Understanding Disinflation and Its Implications
Disinflation refers to a slowdown in the rate at which prices are increasing, but it does not mean that inflation has ended or that prices have stabilized. Instead, it indicates that while prices are still rising, they are doing so at a slower pace than before. This distinction is crucial for understanding the current economic landscape in Nigeria.
The Tinubu administration recently highlighted the decline in headline inflation from 21.9 per cent in July to 18 per cent in September, as reported by the Central Bank of Nigeria (CBN). This reduction was achieved through measures such as printing less money and using foreign loans to delay devaluation during a period when the dollar was experiencing a record decline. While this outcome offers some relief, it is important to recognize that prices are still on an upward trajectory, albeit at a reduced rate.
Key Observations on Inflation Trends
The data reveals a clear trend of disinflation, with the twelve-month average change slowing down from 24.7 per cent in August to 23.5 per cent. Additionally, food inflation, which significantly influences the consumer basket, decreased from 22.7 per cent in July to 16.9 per cent in September. However, despite these improvements, the cost of essential items like food, transport, and housing continues to rise each month, albeit at a slower pace.
For Nigerians, this situation represents a slower erosion of real income rather than a tangible improvement in living standards. While there are signals of progress in monetary control, the data does not guarantee long-term price stability. The 2025 budget set a symbolic inflation target of 15 per cent, yet actual inflation has averaged above 20 per cent, highlighting a significant gap between policy goals and reality.
Economic Implications of Persistent Inflation
The persistent high inflation rate carries several implications for the economy. First, the Central Bank’s credibility is at risk. When inflation consistently exceeds targets, public expectations adjust upwards, making future disinflation efforts more challenging and costly. Second, public finances face strain as higher prices increase nominal spending needs, particularly for subsidies and wages, while revenues lag in real terms. Third, borrowing costs remain elevated, as investors demand higher yields to hedge against inflation, thereby increasing debt service burdens.
This situation is not favorable for the economy. High inflation distorts investment planning, creating uncertainty around input and borrowing costs. Real incomes continue to fall, eroding purchasing power and increasing the risk of poverty. These concerns were also echoed by the World Bank, Nigeria’s major lender.
Monetary Policy and External Borrowing
It is true that the money supply—specifically the act of printing money—has been increasing at a modest rate. This can be partly attributed to conditionalities imposed by the World Bank and the International Monetary Fund (IMF). Between June and August 2025, Nigeria’s M2 money supply rose from N117.24 trillion to N119.51 trillion, representing an increase of about N2.27 trillion, or roughly 1.9 per cent over two months. Compared to earlier surges seen between late 2023 and early 2025, when money growth was in double digits, this increase is relatively manageable.
Slower monetary expansion aligns with the current disinflationary trend, as reduced liquidity growth limits demand pressures in the economy. However, the composition of funding has shifted, according to CBN data. Nigeria’s net foreign assets fell from N47.8 trillion in May to N40.9 trillion in August, while net domestic assets increased from N71.4 trillion to N78.6 trillion. This shift indicates that although money growth has slowed overall, it is now being financed more by domestic credit and external borrowing rather than foreign reserves.
Risks of Continued Borrowing
World Bank loans are part of Nigeria’s foreign liabilities, contributing to the reduction of net foreign assets. Recently, the Nigerian Senate approved another $21 billion external borrowing plan, and the World Bank announced the approval of three loans totaling $1.57 billion. These funds are yet to be ratified by the Senate before being added to the country’s debt profile.
While reliance on new foreign loans provides temporary budget support and foreign-exchange liquidity, it poses risks to longer-term disinflation. Fiscal injections may feed back into spending, undermining efforts to control inflation. Not printing more money as before helps slow price increases, but continued borrowing and domestic credit growth remain a risk to the economy.
Any government debt without a credible repayment plan will eventually force the government to monetize the debt by printing money, leading to higher inflation. Foreign loans come in foreign currency, requiring further devaluation of the naira.
Conclusion: A Temporary Fix with Long-Term Risks
In summary, the current disinflation has been achieved at the expense of an artificially maintained exchange rate, supported by foreign loans. The government injects foreign currency via various loans, using it to buy naira in the local market, which postpones further devaluation. However, this intervention does not bring stability to the local market, as inflation remains high at 18 per cent.
Traders are cautious, anticipating that the value of the dollar is unsustainable. They are betting against the market, expecting changes in American policy and a recovery in the dollar. Prudent marketers do not believe that devaluation can be avoided, knowing that for an import-dependent economy like Nigeria, devaluation is undesirable as it directly increases inflation and reduces real incomes.
Meanwhile, fiscal adjustment has relied heavily on eroding the value of real wages and pensions. Budget delays have also impacted capital expenditures, with the country still operating under the 2024 budget in the last quarter of 2025.
Ultimately, while the Tinubu administration’s short-term management may offer temporary relief, reliance on multilateral loans risks eventual loss of policy autonomy. Their conditionalities will increasingly influence major government decisions, as seen with the removal of various subsidies. There is no precedent in Nigerian history for anything similar.
