Understanding Disinflation and Its Implications
Disinflation refers to a decrease in the rate at which prices are rising, but it does not mean that inflation has stopped or that prices have stabilized. Instead, it indicates that while prices are still increasing, they are doing so at a slower pace than before. This distinction is crucial for understanding the current economic situation in Nigeria.
The Tinubu administration celebrated the announcement that headline inflation fell to 18 percent in September from 20.1 percent in August and 21.9 percent in July, according to Central Bank of Nigeria (CBN) data. This reduction was achieved through measures such as printing less money and using foreign loans to defer devaluation during a period when the dollar was declining at a record level. While this outcome offers some relief, it is important to recognize that prices are still rising, albeit more slowly.
Key Observations on Inflation Trends
The twelve-month average change in inflation has slowed to 23.5 percent from 24.7 percent in August. Food inflation, which plays a significant role in the consumer basket, declined from 22.7 percent in July to 16.9 percent in September. These figures indicate a clear trend of disinflation. However, it is essential to note that prices for food, transport, and housing are still increasing month by month, though at a slower rate than previously observed.
For Nigerians, this situation represents a slower erosion of real income rather than an actual improvement in purchasing power. While there are signs of improvement in monetary control, these developments do not guarantee long-term price stability. The 2025 budget set a symbolic inflation target of 15 percent, but with three-quarters of the year already passed, actual inflation has averaged well above 20 percent. This gap highlights the failure of the Central Bank’s price stability objective to be operational.
Economic Implications of Persistent Inflation
The shortfall in meeting inflation targets carries several implications for the economy. First, the Central Bank’s credibility is at risk. When inflation consistently exceeds the target, expectations adjust upwards, making future disinflation more challenging and costly. Second, public finances weaken as higher prices inflate nominal spending needs, particularly on subsidies and wages, while revenues lag in real terms. Third, borrowing costs remain high, as investors demand higher yields to protect against inflation, pushing up debt service burdens.
The inflation rate figure is not attractive for the economy. It remains too high, distorting investment planning as firms face uncertainty over input and borrowing costs. Real incomes continue to fall, eroding purchasing power and increasing the risk of poverty. This issue was also highlighted by the World Bank, Nigeria’s major lender.
Monetary Policy and Fiscal Management
The money supply, or the amount of money in circulation, has been increasing at a modest rate. This can partly be attributed to conditionalities imposed by the World Bank and IMF. Between June and August 2025, Nigeria’s M2 money supply rose from N117.24 trillion to N119.51 trillion—an increase of about N2.27 trillion, or roughly 1.9 percent over two months. This increase is relatively tolerable compared to earlier surges seen between late 2023 and early 2025, when money growth rose in double digits.
Slower monetary expansion aligns with the current disinflation, 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—the difference between what we own abroad and what we owe to foreigners—fell from N47.8 trillion in May to N40.9 trillion in August, while net domestic assets rose from N71.4 trillion to N78.6 trillion. This means that although money growth has slowed overall, it is now being financed more by domestic credit and external borrowing rather than foreign reserves.
The Role of Foreign Loans and Domestic Credit
World Bank loans are part of Nigeria’s foreign liabilities, which account for the reduction of net foreign assets. Only a few months ago, Nigeria’s Senate approved another $21 billion external borrowing plan. Late last month, the World Bank announced the approval of three loans totaling $1.57 billion. These are yet to be ratified by the Senate before being added to the country’s debt profile.
Reliance on new foreign loans, such as World Bank loans, provides temporary budget support and foreign-exchange liquidity. However, this approach risks weakening longer-term disinflation if fiscal injections feed back into spending. Not printing more money as before is helping prices rise more slowly. However, the high level of continued borrowing and domestic credit growth poses 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.
Long-Term Risks and Economic Stability
Foreign loans come in foreign currency, which will require further devaluation of the naira. Therefore, it can be fairly said that this 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 loan intervention is not bringing stability to the local market. Inflation remains high at 18 percent, and traders are on edge. They feel the value of the dollar is unsustainable, with some betting against the market. The situation will change once American policy changes and the dollar begins recovering from its record decline.
With this information in the open, prudent marketers do not believe that devaluation can be avoided. And they know that devaluation for an import-dependent economy like ours is undesirable, as it directly increases inflation and reduces real incomes.
Fiscal Adjustments and Budget Delays
Meanwhile, fiscal adjustment has relied heavily on eroding the value of real wages and pensions. Let’s not forget about budget delays; we are still operating under the 2024 budget in the last quarter of 2025, which results in deferred capital expenditures, except for selected projects of specific interest to the President.
Practically speaking, we can conclude that the Tinubu administration’s short-term management may work temporarily. However, reliance on multilateral loans risks eventual loss of policy autonomy. Their conditionalities will increasingly control major government decisions, as seen with the removal of various subsidies—including fuel, electricity, health, education, and agriculture. There is no precedent in Nigerian history for anything similar.
