When basic necessities needed for the survival of the common man in Nigeria become less affordable, then the country is really in a crisis. This is what defines Nigeria currently. The general increase in prices of goods and services without corresponding increase in income levels, which economists call inflation, is worsening the already precarious state of the Nigerian economy.
Reported by the National Bureau of Statistics (NBS) in May, Headline inflation which measures the total rise in prices within an economy, including commodities such as food and energy prices, rose to 12.4 percent year-on-year, highest in 24 months. During this period, businesses suffered supply chain disruptions and subdued demand as major fallouts of the COVID-19 pandemic.
Wholesale price index of essential food items, measured by food inflation, rose marginally to 15 percent. Food, as we know, is the primary need that every individual seeks to meet. Despite the subdued demand for goods due to lockdown measures, food prices have remained sticky, trended upwards as supply disruptions take its toll on businesses.
These numbers won’t make much sense without exploring the consequences. In an economy where 39.4 million people may lose their jobs, according to Vice President Yemi Osinbajo, due to the COVID-19 pandemic, higher inflation rate will only make life more miserable for such people as it erodes their purchasing power amid low or no income.
For household investors, inflation rate above rate of return means negative real income. In the Nigeria Treasury Bill market, yields on 1-year bond has fallen from 14.9 percent in November 2019 to 5.91 percent. At 12.4 percent inflation rate, an investor’s inflation adjusted real return for the 364-day T-bill is -5.78 percent. This is the percentage by which, at a minimum, the value of his investment will decline.
It is pertinent to note that higher inflation means higher cost of living for households and will discourage private investments and savings.
For businesses, consistent rise in price levels will mean lower sales, especially for non-essential items, as consumers would rather focus the little they have on essential items such as food. Nigerian businesses will also struggle to raise capital for expansion in an inflationary economic environment as banks will be less willing to offer long term financing for capital formation and growth. Also, high cost of inputs could see businesses record contraction in profit margins.
Nigeria’s rising inflation rate also poses a risk to the government’s ability to implement its budget due to high and uncertain cost of inputs. On the revenue side, the FG may see tax revenue, especially from Company Income Tax and Value Added Tax, decline, worsening the country’s current fiscal crisis due to low oil prices.
Finally, high inflation levels will always discourage foreign inflow of funds.
It is, therefore, important that discourse around driving down inflation to reasonable levels should be encouraged. In line with a report by PwC, we must define strategic approaches to put a lid on consistent upward-flexible commodity prices which impact negatively on household income and business.
We align with the report that one such way defining approaches is by supporting adequately the agricultural and food processing sectors to boost supply. The federal government must provide adequate supply-chain mechanisms to facilitate unrestricted supply of food and other essential incentives. Policies, both monetary and fiscal, that will foster stability on the supply side of the market, must be encouraged.
The Nigerian food prices have been a major factor pressuring Nigeria’s core and headline inflation numbers. We recommend that while measures to put money back to the hands of households are necessary to ease the suffering of the people, a complementary effort will be to improve supply of goods and services.
