• Tuesday, May 21, 2024
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Naira soars, prices stall: Why relief for Nigerian consumers is slow!

Naira slides to two-month low of N1,520.40 at NAFEM

Over the past few weeks, the naira has undergone a dramatic turnaround, appreciating from a record low of around N1,900/dollar to N1,148/dollar as of April 12th. This impressive surge even earned it the title of the best-performing currency in the world in April, according to the US investment bank Goldman Sachs.

For many Nigerians, the strengthening naira is a breath of fresh air after months of being squeezed by a relentlessly weakening currency. The pain was most acutely felt on the battleground of everyday necessities. Every trip to the market felt like a losing fight against rising prices. Staple foods like rice and beans, household items like soap and toothpaste—the cost of everything seemed to be on an upward trajectory. Transportation costs climbed steadily, making commuting from one place to another more expensive. Utility bills equally followed suit, adding another layer of burden to household budgets. Even basic services like haircuts and phone repairs were not spared, pushing the cost of living higher and higher. The feeling of being perpetually behind and constantly struggling to afford basic necessities became a constant source of stress for many Nigerians.

Read also: Inflation quickens to 33% in March despite stronger naira

Q: “This synchronised rise in prices alongside the naira’s depreciation can be largely attributed to Nigeria’s heavy reliance on imported goods.”

This synchronised rise in prices alongside the naira’s depreciation can be largely attributed to Nigeria’s heavy reliance on imported goods. A significant portion of the products consumed in the country are brought in from abroad, including essential consumer goods and industrial necessities like milk, sugar, petrol, vehicles, and machinery. With a weaker naira, the cost of importing these items naturally increases, pushing prices upward. Even service providers, who don’t directly sell imported products, are often forced to raise their prices to stay afloat. They too rely on imported goods and equipment in their daily operations and may need to adjust their pricing to maintain profitability. This domino effect fuels inflation, creating a vicious cycle.

But here’s the question many Nigerians are asking: With the naira strengthening against the dollar and other major global currencies, why haven’t the prices of goods and services followed suit? The answer lies in a concept known as “price stickiness.”

“Price stickiness” refers to the reluctance of businesses to immediately adjust their prices downward, even when their purchasing costs decrease. This is because much of the current inventory they are selling was imported or produced when the exchange rate was significantly lower. Businesses are hesitant to take losses by selling these goods at a price lower than their original cost. Typically, they wait until their existing stock is depleted and they can purchase or manufacture new products at a more favourable exchange rate. Only then will they be likely to adjust their prices downward, assuming all other factors remain constant. This approach protects their profit margins and avoids unnecessary financial strain.

Read also: Naira seen rising further this week, opens flat at 1,120/$ on black market

Many businesses are adopting a wait-and-see approach, with a hint of wariness creeping into their decision-making. The scars of a volatile naira run deep. Memories of the currency’s relentless depreciation are fresh, leaving a lingering fear that the current gains might be temporary. This cautiousness translates into a reluctance to lower prices just yet. Businesses are hesitant to adjust their pricing structure until they’re convinced the naira’s strength is here to stay. This watchful stance, understandable as it may be, has the unintended consequence of further delaying the decrease in consumer prices. Until businesses feel confident enough to adjust their pricing based on the new reality, the relief Nigerians crave might remain frustratingly out of reach.

For service providers, the equation is slightly different. While they may not directly sell physical products, their operating costs can also play a role in price stickiness. Many rely on imported supplies and equipment for their daily operations, from basic office supplies and cleaning materials to tech hardware. Additionally, wages and salaries that were adjusted upward during times of weaker naira might not be reduced even with a stronger currency. Lowering salaries is a sensitive issue that can negatively impact employee morale. Balancing these overhead costs with reduced service prices can significantly squeeze a business’s profit margins.

In essence, several factors create a lag between the strengthening naira and its impact on consumer prices. Businesses understandably prioritise a holistic view, factoring in not just the current exchange rate but also past purchases, overall production costs, and the inherent uncertainty of the future.

While this cautious approach is prudent, it can lead to a frustrating delay in price adjustments. To expedite this process, a collaborative effort might be necessary. Government policies that incentivize businesses to adjust pricing based on the new exchange rate could prove beneficial.

Additionally, open communication between businesses and consumers can foster trust and transparency, allowing Nigerians to better understand the timeline for price reductions.

Ultimately, a stronger naira is an undeniable positive development for the Nigerian economy.

With a little patience and potentially some collaborative efforts, Nigerians can expect to see the relief they deserve reflected on the price tags at the market.