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Nigeria's Inflation Surge: A Tale of Reform and Economic Transition
New Example for Classroom Discussion
When it comes to examples of inflation or hyperinflation, the go-to examples are Venezuela and Zimbabwe. If you’re like me, always looking for new examples to use in your classroom, you might find this helpful.
During the summer, I have been working with, an international student from Nigeria. Our lunch breaks often revolved around discussions on international economics, and through these conversations, I've gained insights into Nigeria's economy. Today, we will get into the "What" and "Why" behind Nigeria’s recent spike in inflation, which I plan to incorporate into this semester's curriculum.
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In June 2023, Nigeria's annual inflation rate surged to 22.79%, marking the highest inflation rate the country has experienced since 1995. While Nigeria has witnessed volatile inflation rates compared to the United States, this recent upward trend has raised concerns at the Central Bank of Nigeria.
While Zimbabwe and Venezuela’s inflation issues can be attributed to government control, Nigeria presents a contrasting example. This is a tale of reform, governmental transition, and the dismantling of government controls.
Nigeria's newly elected President, Bola Ahmed Tinubu, assumed office in May. The economy is grappling with economic and social challenges.
On May 29, 2023, President Tinubu announced the cessation of fuel subsidies, leading to record-high gasoline prices. These subsidies were initially introduced in 1973, a prevalent policy among oil-producing economies. The heightened gasoline prices have subsequently triggered increases in the costs of other goods and services, posing affordability challenges. The decision to eliminate the fuel subsidy stems from the aim to address Nigeria’s substantial debt burden, which had become increasingly unsustainable, costing the government $10 billion last year.
Freeing Exchange Rates
As part of the comprehensive governmental reforms, the fixed exchange rate that maintained a relatively low rate (N490 = $1) was abolished. Nigeria adopted a floating exchange rate system, causing the rate to surge beyond N800. This depreciation of the Naira has translated into higher costs for imports.
The fixed exchange rate and fuel subsidies were contributing factors to Nigeria’s mounting debt. In June, the debt-to-GDP ratio escalated to 37.1%, nearing Nigeria’s self-imposed 40% threshold. The reforms introduced by the new government are projected to save the government $5.1 billion.
Two noteworthy takeaways merit discussion. Firstly, economics courses in the United States often advocate for free-market economics, applauding governments that ease controls and minimize interventions. Nevertheless, change can entail short-term costs and potentially lead to social unrest. Managing an economy in transition is challenging, even when long-term outcomes hold promise.
Secondly, for economics educators, I encourage you to diversify your classroom examples. Nigeria’s inflation predicament diverges from those of Zimbabwe and Venezuela. Consider integrating this example into your teaching this semester.