The excessive use of mathematics in economics has often been criticised as akin to killing an ant with a sledgehammer. This critique extends beyond the realm of equations and models to the world of policy-making: when the wrong problem is met with the right prescription, the outcomes can be disastrous.
It appears that hikes in interest rates by a total of 900 basis points (9 percentage points) since Tinubu took office in 2023 may have stoked inflation that he is trying to tame. This is according to experts including Taiwo Oyedele, Chairman of the Presidential Fiscal Policy and Tax Reforms Committee and Tilewa Adebajo, the CEO of CFG Advisory. The rate moved from 18.50 percent in July 2023 to 27.50 percent in November 2024.
A recent analysis by Sodik Olofin, an economist at the Nigerian Economic Summit Group (NESG), showed that the current inflation approach by the CBN is not effective. “With the new CBN Governor, there’s been talk of an inflation-targeting approach. Yet, given our structural realities, this falls short.”
The statement is not in isolation: analysts estimate that exchange rate movements account for over 50 percent of price level fluctuations in Nigeria. “If you look at factors that pushed inflation in 2024, foreign exchange passed through the biggest factor by a mile,” said Oyedele.
During the recent CBN monetary policy committee (MPC) meeting, Olayemi Cardoso, the CBN governor mentioned: “Our objective, in the medium to long term, is to ensure that we are able to bring 24.47 percent inflation rate down from the double digits to the single digit.” While the idea of tweaking interest rates to tame inflation is conventionally acceptable, this doesn’t solve the problem when the pressure is not money-driven.
Here is a comment made by Milton Friedman, the father of monetary economics about inflation. “Inflation is always and everywhere a monetary phenomenon,” Friedman stated in the 1960s. Even though several research have shown that inflation is not always a “monetary phenomenon everywhere in Nigeria.” This then raises serious doubt on the continuous use of monetary policy tools to achieve price stability in Nigeria.
According to Olofin, “interest rate hikes in theory, it’s effective when inflation is demand-driven. However, in Nigeria, where inflation is largely driven by external shocks and supply-side constraints, this approach leaves us struggling to address the root causes.” He recommends that the apex bank should focus on stabilising the exchange rate, even as the ongoing reform by the bank has begun to bring stability and orderliness to the market—official, black market naira rates converge at 1,510/$ for the first time in 2 years.
“Stabilising the exchange rate can directly reduce import costs (from fertilizers to technology inputs) and indirectly lower prices across agriculture, manufacturing, trade, and services” Olofin said.
Another recent research co-authored by Olajide Oyadeyi, a macroeconomist and three others believes that exchange rate targeting alone is insufficient. According to the paper, inflation targeting, and interest rate targeting should also be pursued side-by-side. Their paper titled “The threshold effects of inflation rate, interest rate, and exchange rate on economic growth in Nigeria,” reveals the certain limits of CBN policy if it must achieve overall macroeconomic stability—economic growth.
The study examines the optimum threshold effects of interest rates, inflation rates, and exchange rates in stimulating economic growth in Nigeria. The study finds that economic growth is best sustained when the monetary policy rate (MPR) is set at 16.5 percent, the prime lending rate at 20 percent, and the maximum lending rate at 30 percent.
To achieve price stability, 9 percent rate should be targeted for headline inflation rate, while core inflation at 8.7 percent, and food inflation of 12.7 percent are considered growth-enhancing. In terms of exchange rates, economic growth benefits when the official exchange rate depreciates by no more than 2.4% per quarter and the unofficial exchange rate by no more than 2.5% per quarter.
The study highlights the importance of managing these macroeconomic variables effectively and recommends that policymakers focus on reforms that diversify exports, strengthen institutions, and improve monetary policy efficiency to ensure sustainable growth.
Whether the single-digit inflation rate target by the CBN is achievable depends on so many factors. Tilewa Adebajo on Arise TV emphasised that achieving single-digit inflation in Nigeria requires addressing key structural and policy issues. He identified government expenditure as a major concern, highlighting that the recently passed budget has a cumulative deficit of nearly N40 trillion, with debt servicing alone accounting for N16 trillion. He argued that this level of debt, which has reached N150 trillion, is unsustainable.
He stressed that macroeconomic factors alone are no longer the main issue; rather, the coordination of policies—monetary, fiscal, trade, and industrial policies—is critical. He suggested that Nigeria needs a strong “conductor” to synchronise these policies effectively. He also pointed out the need to review the country’s trade policies, including the Harmonized System (HS) codes, and to improve the business environment to encourage private sector investment.
Adebajo further emphasised the importance of deliberate policy interventions, citing how former President Olusegun Obasanjo’s administration successfully implemented policies that encouraged local cement production. He suggested that similar policies should be applied to other sectors, such as sugar production, to reduce dependency on imports and enhance economic resilience.
Overall, he advocated for policy-driven structural changes rather than short-term monetary measures as the path to achieving sustainable, single-digit inflation.
If all these recommendations are well-cut and streamlined to the needs of the people rather than the sentiments of te politicians, the Nigerian economy should bounce back from the ongoing reforms. (BusinessDay)
