Nigeria’s September inflation reading saw the fastest increase in the prices of consumer goods and services in four months, a sign that the Federal Government has failed to heed the lessons of the country’s historical inflation story: local prices often move up once foreign supply is cut off.
Inflation rose to 11.24 percent in September from 11.02 percent in August, which was its lowest in almost four years, the National Bureau of Statistics (NBS) said Tuesday.
Inflation had been falling steadily since May.
Food-price growth accelerated for the first time in four months, rising by 34 basis points to 13.51 percent year on year in September.
Food constitutes over 50 percent of the consumer price index.
The acceleration in headline inflation followed Federal Government’s order to partially close Nigeria’s border with Benin and Niger Republic to curb smuggling of rice and other commodities, and a directive to the Central Bank of Nigeria (CBN) to stop providing dollars to import food items including milk.
All these are in a bid to ramp up local farm production and attain full food security as well as manage the nation’s scarce foreign exchange reserves.
Food imports account for about 76 percent of $4.2 billion worth of informal imports from neighbouring Benin Republic, Niger and Cameroon, according to a CBN report.
This highlights the importance of the border to Nigeria where huge domestic demand relative to local production means capital control – a government’s measure to limit the flow of foreign capital in and out of the domestic economy – would always fuel inflation.
Food items like rice, frozen poultry and tomato paste have now risen since the border policy, which has now graduated to full closure, was enacted.
The price of a 50kg locally produced rice rose by more than two-third from the end of July to N22,000 as at October 10, according to a research conducted by Lagos-based Coronation Merchant Bank.
Also, the price of imported rice of the same weight surged at the same rate to N27,000 within the same period, while a 25kg rice produced offshore grew by more than double to N14,000.
A kilogram of imported frozen turkey and frozen chicken have risen by 69 percent and 27 percent respectively, while locally produced frozen chicken has risen 40 percent, straining the pockets of Nigerians, already home to some of the poorest consumers in the world.
“We attribute food inflationary pressures to the impact of border closures in August 2019,” said Cardinal Stone research analysts led by Philip Anegbe, in a note.
“In our view, the closure of several land borders, including the bustling Seme border, to combat food smuggling, led to reduced supply of imported food and increased demand for local food produce.”
The elephant in the room
Capital control is not an unusual approach to managing foreign exchange in Nigeria and it is the government’s preferred option rather than currency devaluation, or floating the currency when faced with acute dollar shortage.
In 1984, the government closed borders as devaluation of the naira and expansion in money supply caused an inflation rate surge to 41.2 percent as the government embarked on price control measures, but inflation fell in 1985 to 5.5 percent after the government opened the borders.
More recently, declines in oil price between 2014 and 2016, which accounts for more than 90 percent of Nigeria’s forex earnings, saw the CBN restrict several food items from accessing forex to curtail pressures in the foreign exchange market.
The continuous restriction of some other items is enough proof it is not working, according to an analyst who would spoke on condition of anonymity.
“The underlying issue is the FX, rather than waiting to talk about devaluation the government is trying to take out demand quantitatively,” the source said. “We have been down this road before and the sooner oil prices rebounded we abandoned it.”
The decision to impose capital controls fuelled inflation to the highest level in almost 12 years thereby worsening the 2016 recession.
Foreign reserves declined by $3.2 billion in the third quarter of 2019 alone to settle at $41.7 billion, on the back of fresh pressure on oil price that has hit capital inflow into Nigeria, according to analysts at United Capital, a Lagos-based investment bank.
While the analysts say the CBN is not yet at a tipping point as the reserves remain well above the 6 to 3 months benchmarks recommended by the IMF, they note the disturbing trend.
Meanwhile other experts say Nigeria with a population of 200 million people to feed, which is practicing largely subsistence agriculture would not be able to produce enough to cover local demand.
“The restriction would be effective if there are complementary policies to drive production locally,” said Johnson Chukwu, MD/CEO of Cowry Asset Ltd. “Otherwise economics teaches us prices would keep rising as cost of smuggling rises.”
The more impoverished Northern Nigeria been hardest hit by the policy to curb food imports, contrary to comments credited to Sabo Nanono, Nigeria’s minister of agriculture, that “there is no hunger in the country.”
In Maiduguri, the capital of Borno state, food is a luxury, according to Abdulkadir Jidda, chairman, All Farmers Association of Nigeria, Borno state.
“I feel very bad because we cannot even afford to participate in the ceremony of world food day (October 16). And you know the reason,” said Jidda, in a phone interview, referring to insecurity which has crippled agricultural output in the once prosperous region where going into farmlands 2 kilometres beyond the capital is now almost like a suicide mission.
5.3 million Nigerians experienced acute food crisis in 16 states of northern Nigeria last year, when the country was identified among eight countries with the worst food crises in 2018.
This was contained in the Global Report on Food Crises, which further noted that 22.7 million Nigerians in the north alone are at risk of food crisis if things do not improve.
Analysts expect inflation to continue to rise for the rest of the year on the back of increased demand due to Christmas festivities and the continued border closure.
Specifically, the price of rice in particular is expected to rise given the nation’s supply gap of about 2.7 million tonnes.
“The inflation print we saw suggests pressure…expectations are for higher prices in the rest of the year,” said Wale Okunrinboye, head of research at Lagos-based Sigma Pensions.
The Federal Government however appears bent on pursuing the border policies, despite pains being inflicted on Nigerians.
“At some point it has to be Nigeria first — we have to protect our own industries,” Finance Minister Zainab Ahmed said on Monday.
SEGUN ADAMS & OLUWASEGUN OLAKOYENIKAN
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