Speaking of Stagflation, it simply means the economy situation of a country whereby the country is characterized by high inflation, slow economic growth (in fact, no growth at all), and high unemployment occurring simultaneously.
The word "stagflation" was first said by a British politician "lain Macleod" in a speech before the House of Commons in 1965. During that time, there was economic stress in the United Kingdom, and Macleod called the combined effects of inflation and stagnation a "stagflation situation."
In other words, it's when a country's economy is stuck (stagnant) while prices keep going up (inflation). Yes, we can say that this is exactly what Nigeria's been dealing with since decade ago.
However, since stagflation combines inflation and economic stagnation, the Nigeria government must balance controlling inflation while avoiding further economic slowdown. But before we dive into that, let's quickly look at some factors that cause stagflation in a country's economy.
What causes stagflation in Nigeria?
Stagflation was once considered by economists to be impossible, but it's occurred repeatedly in the developed world, especially in the U.S. during the 1970s oil crisis. In fact, the inflation doubled in 1973 and hit all-time high in 1974. However, there is no real understanding among economists about how stagflation happens, but several theories have been put together to explain how it occurs.
In 2016, Nigeria experienced a period of stagflation, characterized by high unemployment and inflation, which deviates from conventional explanations.
Some economists blame oil price shock, some blame poor economic policies, while some blame the loss of the gold standard. We can strongly say that stagflation is mostly caused by oil price shock and exchange rate depreciation in Nigeria. Blaming the oil price shock in the sense that when a sudden increase in the cost of oil happens, it'll definitely reduces the economy's productive capacity.
Although, we cannot blame stagflation only on oil price shock and everyday falling of naira. But they're the major contributors to the economic situation in Nigeria. Other factors that contribute to stagflation in Nigeria includes:
- high food and energy prices, excessive money printing by the CBN in the form of "Ways and Means Advances" (borrowing by the government), overdependence on oil, poor infrastructure, insecurity, high unemployment caused by lack of industrialization and unfriendly business environment, inconsistent government policies, and global economic crises.
Thesecombination of structural weaknesses, external shocks, and poor economic policies are seen as the drivers of stagflation in Nigeria. Nevertheless, here’s how stagflation might be approached in Nigeria:
- The federal government could raise interest rates to curb inflation by reducing consumer spending and business investment.
- They might reduce the money supply by selling government securities (bonds) to pull excess money out of the economy.
- Since stagflation often results from supply-side shocks (e.g., oil crises, unemployment), the Nigeria government might advocate for government policies that boost production, such as tax incentives for businesses or deregulation.
- While the CBN controls monetary policy, it might push the government to adopt fiscal policies that stimulate supply without worsening inflation, such as reducing excessive government spending or investing in infrastructure to boost productivity.
- Raising rates too aggressively could worsen unemployment, so the government might increase rates gradually while monitoring economic indicators to avoid deepening the recession.
- Lastly, the government should also implement stable and transparent foreign exchange policies to reduce uncertainty in the exchange rate.
The biggest difficulty in fighting stagflation is that raising interest rates to fight inflation can slow down economic growth even more, making unemployment worse. That’s why balancing these policies is tricky. Let's know your opinion in the comment section.
