"How Nigeria Can Tame Inflation In 2025"

" How Nigeria Can Tame Inflation In 2025 \r\n\r\nBusinesses and consumers in Nigeria have been hard hit by spiraling inflation, which peaked at 34.6 percent, a 28-year high, in November 2024.\r\n\r\nThe federal government expects inflation rate to cool to 15 percent in 2025, but some economists consider the target ambitious.\r\n\r\nBasil Abia, an economist and co-founder of VerivAfrica, said that without effectively addressing key inflation drivers such as high food prices, exchange rates, and excess liquidity, there won\u2019t be sufficient conditions for a substantial decline in inflation.\r\n\r\nAccording to Abia, the 31 percent inflation forecast made by VerivAfrica using the vector autoregressive (VAR) prediction model is likely, noting that it seems more realistic given the nation\u2019s current economic challenges.\r\n\r\nThe elevated inflation raises the prospect that the Central Bank of Nigeria (CBN) will continue its monetary tightening policy, which has seen the benchmark interest rate climb from 18.75 percent at the end of 2023 to 27.5 percent this year. Last month, Olayemi Cardoso, CBN governor, said the Monetary Policy Committee (MPC) expects inflation to start easing in 2025 because of these measures.\r\n\r\nYvonne Mhango, Africa economist at Bloomberg Economics, said that she sees a path to reduced inflation next year.\r\n\r\n\u201cAfter the higher-than-expected rise in Nigeria\u2019s inflation, we now expect price gains to moderate from January \u2013 rather than December \u2013 at a slow pace. Rate hikes will persist until the Central Bank of Nigeria achieves its goal of restoring positive real rates \u2013 likely in the third quarter of 2025. Falling inflation will give scope for policy to become less restrictive in 4Q25.\u201d\r\n\r\nSeveral experts have predicted Nigeria\u2019s inflation rate for 2025 using different prediction models. For instance, the African Development Bank has predicted 20.7 percent while the International Monetary Fund (IMF) predicted 23 percent.\r\n\r\n Lessons for Nigeria from Turkey and other Nations \r\n\r\nTurkey, the 17th largest economy in the world, has a nominal gross domestic product (GDP) of $1 trillion and a GDP per capita of 11,938 USD. However, this nation of 85 million people faced severe inflation, which hit 86 percent in October 2022 and 53.86 percent in 2023.\r\n\r\nTurkey\u2019s high inflation rates were driven by a combination of factors, including geopolitical tensions, supply chain disruptions, high borrowing costs, foreign currency-denominated debt, and President Recep Tayyip Erdogan\u2019s policy of slashing interest rates.\r\n\r\nAdditionally, the Turkish lira lost 60 percent of its value between September 2021 and May 2024, further exacerbating inflation.\r\n\r\nDespite challenging conditions, Turkey successfully reduced inflation by nearly 50 percent, as it dropped from 83 percent in 2022 to 47.1 percent in 2024.\r\n\r\nThis was accomplished through a series of measures, including tightening monetary policies with interest rates raised from 8.5 percent to 50 percent, boosting productivity, cutting public spending by $3.1 billion, reducing capital expenditure by 10 percent, and lowering investments by 15 percent.\r\n\r\nIn contrast, Nigeria could benefit from Turkey\u2019s approach of cutting public spending, boosting productivity, reducing capital expenditure, and tightening monetary policies to curb excessive borrowing and uncontrolled spending.\r\n\r\n The Argentinan, Indonesian Example \r\n\r\nArgentina has faced persistent inflationary challenges, which President Javier Milei pledged to address upon taking office. Inflation soared from single-digit figures in 2004 to over 200 percent in 2023.\r\n\r\nMilei\u2019s strategy of cutting government spending to achieve a balanced budget, reducing public debt, and limiting the money supply played a key role in alleviating inflation and stabilising Argentina\u2019s currency.\r\n\r\nIndonesia, the world\u2019s fourth most populous country (280 million people), has demonstrated resilience in managing inflation and stabilising its currency, according to the World Bank.\r\n\r\nEarlier this year, Airlangga Hartarto, Indonesia\u2019s minister of economic affairs, pointed out that the ongoing Russia-Ukraine conflict had pushed the country\u2019s inflation rate to 5.95 percent.\r\n\r\nHowever, Hartarto assured that measures had been implemented to control inflation, aiming to keep it at 2.5 percent through price regulation, steady supply chains, adequate stock levels, and effective communication.\r\n\r\n What\u2019s the way forward? \r\n\r\nNigeria can effectively combat inflation by learning from the strategic approaches of Turkey, Indonesia, and Argentina. By adopting prudent monetary policies, enhancing foreign exchange reserves, diversifying its economy, and strengthening institutional frameworks, Nigeria can stabilise its economy and foster sustainable growth. While each country\u2019s context is unique, the key issue lies in building economic resilience, enhancing transparency, and curbing excessive reliance on imports.\r\n\r\nAs the renowned economist Milton Friedman once said, \u201cInflation is taxation without legislation.\u201d Nigeria must act decisively to control inflation, ensuring it doesn\u2019t become a silent tax on its citizens\u2019 livelihoods, experts say.\r\n\r\n $50bn FDI can lower inflation to 5% \r\n\r\nAyo Teriba, an economist and CEO of Lagos-based Economic Associates, said the federal government needs to attract foreign direct investment (FDI) of at least $50 billion to rein in inflation to 5 percent in 2025.\r\n\r\nTeriba, who featured on a programme on Arise TV Wednesday, said the country\u2019s net reserves need to expand to enable its macroeconomic conditions to moderate.\r\n\r\nThe economist\u2019s assertion comes against the backdrop of the President Bola Tinubu\u2019s target of lowering inflation to 15 percent next year. Many economists have doubted the feasibility, citing pressures from high food and petrol prices.\r\n\r\nTeriba explained that with enough capital inflows, and large foreign reserves, exchange rate would be stabilized, and inflation would lower drastically to single digit.\r\n\r\nThe economist noted that the government must implement bold reforms aimed at attracting substantial FDI that would be transformative for the economy reeling from multiple woes.\r\n\r\n\u201cFive percent inflation is possible next year. Look at what happened in Argentina. Economists don\u2019t prophesy but make conditional statements,\u201d Teriba said.\r\n\r\n\u201cIf the president can complement the efforts on tax and finance reforms with an investment act to attract $50bn FDI within the next year, exchange rates will stabilise, and inflation will drop to single digits.\u201d\r\n\r\nForeign Direct Investments (FDIs) into Nigeria rose by 248 percent in the third quarter (Q3) of 2024 to $103.82 million, but this still remains too low to engender growth needed to turn around the investment-starved economy.\r\n\r\nFDI declined to its lowest on record in the second quarter (Q2) to $29.8 million, up from $119 million in the first three months of the year.\r\n\r\nTeriba, however, said that the existing economic policies, particularly those focused on debt servicing, undermine the government\u2019s ability to achieve this target.\r\n\r\nHe pointed out that borrowing to pay off previous debt is counterproductive and fails to address Nigeria\u2019s underlying economic challenges.\r\n\r\n\u201cThe interest rates offered to Nigeria by international creditors are among the highest globally, primarily due to the country\u2019s poor credit rating. This makes borrowing inefficient and unsustainable as a long-term strategy,\u201d Teriba said.\r\n\r\nTeriba criticised the government\u2019s current borrowing practices, urging a shift toward equity-based financing over debt.\r\n\r\nHe noted that many countries with economies comparable to Nigeria\u2019s borrow at significantly lower rates because they issue higher-grade debt instruments.\r\n\r\n\u201cThey said they were not going to borrow, but they have continued to borrow. There are right and wrong ways of borrowing, and efficient and inefficient methods.\r\n\r\n\u201cThe foremost issue is the quality of the debt instruments you issue. Some countries of similar economic size borrow more heavily than we do but at a third of our rates,\u201d he said.\r\n\r\nRead also: Achieving 15% inflation and economic diversification in 2025\r\n\r\nHe further argued that Nigeria\u2019s continuous reliance on debt to fund fiscal deficits is unsustainable.\r\n\r\n\u201cWe should not continue to fund deficits year in, year out, with debt. A country with a well-structured balance sheet would prioritise equity over debt.\u201d\r\n\r\nTeriba urged the government to implement a robust investment strategy that prioritises structural reforms and incentives to attract foreign capital.\r\n\r\nHe warned that without such efforts, inflationary pressures would persist, undermining economic stability.\r\n\r\n\u201cIf we remain on this trajectory of high-interest borrowing and poor credit management, we\u2019ll miss the opportunity to stabilise our economy.\r\n\r\n\u201cHowever, if we adopt bold reforms and attract $50bn FDI, Nigeria can transition to an era of growth and stability,\u201d he said.\r\n\r\n "

"How Nigeria Can Tame Inflation In 2025"

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