Why Nigeria Is Not Classified as a Hyperinflationary Economy

The Financial Reporting Council of Nigeria (FRC) recently issued a detailed assessment of the applicability of IAS 29, Financial Reporting in Hyperinflationary Economies, to Nigeria. Despite inflationary pressures, the FRC concluded that Nigeria does not meet the criteria of a hyperinflationary economy, and IAS 29 should not be applied for financial reporting. Here’s a breakdown of their analysis and the reasoning behind this decision.

IAS 29 Indicators and the FRC’s Assessment

IAS 29 outlines five key indicators to determine if an economy qualifies as hyperinflationary. The FRC evaluated Nigeria against each of these indicators:

Preference for Non-Monetary Assets

IAS 29 suggests that in hyperinflationary economies, the general population prefers to hold wealth in non-monetary assets or stable foreign currencies.

FRC’s Position: While demand for foreign currency exists, data shows a significant increase in investments in monetary assets such as treasury bills, mutual funds, fixed deposits, and specialized deposit-taking institutions over the last three years. This suggests confidence in Naira-denominated financial instruments.

These trends indicate that Nigerians are not aggressively divesting from the Naira, undermining the argument for hyperinflation classification.

Conclusion: This indicator is not met.

Pricing in Foreign Currency

In hyperinflationary economies, monetary amounts are often denominated in stable foreign currencies.

FRC’s Position: Prices of goods and services in Nigeria are predominantly quoted in Naira, including those on major e-commerce platforms like Jumia and Konga. Salaries and wages are also paid in Naira.

Conclusion: This indicator is not met.

Inflation-Adjusted Credit Pricing

Credit purchases in hyperinflationary economies are typically priced to compensate for inflation-driven losses during the credit period.

FRC’s Position: In Nigeria, credit terms are based on contractual agreements and risk assessments rather than inflation adjustments. There is no evidence of inflation-driven pricing for credit transactions.

Conclusion: This indicator is not met.

Linkage of Wages, Prices, and Interest Rates to a Price Index

In hyperinflationary economies, wages, prices, and interest rates are adjusted regularly to reflect inflation.

FRC’s Position: Nigeria's wage adjustments have not been systematically linked to inflation rates. The national minimum wage remained ₦30,000 for five years before being increased to ₦70,000 in 2024. However, this latest wage review has been agreed to be reassessed after three years, suggesting that wages are not necessarily indexed to inflation but rather subject to periodic policy reviews.

Conclusion: This indicator is not met.

Cumulative Inflation Rate Exceeding 100% Over Three Years

A cumulative inflation rate approaching or exceeding 100% over three years is a key indicator of hyperinflation.

FRC’s Position: Nigeria’s cumulative inflation exceeded 110.9% as of December 2024, crossing the 100% threshold. However, the International Monetary Fund (IMF) and Economic Intelligence Unit (EIU) project that inflation will stabilize at 21% by the end of 2025.

Conclusion: This indicator is met.

Other Contributing Factors

The FRC considered additional factors to assess Nigeria’s economic trajectory:

Structural Reforms: The government’s removal of fuel subsidies and floating of the Naira caused temporary inflationary pressures but are expected to stabilize the economy long-term.
Agricultural Initiatives: Increased food production and import adjustments are projected to reduce food inflation.
Crude Oil and Refinery Developments: The operationalization of refineries, such as the Dangote Refinery, is expected to lower import costs, reduce foreign exchange demand, and stabilize fuel prices.

Read More: Strengthening Nigeria’s Manufacturing Industry with Independent Internal Audits

FRC’s Conclusion

While Nigeria meets the cumulative inflation criterion under IAS 29, the remaining four indicators were not satisfied. The FRC emphasized that hyperinflationary classification requires a holistic assessment, not just one criterion. Based on this balanced judgment and IMF validation, Nigeria does not qualify as a hyperinflationary economy. Therefore, IAS 29 should not be applied for financial reporting in Nigeria for 2024.

Implications for Nigerian Businesses

Financial Reporting Stability: Nigerian businesses can continue preparing their financial statements under existing standards without adopting IAS 29 adjustments. This ensures consistency in reporting practices and avoids the complexities associated with hyperinflationary accounting.
Focus on Economic Fundamentals: The FRC’s position reflects confidence in the underlying stability of Nigeria’s economic structure despite inflationary pressures. Businesses should focus on strengthening internal controls, optimizing cash flow management, and leveraging local economic opportunities to mitigate short-term inflationary challenges.
Enhanced Monitoring and Adaptability: Organizations should remain vigilant and responsive to updates from the FRC. Proactive measures such as scenario planning and stress-testing financial models will help businesses adapt swiftly to potential future changes in reporting requirements.

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Looking Ahead

Nigeria’s economy is at a critical inflection point. With IMF and EIU projections of inflation stabilization, combined with policy-driven economic reforms, businesses should prepare for measured inflationary management rather than hyperinflationary disruptions. Organizations must stay proactive, ensuring that financial reporting, risk management, and compliance strategies align with evolving regulatory guidance

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