By John Ikani
KPMG, a prominent accounting firm, has stated that Nigeria’s inflation is being driven by a complex mix of demand pull and cost push factors, making policy measures aimed at controlling spending potentially ineffective for moderating inflation.
Oyeyemi Kale, KPMG’s Chief Economist, made this assertion in a statement on Tuesday regarding current inflation trends in the country.
Nigeria’s inflation rate rose to 21.91 percent in February 2023, from 21.82 percent in the previous month.
Kale, who is also the former statistician-general of the federation, identified the effects of the Central Bank of Nigeria’s (CBN) naira redesign policy as contributing to this trend.
He noted that following the policy, currency in circulation has significantly declined from N3.28 trillion in December 2022 to an estimated N982.09 billion in February 2023, a 235 percent drop.
Kale stressed that “the scarcity of redesigned notes, which caused a cash crunch in the economy since January 2023, was expected to slow down demand-pull inflation, particularly with the series of interest rate hikes from the central bank since May 2022.
“However, this has not happened yet, indicating that output has fallen below effective demand.
“As a result, producers of goods and services, whose activities are cash-based, are facing difficulties purchasing inputs for production or replenishing their stock and distributing them across the country.”
The economist added that inflation continues to rise, suggesting that underlying cost-push factors remain clear determinants of the direction of inflation.
These include structural issues that impact domestic food production and transportation, such as insecurity, floods in key agricultural producing areas, exchange rate challenges, and rising international food and energy prices due to the Russia-Ukraine crisis.
“Consequently, policy measures aimed at controlling spending may not be the best approach for controlling current inflation trends,” according to Kale.
He estimated that “about 30-40 percent of Nigeria’s largely informal sector economic activity was cash-based before the cash redesign policy, and even though some of these activities may have shifted to electronic-based transactions, there hasn’t been enough time for them to be fully and effectively substituted.”
Furthermore, Kale argued that “the expected fuel subsidy removal advocated by both the current and incoming administration, if it does materialize, and the 2022 fiscal bill to be introduced in 2023, are expected to keep pressure on domestic prices in 2023.
“The decision of the CBN to recirculate the old naira notes may also delay the full switch to electronic transactions, but this is unlikely to have a significant impact on cash availability constraints, given that the apex bank has indicated that a large portion of the old notes have already been destroyed.”
