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Inflation: Causes and Possible Solutions in Nigeria

By - - [ Must Read Economy ]

Nigeria is one of the largest economy in Africa and one of the fastest growing economies of the world. She is often refer to as the giant of Africa, it is the most populous country in Africa and the most populous black nation on earth with a population of over 180 million people. Apart from its enormous availability of human resources, the country is endowed with large arable lands and mineral resources. These resources include, crude oil and gas, coal, limestone among others. Nigeria is an underdeveloped country because of the mismanagement of its resources over time. This has led to high unemployment rate, poverty, inflation among other such factors.

Meaning Of Inflation:

Inflation is referred to as the persistence rise in the prices of goods and services in an economy for period of time. Inflation relates to a continuous rise in prices of commodities in an economy. The implication is that each unit of the currency in question will buy less than it had previously bought. The means of exchange could be debased as a result of inflation.

Nigeria’s inflation rate as been fluctuating over years rising to 47.56% in 1996 to as low as -2.49% in 2000. The rate of inflation as at april 2018 was reported to be 12.8% which is considered to be low compared to previous years. Nigeria's annual inflation rate decreased to 11.14 percent in July 2018 from 11.23 percent in the previous month. Despite the decrease in inflation, Nigerians still struggle to make ends meet as the prices of goods and services haven’t really change.

Causes of Inflation in Nigeria

  • Low rate of productivity: this is one of the major causes of inflation in Nigeria. Decline of finished goods as a result of epileptic power supply which may increase cost of production would lead to lack of production which could affect supply. As a result of lack of supply compared to demand, the price of commodities tends to increase thereby causing inflation.
  • High rate of tax: inflation can also be caused as a result of increase in taxation. Nigeria currently has a higher rate of taxation on imported goods which discourages importation of goods to the country and because Nigeria is mainly dependent on imported goods it would lead to scarcity and at such there will be increase in prices of the little available goods and services.
  • Civil unrest: Nigeria has been plagued with insecurity especially in the north-east (the major food producers in Nigeria) for quite some time. This has deprived the farmers from going to their farms and it has led to low availability of foodstuffs. Since the demand of foodstuff is higher than the supply, it would lead to increase in price which would in turn leads to inflation.
  • Poor government economic policies: the lack of sustainable monetary policies by the central bank of Nigeria (CBN) has contributed immensely to the high rate of inflation in the country. The CBN pumps a lot of printed money notes into the economy which woul make people want to spend a lot and as a result producers would like to increase the prices of their commodity in order to gain more. This would in turn leads to inflation.
  • Naira devaluation: though the devaluation of the naira would encourage export and reduce trade deficit but it also has a negative effect of inflation. The devaluation of the naira causes low purchasing power i.e the prices of imported goods will increase automatically compared when the naira is not devaluated. This would lead to persistence increase in the prices of imported commodities overtime.

Solutions to Inflation in Nigeria

  • Control of money supply: the Nigerian government should try as much as possible through the central bank to reduce the availability of money in circulation. If there is less money there will be less spending. Hence, there will be no continuous increase in price.
  • Monetary policies: the CBN can control inflation by introducing a suitable monetary policy that would benefit the economy. Such policy should include:

a. Making imports cheaper

b. Reducing demand for exports

c. Increasing incentives for exporters and cut costs

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