Nigeria recorded its highest inflation in nearly three years in September after food prices quickened on the back of the country’s land border closure and dollar squeeze.
Headline inflation hit 13.7 percent in September 2020 from 13.2 percent in August.
Food costs rose by 16.7 percent in September 2020 compared to a year ago, the highest this year.
“The decision by the government to close the border was the catalyst that spurred the consecutive rise in inflation from August/September last year”, said Omotola Abimbola, a macroeconomist at Chapel Hill Denham.
The Federal Government’s decision to shut land borders to trade with neighbouring countries was intended to stimulate local production but this move does not seem to yield much gain as consumer food prices have been on a steady rise one year after.
In July 2019, just before the borders were shut, the inflation rate stood at 11.02 percent, the lowest in 39 months but the spike in prices began as soon as the borders were closed in August 2019.
Although the Covid-19 Pandemic might have increased the pressure on food prices, experts say the closure of the land borders have been a major trigger as Nigeria does not have enough production capacity to meet demand, therefore the gap is passed on to the consumers in the form of high prices.
The challenge of production shortage has also been compounded by the insistent flood disaster in food producing states.
“Security and flood issues in Northern Nigeria have also affected food prices through lower production and supply” says Abudulazeez Kuranga, an economist at Lagos-based Cordros.
Recently, floods washed away at least two million tons of rice in Kebbi state, the country’s main rice-growing state. As such, planters who had a target to contribute a 2.5 million ton in 2020 are now 20 percent short.
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Asides from Kebbi state, Farmers in Kano, Jigawa, Nasarawa and Enugu have also reported damages from floods.
However, there have been other pressure points in the economy responsible for the consecutive rise in inflation rate for the year 2020.
“The lack of foreign exchange (FX) liquidity, currency depreciation and reeling effects from COVID-19 has also contributed to rising inflation”, said Abimbola.
The naira has weakened against the dollar by 24.5 percent to N381 per dollar in September from N306 at the beginning of the year.
The Central Bank of Nigeria (CBN) also got an order from the Federal Government to stop providing foreign exchange for food and fertilizer import to conserve scarce dollars and boost local productions.
Many businesses and manufacturers that rely heavily on dollars have had to turn to the parallel market to access dollars.
“The cost of imported goods increased year-on-year as dollar restrictions negatively affected imports since importers had to purchase raw materials using the black market rather than the official exchange rate” says Abudulazeez Kuranga, an economist at Lagos-based Cordros.
According to data from NBS, the cost of imported food rose by 1.35 percent to N374 per 1000 kg in September 2020 up from N369 in August 2020 and N321 per kg in September 2019.
Abimbola also explained that other key factors that contributed to rising inflation were the effects of deregulating the downstream oil & gas sector which led to higher prices of petroleum products; and the momentary increase in electricity tariffs which was later reversed, otherwise the increase in inflation would have been worse than it is now.
The federal government early September increased the pump price of petrol to N151.56 per litre, up from N148.
What rising inflation means for Nigerians
The heightened inflation rate means that more money is chasing fewer goods, and when coupled with other gloomy socioeconomic indicators such as poverty and unemployment, this further depletes Nigerians ability to purchase national commodities due to lower purchasing power.
A dejected and frustrated Sarah stormed by the roadside cursing and swearing on her way home. When asked what the problem was, she bitterly lamented about the crazy jump in food items.
She first pointed out that she usually buys at most N700 vegetables to make a popular Nigerian delicacy called Afang soup for her family.
However, her trip to the market went south as she ended up buying N2,000 worth of vegetables, a 186 percent price jump which was not even enough to match up the former quantity usually purchased to feed her family.
Sarah also recounted how the vegetable seller sadly explained that even she could not buy up to half of the portion usually purchased on a market day due to drastically higher costs.
Vegetables were not the only things that had increased in price as Sarah highlighted that products like bread, onions, bags of rice, maize, tomatoes, and fish had risen in prices and this escalating inflation level had affected other economic sectors including transportation.
The current realities faced by Nigerians seems to also confirm the findings of Steve Hanke, a Professor of Applied Economics at Johns Hopkins University, United States who re-estimated Nigeria’s August inflation to 31 percent.
This ranked Nigeria as 9th out of 12 countries with the highest inflation rates in the world despite using purchasing power parity (PPP), the black-market exchange rate data and wider basket of goods and services.
Outlook for Nigeria’s rising inflation
The federal government plans to reopen the borders soon, although a definite date has not been set yet.
Experts believe that in the coming months, we should probably expect food prices to gradually start coming down due to the harvest period that has commenced and the reopening of closed borders.
“If Nigeria reopens her borders, it will help to offset the rising inflation record which was jointly triggered by reduced local production and no imports.” Kuranga said.
CBN has also tried to offer some palliatives by granting access to FX for sectors that deal with essential inputs, for instance, maize and this counts for something in providing some sort of relief to rising inflation levels”, said Abimbola.
“However, the core division could still remain under pressure as power tariffs might take off very shortly and another round of electricity tariff sometime in January next year judging by the agreement between the labour union and the Presidency, making inflation to remain relatively high.
The first half of next year might still be considerably plagued with some level of inflation because of the low base effect from the current downtimes and crisis being experienced in the Nigerian economy.
It might not be until the second half of next year that inflation will substantially decelerate given the projected high base effect as an outcome of economic recovery and stability.
Nonetheless, CBN can also do more to provide palliatives by resolving the FX liquidity challenges due to the importance of imported components and improving the supply of FX generally to keep inflation in check.” Abimbola said.
