How can Nigeria tame rising inflation?

With Nigeria's inflation rate soaring, policymakers are faced with the challenging task of taming rising inflation. In a recent interview, Godfrey Mwanza, Senior Economist at Standard Bank, shed light on the factors contributing to Nigeria's inflationary pressures and the measures needed to address them. Nigeria's inflation rate for August stood at 25.8% year-on-year, with urban inflation significantly higher than rural inflation at 28% and 24% respectively. The surge in urban inflation can be attributed to the increased prices of petrol due to fuel subsidy removal, which heavily impacts transportation costs. Transport inflation rose by 31% year-on-year, driven by a 300% increase in petrol prices. Food inflation, however, emerged as the primary contributor to both urban and rural inflation, surging by 32% year-on-year. The structural challenges in the food supply chain, exacerbated by climate change-induced conflicts between farmers and Fulani herdsmen, pose a significant obstacle to addressing food inflation. Mwanza emphasized the need for a multi-faceted approach to tackling inflation, including industrial policy interventions to boost food production. Additionally, the Central Bank of Nigeria was urged to curb inflation expectations by tightening money supply and raising interest rates more aggressively. On the other hand, Ghana's inflation has experienced a slowdown, prompting the Bank of Ghana to maintain key rates at 30%. Despite the contrasting inflation trends in Nigeria and Ghana, both countries are grappling with foreign exchange market challenges. The depreciation of the Naira against the US dollar has raised concerns among investors, with the parallel market exchange rate reaching 995 Naira to the dollar. Mwanza highlighted the importance of addressing excess demand for dollars through increasing supply and offering attractive rates to incentivize local dollar holders to sell. He underscored the urgency of clearing the backlog of dollar demand to prevent further Naira depreciation. However, achieving this in the short term may require attracting hot money through higher interest rates to attract foreign investors. In the medium term, divesting assets and unifying exchange rates could provide additional solutions. The conversation also touched on the impact of fuel price policies on inflation, with Mwanza emphasizing the need for a market-driven approach to determine fuel prices in Nigeria. The implementation of petrol subsidies and exchange rate policies must align to prevent potential economic repercussions. As Nigeria navigates the complex interplay of inflation, foreign exchange dynamics, and fuel pricing, policymakers face the formidable task of implementing measures to stabilize the economy and mitigate inflationary pressures.