly challenging for those on low incomes, who are struggling to make ends meet in the face of rising prices. Higher cost of food, transport and energy prices would further trigger social unrest and lead to demand for higher wages.
For business, Inflation often leads to higher costs, including increased prices for raw materials, utilities, and labor. This can squeeze profit margins, especially for businesses operating on tight budgets. As operating costs rise, businesses struggle to maintain profitability, particularly if they are unable to pass on higher costs to consumers due to competitive pressures or consumer resistance.
Inflation introduces uncertainty into business planning and decision-making. Fluctuating prices has made it challenging to predict future costs and revenues, leading to increased risk for businesses, especially those operating in volatile sectors. Inflationary pressures can also affect employee morale, particularly if wages do not keep pace with the rising cost of living. Businesses may face challenges with employee retention and productivity if workers feel financially strained.
