ENTREPRENEURS: WHY YOU NEED TO WORRY ABOUT INFLATION RATE

By Timi Olubiyi, Ph.D

It is widely acknowledged that the novel coronavirus(COVID-19) has continued to have severe impact of businesses, households and economies globally and it has triggered inflation in many countries. Even though inflation is a concept that affects all of us; but most importantly high inflation is hostile to any economy and business especially the micro, small and medium enterprises(MSMEs). With persistent inflation, businesses and households usually perform poorly and expectedly we pay more for the same goods and services. Admittedly, inflation erodes the value of money and also erodes the purchasing power of citizenries. The inflation- business growth nexus is the specific focus of this article; however, it was mainly instigated by the continuous rise in the level of inflation rate in Nigeria in recent times. The consequence and impact of inflation (price instability) on businesses in Nigerian cannot be over-emphasized.

 

Inflation is simply defined as a persistent rise in the general price level of the broad spectrum of goods and services in a country over a long period. Largely, when prices of energy, food, commodities, goods, and services go up, purchasing power usually goes down. The persistent rise in the inflation rate will erode the value of the naira and continue to cause general price instability and this is a concern. The entire economy is affected by this increasing rate of inflation and it affects economic growth negatively. The inflation rate is measured as the percentage change in the price index (consumer price index (CPI), wholesale price index (WPI), producer price index (PPI), etc).

 

The CPI is the more acceptable means of measure of inflation or price movements and it represents the actual cost of living. Therefore, because CPI is available on a more frequent basis, it is mostly in use for monetary policy purposes even by the Central Bank of Nigeria (CBN). The Nigerian data on CPI in recent years was used to examine the level of the inflation rate. Data from the National Bureau of Statistics (NBS) reveals that the headline inflation rate for 2018 was 12.09%, a 4.43% decline from 2017 from an inflation rate of 16.52%. The inflation rate for 2016 was 15.68% and the inflation rate for 2015 was 9.01%. The annual inflation rate in Nigeria rose for the eight-straight month to 12.50% in May 2020 from 12.26% in April 2020. So far, we have seen the inflation rate rise from month on month(MoM) in year 2020. The 12.50% rate in May 2020 was the highest inflation rate since April of 2018 which is a two-year high and is a cause for concern. This steady rise has been largely driven by the effects of government policies, COVID-19, external shocks and public debt.

 

Noticeably in a study on inflation in Nigeria using paneldata models by Sani Ibrahim Doguwa of Ahmadu Bello University, Zaria Kaduna State finds a threshold inflation level of 12 percent applicable to Nigeria. This threshold implies that below the level, inflation has a mild effect on economic activities; while above it, the magnitude of the negative effect of inflation on growth is very high. Consequently, from the National Bureau of Statistics (NBS) data Nigeria has experienced high volatility in inflation rates in recent times and the continuous rise above the threshold level of 12% is a cause for apprehension. The sharp increase in the inflation rate, lull in economic activities and looming economic recession could be attributable in specific terms to the land border closure, increase in Value Added Tax (VAT) rate, increasing public debt, volatility in the price of crude oil, and the multifaceted COVID-19 consequences. The novel coronavirus (COVID-19) pandemic has negatively affected the global economy and most especially in Nigeria. It has significantly affected industrial output, the fortune of businesses especially MSMEs. More so causing a decline in economic activities with an attendant shrink in GDP. Furthermore, COVID-19 has caused severe shortages in the supply of goods and services across borders, due to series of restrictions and this has necessitated depressing foreign earnings for Nigeria and also impacted negatively on economic growth and the fortune of MSMEs.

 

History and literature also replete some other factors adduced to the unsustainable business and economic growth in Nigeria apart from the high inflation rate and impact of COVID-19 to include: rising foreign and domestic debt, currency exchange rate volatility, propensity to consume more and save less, decrepit infrastructure and poor policy implications, among others. Regrettably, these issues can further compound and manifest in areas we already have a deficit as a nation, increase the staggering unemployment, trigger a rise in the cost of borrowing, bleak SME business continuity, overwhelming poverty level, worsened living standards, illiteracy, crime, and terrorism. Another big issue is the economy of Nigeria solely dependent on crude oil production, our country’s growth prospects are over-reliance on the revenue from oil. Due to external shocks and current realities, crude oil per barrel trades below $27, which is a big dip in our nation’s projected revenue fortunes.

 

Based on the aforementioned and from the inflationary perspective, to achieve adequate price stability in the country, government need to adopt significant structural policy reforms with tight monetary and fiscal policies. This will help to maintain stronger growth rates in terms of improved Gross Domestic Product (GDP) and to stabilize tide of inflationary pressures on the economy and in business operations. It is advocated that political leaders should minimize avoidable public spending, address insufficient infrastructure, and build strong and effective institutions. The massive growth and developmental challenges of the country can improve by also promoting human and SME development. The SME sector can play a major role in the economic growth of the country through the distribution of wealth, poverty reduction, and job creation. The sector is labor-intensive and can provide a reasonable reduction in the unemployment rate in the country but government needs to provide adequate enabling environment for the sector to strive.

 

Considerably, institutions and individuals have the opportunity to beat inflation by accelerating the preservation of capital and strengthening purchasing power with income addition. This can be done by acquiring investments particularly assets such as real estate because they usually keep up with inflation. Remember N100,000 today will not acquire the same value of goods and services in 10 years mainly due to inflation. Therefore, investing is key to hedge against a sharp inflation impact because it erodes the value of savings, if funds are just left in the bank accounts.

 

Supportively, it is imperative to consider investing in other currencies, diversify investment portfolio internationally if you can, consider inflation-protected securities with potential for higher-growth like equities, Gold Shares ETF, or mutual funds. These can earn more interest returns per year than the inflation rate therefore the options are reasonable. It is also possible to start a business, cultivate passive income, and even buy items with a long shelf life as today.

 

How may you obtain advice or further information on the article? 

Dr. Timi Olubiyi holds a Ph.D. in Entrepreneurship and Small Business Management. He is a prolific investment coach, Chartered Member of the Chartered Institute for Securities & Investment (CISI) and a financial literacy specialist. He can be reached on the twitter handle @drtimiolubiyi and via email: drtimiolubiyi@gmail.com,for any questions, reactions, and comments.

 

 

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