• Tuesday, July 16, 2024
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Why Nigeria inflation could hit record high of 20% by end of 2021

Food inflation

Nigeria’s annual inflation rate climbed for a 17th straight month to 16.47% in January of 2021.

It was the highest inflation rate since April of 2017, as food inflation hit an over 12-year high of 20.57% due to pandemic disruptions and dollar shortages as well as lingering restrictions on imports of certain food items despite the reopening of the country’s borders. At the same time, the incessant attacks on farmers and farmlands have prevented farmers from operating at optimal capacity. President Muhammadu Buhari is already under pressure to curb a decade-long jihadist insurgency in the northeast and growing criminal gang violence in the northwest.

Despite the pain caused by the continuous rise in inflation to the economy, it is however unfortunate that this trend is envisaged to get worse in subsequent months and probably reach 20% before the year runs out. With rising scepticism about what the economy holds for its citizens in the future, people are inquisitive on knowing what future inflation figures would be in order to anticipate future endeavours. However, there are no mystical calculations to this, just indicators from past economic behaviours.

The CBN is currently in a quagmire knowing that if they don’t devalue, the earliest they would see inflation trending downwards will be in August. This means that inflation would trend higher for another 5-6 months.

From this current predicament, if inflation increases by an additional 100 basic points every month, then it’s going to hit 20% before the year runs out. If the CBN however devalues, the Year-on-Year price change will be worse and the inflation rate will increase faster.

Read Also: Nigeria’s January inflation rate jumps to 34-month high on rising food cost

In the light of current events, some economic factors that could worsen the inflation rate presently are the pace of economic growth and the steady rise in crude oil price. Nonetheless, if growth does not come in quickly, underutilization of the production capacity of our industry will make companies struggle to cover cost and push them to consider raising prices today.

COVID-19 brought along with it its own share of drama as global supply chains were impeded and, in a bid, to grow the economy, border closure was also implemented. Unfortunately, these factors also contributed to the rise in inflation.

With the implementation of the border closure policy, supply chains were drastically disrupted as the cost of clearing goods at the ports swelled. Thus, in an effort to ensure the survival of their businesses as well as make relatively moderate profits, these costs were incorporated in the prices of their products.

Most analysts are of the opinion that the re-opening of the borders was a hail-Mary that would extinguish the predominant reign of rising inflation; however, those insinuations were flawed as the exchange rate dipped from N387/$1 to over N400/$1 due to the scarcity of dollars in the fx market making it difficult to embark in trading transactions. Also, the import dependency of the economy also served as a deterrent in this regard. As a result of the above, prices of imported commodities sky-rocketed thus leading to imported inflation in the economy. This could be evidenced in the percentage increase in the prices of imported vehicles by almost 20%, prices of clothing by 7.5%, prices of COVID-19 preventive related items etc.

From the cost angle, it could be envisaged that the prices of food items continue to sky-rocket. This is accruable to the insecurity in the food baskets of the nation and to the fact that farmers have started appending price tags to their lives and safety. Farmers that reside in these regions have complained that in an attempt to save their lives as well as their means of livelihood, that they have to make payments above what they make from harvest as penance to bandits and hoodlums. As a result, the only other alternative to make ends meet or at the least break-even would be to spike the prices of their goods/products since these products can not also be transported without appeasing these bandits. Incorporating all these expenses into the cost of these products thus translates to the inflated prices of food experienced by the general populace hence the saying ‘Putting a price-tag on their lives. This subsequently translates to cost-push inflation. The combination of demand-pull and cost-push would definitely have a significant impact on inflation statistics.

If oil prices continue to rise, the PPPRA will be forced to raise the pump price of petrol which is the worst possible thing that could happen to Nigerians with the current inflation predicament. It would be tantamount to pouring fuel on the proverbial flames.

The Federal government, however, recently approved the restructuring of its debt with the CBN which hovers around the range of N10 trillion; if this is done and the instruments are issued, it would thus stimulate interest rates. This trend could be observed in the previous week as primary market rates began to creep up gradually.

However, with exchange rate flexibility, channelling interest rates in the right direction and price level stability which have sprung into implementation currently, inflation is bound to dip by August/September if policymakers maintain these strategies and give room for implementation lag to run its course.