Inflation in Nigeria is one of the issues to deal with in this country. The price of goods increase causing much discomfort to Nigerians. Inflation leads to the low use of resources since changes that take place in nominal variables are not the same changes that take place in real variables.
There is increase in opportunity cost when there is inflation. This reduces the purchasing power of a currency and reduces the standard of living of Nigerians. The economy of Nigeria have seen a lot of inflation in the 70s and 90s. It doubled in the 90s and rose to 72.8% in 1994. Nigeria had 12.9% and 17.9% inflation rates respectively between 2000 and 2005. Inflation in Nigeria was between 11 to 12% from 2010 to 2013. Price of goods and services a few years ago are no longer what they are today due to inflation.
Inflation reduces the worth of a currency and this have reduced the worth of the naira. You can remember those days when you can buy a lot of things with N500 and still have change. Now the case is different due to inflation, so where is the naira heading to? Inflation is a disease, it is not good for the Nigerian economy neither is it good for any country. In this article we look at ways to curb inflation in Nigeria.
How To Curb Inflation Inside Nigeria
1) The use of fiscal policy
Nigeria’s government can reduce spending and increase Value Added Tax and income tax. This can cut demand and promote budgets. Fiscal policies cut inflation through the reduction of what is referred to as Aggregate Demand. The reduction of Aggregate Demand will cut inflationary factors and this will not lead to recession.
2) Monetary policy
When there is much growth within a nation’s economy, demand can lead to inflation. This can increase inflationary factors the way organisations increase prices where is low demand. A phenomenon of this nature is what is called demand-pull inflation. The Central Bank of Nigeria may increase the rates of interest for this.
Borrowing is more costly with higher rates of interest than when there is lower rates of interest. This can cut the rate of spending by consumers. When the rates go up, the exchange rate goes up too. This reduces inflation by encouraging cost reduction by exporters and reducing the price of imports. A lot of countries use what they call inflation target and Nigeria should not be an exception. The government of Nigeria can reduce inflation by making the Central Bank of Nigeria more independent when it comes to making a monetary policy.
When the Central Bank of Nigeria is not influenced by too many political factors, they will be able to bring rates that are lower especially before a presidential election.
The government of Nigeria through the Central Bank can increase the requirements for bank reserves in Nigeria. This means that banks in Nigeria will require more money on their reserves to operate and let people withdraw. When banks hold more money, it makes them lend less to consumers.
Lending less to consumers will make consumers not to borrow more and this can reduce spending. Reduction in spending will reduce inflation. One way of reducing money supply is by calling for the debts for the government to reclaim. This can increase the rate of exchange of a currency which will reduce inflation. When the exchange rates go up, the amount of cash in circulation will go down and this will cut inflation.
3) Monetarism
This is another method of reducing inflation by cutting the amount of cash. Monetarism sees a connection between inflation and the supply of cash. It emphasizes on controlling cash supply as a way of controlling inflation. These policies encourage monetary control methods, reduction of deficits and the use of higher rates of interest.
However some economists argue that there is not much connection between inflation and cash supply, nevertheless reduction in cash supply can reduce inflation. Rising costs can lead to inflation. The use of policies like supply-side policies can increase competition in the Nigerian economy and this can reduce inflation. When labour markets are more flexible, it can lead to reduction in inflation.
Nevertheless supply side-policies consume time and may not control rising demand but is still able to reduce inflation to a considerable state.
4) Reduce in oil prices
Reducing the price of petrol in Nigeria is one of the surest ways of cutting inflation. Nigeria is one of the largest producers of petrol in the world and has what it takes to reduce the price of oil within Nigeria. The price of oil affects the price of many other things in Nigeria and reducing it will reduce inflation inside the country.
