The inflation rate in Nigeria has reached 34.6% in November, marking a significant increase for the third consecutive month and the highest rate recorded in over 28 years, according to data from the statistics agency.

This escalation in inflation has been exacerbated by recent flooding in the northern parts of the country, causing prices of essential staples like yam, corn, and rice to surge. Additionally, rising fuel prices have contributed to the economic strain faced by Africa’s largest crude oil producer.

The steep rise in inflation during the latter part of 2023 followed President Bola Tinubu’s policy changes aimed at allowing the naira to devalue and cutting fuel subsidies to foster economic growth and stabilize public finances. Since the start of the year, the naira has lost 42% of its value against the dollar, leading to increased import costs for fuel and other goods.

Tight monetary policy

Given the persistently high inflation, the Central Bank of Nigeria is likely to continue its tight monetary policy, which has seen the benchmark interest rate climb from 18.75% at the end of 2023 to 27.5% this year. Last month, Governor Olayemi Cardoso noted that the Monetary Policy Committee expects inflation to start easing in 2025 as a result of these measures.

Yvonne Mhango, an Africa economist at Bloomberg Economics, suggests that there is a path toward lowered inflation in the upcoming year.

“In light of the unexpected rise in Nigeria’s inflation, we now predict that price increases will start to slow down from January instead of December, though this will be a gradual process. We anticipate continued rate hikes until the Central Bank of Nigeria achieves its goal of restoring positive real interest rates, likely by the third quarter of 2025. A decline in inflation is expected to facilitate a less restrictive policy by Q4 2025.”

Churchill Ogutu, an economist at IC Asset Manager, explains to African Business that while elevated interest rates will eventually lead to lower prices, this outcome may take time to materialize.

“Monetary policy has significant lag effects, and we have yet to observe the full impact of the 875 basis points increase reflected in the inflation data. Additionally, Nigeria’s inflation is significantly influenced by the depreciation of the naira, which has greatly affected imported food prices.”

Need to stick to reform agenda

As inflation hits its highest point in decades and the naira falls to unprecedented lows, concerns about Nigeria’s recovery capacity are mounting. Ogutu remains hopeful that recovery is possible if the country stays dedicated to the economic reforms initiated by President Tinubu.

“Nigeria can overcome these challenges if it adheres to its reform agenda, though the nation is currently enduring short-term pain that could result in long-term advantages,” he stated.

He emphasizes the need to prioritize revenue mobilization to support economic stabilization.

“On the fiscal side, we recognize Nigeria’s efforts to reform its VAT system, with plans to increase the VAT rate from the current 7.5% to 15.0% by 2030, which should assist in generating revenue.”

“Recently, Nigeria issued a dual-tranche $2.2bn Eurobond at higher yields compared to South Africa, which issued bonds two weeks prior, reflecting the fiscal challenges Nigeria is facing. Thus, revenue mobilization must remain a priority as it advances its reform agenda.”

Ndiame Diop, World Bank country director for Nigeria, also shares the view that initiatives to boost revenue should continue. However, he emphasizes that these efforts must be accompanied by support for vulnerable households most adversely affected by diminished purchasing power.

“Looking forward, it will be essential to consolidate the improving fiscal outlook while increasing support for the poorest households to address purchasing power losses and hardships while creating opportunities for growth and productive employment,” he remarked.