Nigeria’s ambitious target to rein in inflation to 15% in 2025 hinges critically on the continued stability of the naira exchange rate, according to Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at PricewaterhouseCoopers (PwC).
Speaking at the PwC economic outlook and 2025 budget review in partnership with BusinessDay, Oyedele emphasized the significant impact of exchange rate fluctuations on inflation in 2024. He argued that while the average inflation for 2024 is projected to be around 33%, leading to a nominal inflation of 25% in 2025, the recent stabilization of the naira exchange rate offers a glimmer of hope for achieving the 15% target.
Exchange Rate Volatility, Primary Driver of Inflation
Oyedele underscored that exchange rate volatility was the single most significant factor driving inflation in 2024. “FX passed through the biggest factor by a mile,” he stated, highlighting the direct impact of currency fluctuations on the prices of imported goods and services.
President Bola Tinubu has set an ambitious goal of halving inflation, which has reached its highest level in over three decades. However, many analysts remain skeptical, citing persistent inflationary pressures, particularly driven by soaring food prices.
The Role of Base Effects and Naira Stability
Oyedele countered these concerns, stating that the recent calmness in the foreign exchange market and the subsequent stabilization of the naira will contribute to a downward trend in inflation this year. He further emphasized the role of base effects, where high inflation figures in the previous year will create a lower base for comparison in 2025.
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Monetary Policy and Fiscal Discipline
Oyedele also challenged the conventional view of the monetary policy rate (MPR) as an effective tool for curbing inflation. “As far as I’m concerned, the MPR was a factor that was pushing inflation up, not bringing it down,” he argued.
He explained that inflation can only be effectively controlled through sound fiscal policy. “You only stop inflation from the fiscal side if you inject new money. If the money that the government is spending is from taxes, is from resource revenue, and is from borrowing, not from the central bank, then the impact on inflation is limited,” Oyedele elaborated.
Maintaining Stability and Fiscal Discipline
Achieving the ambitious inflation target of 15% will require a multi-pronged approach. Continued stability in the foreign exchange market is paramount, requiring a concerted effort to maintain a sustainable exchange rate regime.
Furthermore, fiscal discipline is crucial. The government must prioritize revenue generation through tax reforms and efficient resource management while minimizing inflationary pressures from excessive government spending.
If You Ask Me
While achieving the 15% inflation target in 2025 presents significant challenges, it is not entirely out of reach. The continued stability of the naira exchange rate, coupled with the impact of base effects, offers a realistic pathway to achieving this ambitious goal. However, maintaining fiscal discipline and avoiding excessive government spending will be crucial for ensuring the sustainability of these gains.
