How do you control inflation in Nigeria?

Answer 1

Monetary Policy

With growth of 3.8%, demand in the economy could be growing faster than capacity can grow to meet it. This leads to inflationary pressures. We can term this demand pull inflation. Therefore, reducing the growth of Aggregate demand, should reduce inflationary pressures.

The Central bank could increase interest rates. Higher rates make borrowing more expensive and saving more attractive. This should lead to lower growth in consumer spending and investment. A higher interest rate should also lead to higher exchange rate, which helps to reduce inflationary pressure by

• making imports cheaper.
• Reducing demand for exports and
• Increasing incentive for exporters to cut costs.

Fiscal Policy

The government can increase taxes (such as income tax and VAT) and cut spending. This improves the budget situation and helps to reduce demand in the economy.

Both these policies reduce inflation by reducing growth of Aggregate Demand. In Nigeria's case, the economy seems to be growing reasonably strongly. Therefore, we can reduce inflationary pressures without causing a recession.

If Nigeria had high inflation and negative growth, then reduce aggregate demand would be more unpalatable as reducing inflation would lead to lower output and higher unemployment. They could still reduce inflation, but, it would be much more damaging to the economy.