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Heightened insecurity adds to dollar squeeze as inflation nears 3-year high

Nigeria has recorded its highest inflation rate in nearly three years as heightened insecurity and dollar squeeze push prices upwards.

Inflation rate stood at 14.89 percent in November 2020, up from 14.23 percent in October 2020 as food prices continued to surge.

Food cost rose by 18.30 percent in November from 17.38 percent in the previous month. This implies that it is more costly to buy major food items.

The major drivers of the rise in Nigeria’s food index are bread, cereal, meat, fruits, vegetables, oil & fat, potatoes, fish, alcoholic beverages, yam and other tubers.

The spike in food prices is adding more pains for Nigerians still reeling for a COVID-19 year and the current economic recession.

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According to World Bank estimates, recession is likely to push an additional 6.6 million Nigerians into poverty in 2020, bringing the total newly poor to 8.6 million this year.

This is made worse for the 27.1 percent of the population who are currently unemployed, according to the National Bureau of Statistics.

“The factors that drove food prices in November are the same as the previous months,” Omotola Abimbola, a macro-economist at Chapel Hill Denham said.

“The supply chain challenge, public unrest during the endsars protest, the closure of borders, heightened insecurity and currency depreciation are major factors that continue to drive inflation rate in Nigeria,” Abimbola .

On heightened security, 44 rice farmers were brutally killed while harvesting their crops in Zabarmari, a Borno community popular for rice farming.

This occurrence is just one of the several cases that has happened this year. This insecurity would discourage other farmers from harvesting and cultivating their crops which would affect food prices in the coming months.

The federal government has ordered the restriction of dollars access for food and fertilizer import in order to boost local production.

This move has driven traders to the parallel market to source dollars where they get access at higher cost which is then transferred to consumers in form of higher prices.

The underwhelming harvest season has also compounded inflationary pressures.

The main harvest periods in Nigeria occur between August to November with declining food prices but the reverse has been the case stemming from reduced planting during the COVID-19 lock down.

However, core inflation, which excludes the prices of volatile agricultural produce stood at 11.05 percent month-on-month, down 0.09 percent compared to 11.14 percent in October 2020.

The cumulative effect of the border closure is still embedded within the cause for price uptick as importation activities which would have been the ready alternative for Nigerians is still greatly restricted.

Bauchi, Kogi and Zamfara are the states with the highest inflation in November 2020 while Kwara, Delta and Abia recorded the slowest rise in inflation rate.

Inflation Outlook

Analysts expect prices to continue rising based on previous trends in the Yuletide season.

“The trend will continue in December given the increased festive demand and the impact of limited harvest which continues to reduce domestic supply of food,” Abudulazeez Kuranga, an economist at Lagos-based Cordros.

Analysts also believe that the rising trend in food prices will continue until 2021.

“It might not be until the second half of next year that inflation will substantially decelerate given the projected high base effect as an outcome of economic recovery and stability,” said Abimbola.

The energy reforms are already having effect utilities and transport as they also increase year on year.

“Core inflation will also record uptick on higher electricity and fuel price given that markers are reluctant on adjusting their fuel prices,” Kuranga said.

Opening up the border would also help in bringing down the prices of food.

“If Nigeria reopens her borders, it will help to offset the rising inflation record which was jointly triggered by reduced local production and no imports.