Nigerians are struggling to relate with the month of May’s inflation numbers which show that consumer goods prices rose at a slower pace.
The headline inflation number released by the National Bureau of Statistics (NBS) shows that inflation for the month of May 2021 settled at 17.93%, which was 0.19% lower than the 18.12% of the previous month of April.
Relying on the May 2021 inflation rate data, households are expected to heave a sigh of relief as purchasing power (how much a naira note can buy in local markets) would have defied analysts’ morbid projections for the month, however, with supply chains still fragile and insecurity across geopolitical zones worsening, the recent inflation rate numbers are flaky.
The new headline inflation figure took analysts by surprise as most economists had expected the number to reverse the decline between March and April 2021 based on concerns over slow domestic supply chain recoveries and persistent security concerns in the country’s farm belts of Plateau, Benue and Taraba states.
The troubles of the food production belt have seen a steady month-on-month increase in the cost of food and a reduction in consumers’ real disposable incomes. May 2021 data, however, suggest that food pains are gradually abating.
Nigeria’s agricultural import continues to skyrocket despite the significant funding received by the sector and various measures put in place by the federal government to increase the agricultural productivity in the country.
Data from the recently published foreign trade report by the National Bureau of Statistics (NBS), Nigeria’s agricultural import spiked by 140% year-on-year in Q1 2021. Nigeria imported agricultural items worth N630.18 billion in the period compared to N262.1 billion in Q1 2020. This represents the highest quarterly Agric import recorded by Nigeria since 2016. In the past two years, between Q2 2019 and Q1 2020, Nigeria has spent N3.1 trillion on agricultural imports.
The rise in Agric imports has continued unabated despite hundreds of billions of Naira in funding backed by the CBN’s initiatives. The apex bank explained that these intervention facilities, which aimed at stimulating output growth, had started to yield positive results. These initiatives include the Anchor Borrowers’ Program, Targeted Credit Facility, and Agri-Business Small and Medium Enterprise Investment Scheme (AGSMEIS).
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Some of the intervention programs, as stated by the apex bank in its last MPC briefing, include N631.4 billion to 3.11 million smallholder farmers cultivating 3.8 million hectares of land, under the Anchor Borrowers’ program. Also, 29,26 beneficiaries received N111.7 billion for the AGSMEIS, while 548,345 beneficiaries have received N253.4 billion under the Targeted Credit Facility.
These interventions notwithstanding, Agric imports continue to rise, triggered by multiple devaluations of the naira, demand for higher input raw materials, and rising inflation. Much of Nigeria’s food consumption still relies significantly on the importation of food items to stimulate local production. For example, wheat remains an imported production input costing Nigeria about N222 billion in the first quarter of 2021 alone. It was N252 billion in the 4th quarter of 2020, translating to an annualized cost of N1 trillion ($2 billion).
Food Inflation- When the Stomach Grumbles
According to the data released by NBS, Food Inflation for the month of May was estimated at 22.28 % this was 44 basis points lower than the food inflation rate for the month of April. This shows that the CPI, the average price of a selected basket of commodities, was 22.8% higher in May 2021 than it was at the same period in 2009 the data’s base year. A look at the month-on-month data, the food inflation index rose by 1.05% in May. The 12-month period to May 2021, saw a 0.6% rise in the average annual rate of change of the index from 18.58% in April to 19.18% in May 2021.
A recent market survey that studies the prices of food items in major markets in Abuja revealed that a bag of pepper surged by as much as 85.7% in May 2021, beans increased by 15.1% while bread increased by 38% in the same period. Other items that have witnessed significant increases recently include flour, egg, tomatoes, noodles, pasta, bread, beverages, just to state a few. However, the items that recorded the highest increase include Bread and Cereals, Fish, fruits, vegetables, Poultry products, Meat, and Beverages. Unfortunately, these items comprise major staple foods which Nigerians require on a daily basis for survival.
Suleiman Dikwa, the CEO of Green Sahara Farms stated that a major cause of the surge in agricultural imports is the inability of Nigeria to produce sufficiently for local consumption. He also reiterated that another major problem we face in Nigeria and Africa at large is that we export raw materials and bring in finished goods, which has affected our trade deficit over time.
Healthcare Inflation Gallops to Record High
The cost of providing healthcare services in Nigeria has surged to unprecedented levels despite various strategic interventions by the central bank and the government to mitigate the effect of the covid-19 pandemic on the economy.
Data from the National Bureau of Statistics shows the composite consumer price index for health surged by 15.8% year-on-year in May 2021 having reached a ten year high in April 2021 at 15.9%. Urban health inflation also skyrocketed to 16.7%, while rural health inflation tallied behind at 15.1% for May 2021.
According to the latest GDP numbers, the economic size of Human Health Care and Social Services is about N487 billion making up about 0.7% of Nigeria’s GDP. The sector also recorded a GDP growth rate of about 4.65% in the first quarter of 2021, ahead of the broader composite growth rate of 0.51%.
Nigeria continues to face challenges in the healthcare sector largely due to relatively low private and public sector investments, low density of medical personnel to population (1.95 per 1000) and weakening disposable income. This appears to have inadvertently led to rising healthcare cost across the value chain. There are also external factors that perhaps and in recent times, play a much greater role in rising health care cost.
Mrs Eniodunmo Olanike, a healthcare practitioner in Lagos stated that exchange rate devaluations as a major cause of the sudden spike in the cost of health care services in Nigeria, which has consequently increased the mortality rate in the country. She also highlighted that Nigerians are still very much afraid of visiting hospitals due to the covid-19 disease which broke out earlier in 2020, hence affecting the revenue of the hospitals, to the extent that they are downsizing staff and also raising prices just to breakeven.
Core Inflation- Still Rising Despite Drop in Food Inflation
The year-on-year (Y-o-Y) analysis of the prices of all items apart from farm produce reveals that Prices rose by 13.15% in May 2021 which corresponds to a 0.41% increase when compared to April 2021.
However, month on month the core inflation index increased by 1.24 percent in May as against a 0.99% increase recorded in April 2021.
The average annual rate of change of the core inflation index for the month of May was 11.5% which is 0.25% higher than the index for April.
The highest increases in this sub-index were recorded Healthcare services, shoes, carpets pharmaceutical products hairdressing cooking gas, and garments
May Inflation Rates-How the States Stacked Up
A deeper review of the May 2021 CPI data shows that across the 36 states, the three states that saw the sharpest rise in prices were, Kogi State with an inflation rate of 25.13% Y-o-Y, Bauchi State with an inflation rate of 23.02% Y-o-Y and Sokoto State with an inflation rate of 20.11%. On the other hand, Imo State and Delta State saw the lowest Y-o-Y rates of 15.52% and 14.85% respectively.
Urban-Rural Inflation: Handshakes Across Communities
Considering the inflation figures for May, the Urban index rose Y-o-Y by 18.51%, down from 18.68% in April 2021, the Rural index, on the other hand, rose by 17.36% Y-o-Y in May from 17.57% in April 2021.
Major Driver
Many Economists had anticipated higher monthly inflation rates. We, therefore, have inflation rates lower than expected and this can be attributed majorly to High Base Rate effect. Given that the price index had risen at a high rate in the corresponding period of last year when the CPI increased between May 2019 and May 2020 from 286.6 to 322.2 thereby recording an inflation rate of 12.4%, even an equal increase in the price index between May 2021 can only yield a lower inflation rate.
Thinking Forward
The inability to re-establish food supply chains and other supply networks indicates that the reprieve from rising food inflation is only temporary and that even core inflation may see an upward reversal as other items in the CPI basket rise on the back of rising international oil prices (recent Brent oil price rose to US$73 per barrel) and a likely upward adjustment in the domestic cost of white oils such as petrol (PMS), diesel (AGO) and kerosene (DPK) between June and August 2021.
Analysts believe that the Central Bank of Nigeria (CBN) will wait to see June inflation figures before considering a policy reset to tighten the money supply to reduce the inflation rate. The foreseeable attempt at reeling in inflation by Q3 2021 could lead to a rise in money market rates and a fall in fixed income asset prices. If Inflation rises in June 2021 fixed income investors may decide to go short as bond prices tumble. Money market rates may rise in H2 2021 if CBN’s money supply causes rates to go up and hurts manufacturing sectors finance costs meaning that highly geared companies could see share prices taking a dip. If the inflation rate, however, falls again in June the CBN may decide to hold policy rates constant as the scenario would indicate a situation where inflation heads towards the International Monetary Fund’s (IMF’s) projection of 16% per annum for 2021.
