Russia’s war with Ukraine is causing turmoil in global markets on account of massive re-pricing of commodities due to supply chain disruptions and the effect of bruising sanctions. This is taking a toll on many economies, including Nigeria’s, and worsening the economic woes facing Nigerians.
The prices of commodities such as crude, natural gas, aluminium, nickel, wheat, and other commodities are soaring to record levels, leaving markets in disarray.
The price of a litre of diesel has skyrocketed to a record high of N600, two weeks into Russia’s invasion of Ukraine, from around N420-N450, as oil prices climbed above $120 a barrel, worsening inflation outlook in Africa’s biggest economy.
Manufacturers, retail outlets and small businesses who rely on diesel to power their machines have had to raise prices of manufactured goods and services even as consumers grapple with lower purchasing power.
“The immediate implication of the price of diesel at above N600 per litre is the increase in cost of production and logistics which can translate to higher prices of products,” Chinyere Almona, director general (DG) of Lagos Chamber of Commerce and Industry (LCCI), said.
“We should expect a rise in inflation above the 15.60 percent as at January. The rate of 13 percent assumed for the MTEF 2022 to 2024 is threatened in the short-term, and except the right interventions apply, we may miss this target even in the medium term,” she added.
At 15.60 percent inflation rate, it means someone earning N200,000 a month is actually taking home N168,800.
According to the LCCI DG, the supply chain disruption arising from the Russia/Ukraine crisis is expected to put more inflationary pressures on the system to cause an uptick in inflation rate into the second quarter of 2022.
Experts say this situation would lead consumers to keep rationing income to prioritise necessities, remove any incentives to save and worsen the rate of emigration and crime.
“The Nigerian economy, over the last decade, has grown considerably pre-COVID. Yet this economic growth has not impacted significantly on the level of poverty and economic inequality in the country,” said Margery Chuba Okadigbo, chairman of NNPC Ltd board, in an address at an oil conference on Tuesday, while speaking on lack of opportunities and inclusion.
Domestic airfares have doubled within a month on the back of rising cost of aviation fuel, a by-product of the crude oil refining process. This has seen airlines band together to raise prices, disrupting the business plans of many.
With the landing cost of petrol now above N300 per litre, the Federal Government is paying a king’s ransom to maintain the retail price band of N162-N165 per litre.
Subsidy payments this year could surpass the budgeted oil revenue of N3.36 trillion which could erode modest gains on the fiscal front.
Bismarck Rewane, chief executive officer of Financial Derivatives Company Ltd, in the company’s March presentation, said Nigeria was “between the devil and the deep blue sea” as most of the gains could easily be eroded.
“Nigeria will benefit from higher oil prices, but subsidy will be a major problem,” said Rewane.
Analysts project that the fiscal gap will be funded through borrowing, saying even that will bring its own problem in the form of higher debt service as interest rates rise.
According to Almona, the government needs to focus on resolving the supply-side challenges that are pushing prices upward.
“We have issues like exchange rate pressures due to a weakening naira, insecurity in production bases, high cost of logistics due to rising energy costs, etc.,” she said.
Russia is one of the world’s biggest exporters of key raw materials, from crude oil and gas to wheat and aluminium, and the possible exclusion of supplies from the country due to sanctions has sent traders and importers into a frenzy.
Aluminium hit a record high of $3,850 a tonne, up nearly 13 percent and heading for its largest weekly gain ever; the Chicago Board of Trade’s most-active wheat contract spiked 40 percent this week, the biggest weekly gain on record, while corn was up 17 percent and soybeans added nearly six percent, according to data from global commodity traders.
Russia accounts for around six percent of global aluminium supply and exports around 35mt of wheat, or 17 percent of global export supply.