Pre-pandemic prices to elude Nigeria in medium term
Prices of goods and services in Nigeria may struggle to revert to the pre-COVID-19 pandemic era, as inflation to remain above single-digit in the medium term.
Nigeria’s minister of finance, Zainab Ahmed at a public presentation and break-down of the highlights of the 2022 appropriation bill on Friday stated that inflation is expected to remain above single-digit territory in the medium term given structural issues impacting the cost of doing business, including high food distribution cost.
January of 2016 was the last time Nigeria witnessed single-digit inflation of 9.62 percent.
According to Ahmed, a steady decline is, however, expected to be sustained, seeing the inflation rate drop to 14 percent, 13 percent and 10 percent in 2022, 2023 and 2024 respectively.
“Inflationary pressures from forecasts are expected to dwindle in the medium term, however, attainment of single-digit inflation rate cannot be promised in the medium term as a result of structural issues impacting the cost of business in the economy,” Ahmed said.
The IMF in a recent report titled ‘inflation scares’ stated that “although the overall findings on a global scale imply an increase in headline inflation in both advanced and emerging markets, it is expected to subside to pre-pandemic ranges by mid-2022 in the baseline. However, this assessment is subject to significant uncertainty, given the uncharted nature of the recovery.
Simulations of scenarios characterised by strong rises in commodity prices, continued sectoral shocks, and adaptive expectations suggest significant risks to the inflation outlook.”
“More persistent supply disruptions and sharply rising housing prices in both advanced economies and emerging market and developing economies, or currency depreciation and food price pressure in the latter group emerging market and developing economies, could all lead inflation to remain elevated for longer than currently expected,” the report stated.
The COVID-19 crisis triggered large price movements in some sectors, notably transportation, food, clothing, and communications. This can be evidenced in the huge dispersion between the initial 2021 budget inflation expectation of 11.95 percent and the current actual inflation figure for August which stands at 17.01 percent. However, overall sectoral price dispersion so far has remained relatively subdued by recent historical standards, especially compared with the global financial crisis.
The unprecedented nature of the current recovery has raised questions about how long supply will take to catch up with accelerating demand. These uncertainties are fueling worries that inflation could persistently overshoot the Central Bank of Nigeria (CBN) and the Federal Government’s targets and de-anchor expectations, leading to a self-fulfilling inflation spiral.
The Nigeria Labour Congress (NLC) recently lamented the impact of inflation on the N30, 000 national minimum wage.
The NLC president, Aliyu Wabba stated that inflation has reduced the current minimum wage of N30,000 (signed into law in 2019 by President Muhammadu Buhari) to nothing. He stated this during a round-table discussion, to mark 2021 World Day for Decent Work with the theme: ‘The effect of the COVID-19 pandemic on health, employment, income and gender equality.’
“Today we know that the 30,000 minimum wage has been reduced to virtually nothing due to external effects of inflation in our system,” Wabba said.
The MTEF in their report stated that “Inflation rate is revised at 15 percent on the average for 2021 (up from 12.25) but 13 percent in 2022, 11 percent in 2023 and 10 percent in 2024. Upward pressure on prices is expected to be impacted by sluggish decline in headline rate as of mid-2021, insecurity, rising imports and exchange rate depreciation.
In addition, new analysis on the role of fuel, transport and electricity prices and border closure, imported food inflation are expected to put upward pressure on prices. Downward pressures are expected to be motivated by base effects and likely response of the CBN to tame inflation amidst expected pre-election season spending”.
The underlying assumptions of likely increases in the price of petrol, transport fares, electricity tariffs and further depreciation of the naira amidst rising imports and insecurity with a negative impact on production especially in agriculture, leading to increased food imports, according to analysts, cannot be the basis for inflation to moderate to 13 percent in 2022, 11 percent in 2023 and 10 percent in 2024.
Rather, these are reasons that will most likely keep inflation at present levels or even further increase the same, they say.
Another major deficiency identified in the 2022 budget which could further exacerbate inflationary pressures in the medium term, according to analysts, lies in the fact that projecting the average exchange rate at N410.15 to 1USD over the medium term is not backed by empirical evidence. The MTEF provides no underlying assumptions for this projection.
Pat Utomi, a professor of political economics stated that “to boost the value of the naira against major international currencies will require the avoidance of the creation of new money. This will imply the direct allocation of foreign exchange earned from oil to the three tiers of government rather than monetising it. This was the unimplemented recommendation of Vision 20:2020 which has since been ignored by monetary and fiscal policy.”
“When expectations become de-anchored, inflation can quickly take off and be costly to rein back in. Ultimately, central bank policy credibility and price expectations are difficult to precisely define, and any assessment of anchoring can’t be decided entirely based on relationships in historical data,” Utomi said,
“Even when expectations are well anchored, risks to credibility could arise when inflation moves far from its target or when it remains above its band for an extended period,” he added.